PART A
PROSPECTUS
PROSPECTUS
SMITH
BARNEY
Disciplined
Small
Cap
Fund,
Inc.
JUNE 23,
1997
Prospectus begins on page
one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
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Prospectus June 23,
1997
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Smith Barney Disciplined
Small Cap Fund, Inc.
388 Greenwich Street
New York, New York 10013
1-800-451-2010
Smith Barney Disciplined Small Cap Fund, Inc. (formerly The
Inefficient-Market Fund, Inc.) (the "Fund") is an open-end diversified
management investment company that seeks long term capital appreciation by
investing primarily in the common stocks of companies with relatively small
market capitalizations. In order to provide consistent relative performance,
the
Fund will hold a portfolio that is comparable to the Russell 2500 Stock Index,
a
broad based index of the smaller cap segment of the U.S. stock market in terms
of overall risk, economic sector weightings and market capitalization. By
linking its investment strategy to the Russell 2500 Stock Index, the Fund will
provide diversified exposure to the universe of stocks that comprise the
lowest
25% of market capitalization of publicly traded companies in the U.S. with
market values greater than $100 million. The adviser to the Fund will select
stocks based on a disciplined quantitative screening process that seeks a
combination of attractive relative value and earnings growth.
This Prospectus sets forth concisely certain information about the Fund
including sales charges, distribution and service fees and expenses, that
prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference.
Additional information about the Fund is contained in a Statement of
Additional Information dated June 23, 1997, as amended or supplemented from
time
to time, that is available upon request and without charge by calling or
writing
the Fund at the telephone number or address set forth above or by contacting a
Smith Barney Financial Consultant. The Statement of Additional Information
("SAI") has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
TRAVELERS INVESTMENT MANAGEMENT COMPANY
Investment Adviser
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A
CRIMINAL OFFENSE.
1
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Table of Contents
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Prospectus Summary
3
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Financial Highlights
9
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Investment Objective and Management Policies
10
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Valuation of Shares
13
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Dividends, Distributions and Taxes
14
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Purchase of Shares
15
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Exchange Privilege
24
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Redemption of Shares
28
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Minimum Account Size
30
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Performance
30
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Management of the Fund
31
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Distributor
32
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Additional Information
33
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No person has been authorized to give any information or to make any
representation in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund
or
the Distributor. This Prospectus does not constitute an offer by the Fund or
the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to
make
such offer or solicitation in such jurisdiction.
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2
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Prospectus Summary
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The following summary is qualified in its entirety by detailed
information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the
Prospectus.
See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, management investment
company
that seeks long term capital appreciation by investing primarily in the common
stocks of companies with relatively small market capitalizations. In order to
provide consistent relative performance, the Fund will hold a portfolio that
is
comparable to the Russell 2500 Stock Index, a broad based index of the smaller
cap segment of the U. S. stock market in terms of overall risk, economic
sector
weightings and market capitalization. By linking its investment strategy to
the
Russell 2500 Stock Index, the Fund will provide diversified exposure to the
universe of stocks that comprise the lowest 25% of market capitalization of
publicly traded companies in the U.S. with market values greater than $100
million. The adviser to the Fund will select stocks based on a disciplined
quantitative screening process that seeks a combination of attractive relative
value and earnings growth. See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of
shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of
expenses
to which they are subject. A fourth Class of shares, Class Y shares, is
offered
only to investors meeting an initial investment minimum of $5,000,000. See
"Purchase of Shares" and "Redemption of Shares."
Class A Shares. Upon the conversion of the Fund to open-end status, the
Fund's outstanding shares were designated Class A shares. No sales charge was
due as a result of the conversion. However, if such shares are redeemed prior
to
January 1, 1998, they will be subject to a 2% redemption fee payable to the
Fund. Class A shares are sold at net asset value plus an initial sales charge
of
up to 5.00% and are subject to an annual service fee of 0.25% of the average
daily net assets of the Class. The initial sales charge may be reduced or
waived
for certain purchases. Purchases of Class A shares of $500,000 or more will be
made at net asset value with no initial sales charge, but will be subject to a
contingent deferred sales charge ("CDSC") of 1.00% on redemptions made within
12
months of purchase. See "Prospectus Summary -- Reduced or No Initial Sales
Charge."
Class B Shares. Class B shares are offered at net asset value subject to
a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year
after
the date of purchase to zero. This CDSC may be waived for certain redemptions.
Class B shares are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.75% of the average daily net assets of the Class. The
Class B
3
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Prospectus Summary (continued)
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shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight
years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain
portion
of Class B shares that have been acquired through the reinvestment of
dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with no
initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.75% of the average daily net assets of the Class C
shares,
and investors pay a CDSC of 1.00% if they redeem Class C shares within 12
months
of purchase. The CDSC may be waived for certain redemptions. The Class C
shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Fund shares, which when combined
with current holdings of Class C shares of the Fund equal or exceed $500,000
in
the aggregate, should be made in Class A shares at net asset value with no
sales
charge, and will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any
service
or distribution fees.
In deciding which Class of Fund shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of
regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject
to
lower ongoing expenses over the term of the investment. As an alternative,
Class
B and Class C shares are sold without any initial sales charge so the entire
purchase price is immediately invested in the Fund. Any investment return on
these additional invested amounts may partially or wholly offset the higher
annual expenses of these Classes. Because the Fund's future return cannot be
predicted, however, there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class
B
shares, they do not have a conversion feature, and therefore, are subject to
an
ongoing distribution fee. Thus, Class B shares may be more attractive than
Class
C shares to investors with longer term investment outlooks.
4
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Prospectus Summary (continued)
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Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases of $500,000 or more, will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made
within
12 months of purchase. The $500,000 investment may be met by adding the
purchase
to the net asset value of all Class A shares offered with a sales charge held
in
funds sponsored by Smith Barney listed under "Exchange Privilege." Class A
share
purchases also may be eligible for a reduced initial sales charge. See
"Purchase
of Shares." Because the ongoing expenses of Class A shares may be lower than
those for Class B and Class C shares, purchasers eligible to purchase Class A
shares at net asset value or at a reduced sales charge should consider doing
so.
Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B and Class C shares is the same as that of
the
initial sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Fund" for a complete
description of the sales charges and service and distribution fees for each
Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes"
and "Exchange Privilege" for other differences between the Classes of shares.
SMITH BARNEY 401(k) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible
to participate in the Smith Barney 401(k) Program, which is generally designed
to assist plan sponsors in the creation and operation of retirement plans
under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
as
well as other types of participant directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available without sales
charge as investment alternatives under both of these programs. See "Purchase
of
Shares -- Smith Barney 401(k) and ExecChoice(TM) Programs."
PURCHASE OF SHARES Shares may be purchased through a brokerage account
maintained by Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
other institutional investors, may purchase shares directly from the Fund
through the Fund's transfer agent, First Data Investor Services Group, Inc.
("First Data"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may
open an account by making an initial investment of at least $1,000 for each
account, or $250 for an individual retirement account ("IRA") or a Self-
Employed
Retirement Plan. Investors in Class Y shares may open an account for an
initial
investment of $5,000,000. Subsequent investments of at least $50 may be made
for
5
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Prospectus Summary (continued)
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all Classes. For participants in retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes of shares is $25. The minimum
investment
requirements for purchases of Fund shares through the Systematic Investment
Plan
are described below. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Fund shares. The minimum initial
investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes for shareholders purchasing
shares through the Systematic Investment Plan on a monthly basis is $25 and on
a
quarterly basis is $50. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York
Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE FUND The Travelers Investment Management Company (the
"Adviser") serves as the Fund's investment adviser. The Adviser provides
advisory and management services to certain investment companies affiliated
with
Smith Barney. The Adviser is a wholly owned subsidiary of Smith Barney
Holdings
Inc. ("Holdings"). Holdings is a wholly owned subsidiary of Travelers Group
Inc.
("Travelers"), a diversified financial services holding company engaged,
through
its subsidiaries, principally in four business segments: Investment Services,
Consumer Finance Services, Life Insurance Services and Property & Casualty
Insurance Services. See "Management of the Fund."
Smith Barney Mutual Funds Management Inc. ("SBMFM") serves as the Fund's
administrator. SBMFM is also a wholly owned subsidiary of Holdings. SBMFM
provides investment advisory and
administration services to investment companies affiliated with Smith Barney.
See "Management of the Fund".
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the
same Class of certain other funds of the Smith Barney Mutual Funds at the
respective net asset values next determined. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day
generally
is quoted daily in the financial section of most newspapers and is also
available from a Smith Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income and
distributions of net realized capital gains, if any, are declared and paid
annually. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
6
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Prospectus Summary (continued)
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investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and
distribution reinvestments will become eligible for conversion to Class A
shares
on a pro rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that
the
Fund's investment objective will be achieved. The value of the Fund's
investments, and thus the net asset value of the Fund's shares, will fluctuate
in response to changes in market and economic conditions, as well as the
financial condition and prospects of issuers in which the Fund invests. See
"Investment Objective and Management Policies."
THE FUND'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Fund, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and the Fund's estimated
operating expenses for the fiscal year ending December 31, 1997:
<TABLE>
<CAPTION>
Class A Class B
Class C Class Y
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<S> <C> <C>
<C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) ................ 5.00% None
None None
Maximum Redemption Fee or CDSC (as a percentage
of original cost or redemption proceeds, whichever
is lower) .......................................... 2.00%+* 5.00%
1.00% None
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management fees ...................................... 0.75% 0.75%
0.75% 0.75%
12b-1 fees** ......................................... 0.25 1.00
1.00 --
Other expenses*** .................................... 0.26 0.26
0.26 0.26
Total Portfolio Operating Expenses ...................... 1.26% 2.01%
2.01% 1.01%
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</TABLE>
+ Shareholders at the time of conversion to open-end status will receive
Class A shares and will be required to pay a 2% redemption fee upon redemption
of those Class A shares from the date the Securities and Exchange Commission
declares the Fund's conversion to be effective through the end of 1997.
*Purchases of Class A shares of $500,000 or more will be made at net
asset
value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
**Upon conversion of Class B shares to Class A shares, such shares will
no
longer be subject to a distribution fee. Class C shares do not have a
conversion
feature and, therefore, are subject to an ongoing distribution fee. As a
result,
long-term shareholders of Class C shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.
***Estimated through the end of the Fund's first fiscal year as an open-
end
investment company on an annualized basis.
Class A shares of the Fund purchased through the Smith Barney AssetOneSM
Program will be subject to an annual asset-based fee, payable quarterly, in
lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%,
depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.
7
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Prospectus Summary (continued)
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The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in
the
case of Class B, Class C and certain Class A shares, the length of time the
shares are held and whether the shares are held through the Smith Barney
401(k)
or ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of
Shares."
Smith Barney receives an annual 12b-1 service fee of 0.25% of the value of
average daily net assets of Class A shares. Smith Barney also receives with
respect to Class B and Class C shares an annual 12b-1 fee of 1.00% of the
value
of average daily net assets of the respective Classes, consisting of a 0.75%
distribution fee and a 0.25% service fee. "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
Example
The following example is intended to assist an investor in understanding
the various costs that an investor in the Fund will bear directly or
indirectly.
The example assumes payment by the Fund of operating expenses at the levels
set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Fund."
<TABLE>
<CAPTION>
1 Year 3 Years 5
Years 10 Years*
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<S> <C> <C>
<C> <C>
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5.00% annual return and
(2) redemption at the end of each time period:
Class A............................................. $62 $88
$116 $195
Class B............................................. 70 93
118 215
Class C............................................. 30 63
108 234
Class Y............................................. 10 32
56 124
An investor would pay the following expenses on
the same investment, assuming the same
annual return and no redemption:
Class A............................................. $62 $88
$116 $195
Class B............................................. 20 63
108 215
Class C............................................. 20 63
108 234
Class Y............................................. 10 32
56 124
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</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at
the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00%
annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater
or
less than those shown.
8
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Financial Highlights
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The following information since inception until December 31, 1996 has
been
audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon
appears in the Fund's annual report dated December 31, 1996. The figures set
out
below pertain to the closed-end predecessor to the Fund. Closed-end funds are
not subject to the same legal requirements as open-end funds, especially with
respect to liquidity requirements. The total returns noted for each year may
have been different if the Fund had been an open-end fund from inception. The
information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual Report to
Shareholders, which is incorporated by reference into the Statement of
Additional Information. Financial information is not presented for Class B,
Class Cand Class Y shares since no shares of those classes were publicly
issued
as of the date of this Prospectus.
For a Class A share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
1996 1995 1994 1993
1992 1991 1990(a)
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<S> <C> <C> <C> <C>
<C> <C> <C>
Net Asset Value, Beginning of Year $ 12.15 $11.78 $12.50 $ 11.49
$10.34 $ 9.32 $
11.12
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Income (Loss) From Operations:
Net investment income 0.05 0.11 0.05 0.01
0.05 0.13 0.37
Net realized and unrealized gain (loss) 2.14 2.31 (0.63) 1.01
1.15 1.82 (1.80)
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Total Income (Loss) From Operations 2.19 2.42 (0.58) 1.02
1.20 1.95
(1.43)
Less Distributions From:
Net investment income (0.04) (0.11) (0.05)
(0.01) (0.05) (0.14) (0.37)
Net realized gains(1) (2.00) (1.94) (0.09) --
- -- (0.79) --
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Total Distributions (2.04) (2.05) (0.14)
(0.01) (0.05) (0.93) (0.37)
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Net Asset Value, End of Year $ 12.30 $12.15 $11.78 $ 12.50
$11.49 $10.34 $
9.32
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Total Return,
Based on Market Value 39.57% 24.18% (8.46)%
6.44% 11.86% 17.21%
(27.27)% ++
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Total Return,
Based on Net Asset Value 20.56% 18.90% (4.36)%
8.90% 11.71% 22.69%
(12.66)%++
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Net Assets, End of Year (in millions) $ 53 $ 53 $ 52 $ 55
$ 50 $ 45 $ 41
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Ratios to Average Net Assets:
Expenses 1.21% 1.22% 1.22%
1.24% 1.36% 1.28%
1.32%+
Net investment income 0.43 0.84 0.43 0.08
0.45 1.26 3.90+
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Portfolio Turnover Rate 151% 177% 45%
87% 46% 47%
27%
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Market Price, End of Year $11.500 $9.813 $9.500 $10.500
$9.875 $8.875 $
8.375
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- --------------------------------
Average commissions per share
paid on equity transactions(2) $ 0.05 $ 0.05 -- --
- -- -- --
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======================================
</TABLE>
(1) Includes short-term realized gains distributions which are considered
ordinary income for Federal income tax purposes.
(2) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(a) For the period from January 23, 1990 (commencement of operations)to
December 31, 1990.
+ Annualized.
++ Total return is not annualized as it may not be representative of the
total
return for that period.
9
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Investment Objective and Management Policies
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Smith Barney Disciplined Small Cap Fund, Inc. (the "Fund") is an open-end
diversified management investment company that seeks long term capital
appreciation by investing primarily (at least 65% of its total assets) in the
common stocks of U.S. companies with relatively small market capitalizations
at
the time of investment. Companies with relatively small market capitalization
are defined as those which fall in the lowest 20% of market capitalization of
publicly traded companies in the U.S. with market values above $100 million.
The
adviser to the Fund will select stocks based on a disciplined quantitative
screening process that seeks a combination of attractive relative value and
earnings growth.
In order to provide consistent relative performance, the Fund will hold a
portfolio that is comparable to the Russell 2500 Stock Index in terms of
overall
risk, economic sector weightings, and market capitalization. The Russell 2500
is
a broad based index of the smaller cap segment of the U.S. stock market. By
linking its investment strategy to the Russell 2500 Stock Index, the Fund will
provide diversified exposure to the universe of stocks that comprise the
lowest
25% of market capitalization of publicly traded companies in the U.S. with
market values of greater than $100 million. However, the Fund is not an index
fund and is not limited to investing in the stocks that comprise the Russell
2500 Stock Index. Over time, the Fund is expected to exhibit performance
volatility that is similar to that of the Russell 2500 Stock Index. Of course,
there can be no assurance that the Fund's total return, before or after
expenses, will match or exceed that of the Russell 2500 Stock Index.
The Fund will employ an active investment strategy that focuses primarily
on individual stock selection. In selecting individual holdings for the Fund's
portfolio, the investment adviser will apply a number of computerized
investment
models to identify stocks that have a high probability of outperforming their
respective industry/sector peer groups within the Russell 2500. These
investment
models incorporate a diverse set of valuation, earnings and relative price
variables to produce a comprehensive appraisal profile on every stock in the
universe of securities described above. Stocks that are determined to be
attractive based on a combination of quantitative and fundamental criteria
will
be overweighted relative to the benchmark index. In general, the discipline
will
favor stocks that demonstrate an improving trend of earnings and also appear
attractive based on measures of fundamental value. While these securities have
the potential to outperform the securities represented in the Russell 2500,
they
may in fact be more volatile or have a lower return than the benchmark index.
Although equity securities have historically demonstrated long-term growth in
value, their prices fluctuate based on changes in a company's financial
condition and general economic conditions. This is especially true in the case
of smaller companies.
Under normal circumstances the Fund will seek to maintain full exposure
to
the stock market. In order to provide normal liquidity, the Fund may invest in
certain short-term money market instruments and may establish a position in
10
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Investment Objective and Management Policies (continued)
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exchange-traded stock index futures contracts for the purpose of gaining
short-term equity exposure.
Further information about the Fund's investment policies, including a
list
of those restrictions on its investment activities that cannot be changed
without shareholder approval, appears in the SAI.
INVESTMENT POLICIES AND STRATEGIES
Short-Term Investments. The short-term money market instruments in which
the Fund may invest include: U.S. government securities, certificates of
deposit, time deposits, and bankers' acceptances issued by domestic banks
(including their branches located outside the United States and subsidiaries
located in Canada), domestic branches of foreign banks, savings and loan
associations and similar institutions, high-grade commercial paper, and
repurchase agreements with respect to such instruments.
Repurchase Agreements. The Fund may enter into repurchase agreements with
banks which are the issuers of instruments acceptable for purchase by the Fund
and with certain dealers on the Federal Reserve Bank of New York's list of
reporting dealers. Under the terms of a typical repurchase agreement, the Fund
would acquire an underlying obligation for a relatively short period (usually
not more than one week) subject to an obligation of the seller to repurchase,
and the Fund to resell, the obligation at an agreed-upon price and time,
thereby
determining the yield during the Fund's holding period. This arrangement
results
in a fixed rate of return that is not subject to market fluctuations during
the
Fund's holding period.
Stock Index Futures Contracts. The Fund will use exchange-related stock
index futures contracts as a hedge to protect against changes in stock prices.
A
stock index futures contract is a contractual obligation to buy or sell a
specified index of stocks at a future date for a fixed price. Stock index
futures may also be used to hedge cash inflows to gain market exposure until
the
cash is invested in specific common stocks. The Fund will not purchase or sell
futures contracts for which the aggregate initial margin exceeds five percent
(5%) of the fair market value of assets, after taking into account unrealized
profits and losses an any such contracts which it is entered into. When a
futures contract is purchased, the Fund will set aside, in an identifiable
manner, an amount of cash and cash equivalents equal to the total market value
of the futures contract, less the amount of the initial margin.
All stock index futures will be traded on exchanges that are licenced and
regulated by the Commodity Futures Trading Commission ("CFTC"). To ensure that
its futures transactions meet CFTC standards, the Fund will enter into futures
contracts for hedging purposes only. The Fund expects that risk management
transactions involving futures contracts will not impact more than twenty
percent (20%) of its assets at any one time.
Real Estate Investment Trust Securities. The Fund may invest in Real
Estate
Investment Trusts ("REITs"). REITs are pooled investment vehicles that invest
11
<PAGE>
- ------------------------------------------------------------------------------
- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------------------
- --
primarily in either real estate or real estate related loans. The value of a
REIT is affected by changes in the value of the properties owned by the REIT
or
securing mortgage loans held by the REIT. REITs are dependent upon cash flow
from its investments to repay financing costs and the ability of the REIT's
manager. REITs are also subject to risks generally associated with investments
in real estate.
Lending of Portfolio Securities. From time to time, the Fund may lend its
portfolio securities to brokers, dealers and other financial organizations.
These loans may not exceed 331 1/43% of the Fund's total assets taken at
value.
Loans of portfolio securities by the Fund will be collateralized by cash,
letters of credit or obligations of the United States government or its
agencies
and instrumentalities ("U.S. government securities") which are maintained at
all
times in an amount equal to at least 100% of the current market value of the
loaned securities. By lending its portfolio securities, the Fund will seek to
generate income by continuing to receive interest on loaned securities, by
investing the cash collateral in short-term instruments or by obtaining yield
in
the form of interest paid by the borrower when U.S. government securities are
used as collateral. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delays in receiving
additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially.
Leveraging. The Fund may from time to time leverage its investments by
purchasing securities with borrowed money. The Fund may borrow money only from
banks and in an amount not to exceed 331 1/43% of the total value of its
assets
less its liabilities. Borrowed money creates an opportunity for greater
capital
gain but at the same time increases exposure to capital risk, as any gain in
the
value of securities purchased with borrowed money that exceeds the interest
paid
on the amount borrowed would cause the Fund's net asset value to increase more
rapidly than otherwise, while any decline in the value of securities purchased
would cause the Fund's net asset value to decrease more rapidly than
otherwise.
Restricted Securities. Restricted securities are those that may not be
sold
publicly without first being registered under the Securities Act of 1933, as
amended. For that reason, the Fund may not be able to dispose of restricted
securities at a time when, or at a price at which, it desires to do so and may
have to bear expenses associated with registering the securities. At any one
time, the Fund's aggregate holdings of restricted securities, repurchase
agreements having a duration of more than five business days, and securities
lacking readily available market quotations will not exceed 15% of the Fund's
total assets.
Certain Risk Considerations. There can be no assurance that the Fund's
investment objective will be achieved. The Fund is expected to remain fully
invested in common stocks to the extent practicable, and is therefore subject
to
the general risk of the stock market. The Fund will invest in stocks of
smaller
companies that may individually exhibit more price volatility than the broad
market averages. Moreover,
12
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- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------------------
- --
the Fund will invest in stocks of growth-oriented companies that tend to
reinvest earnings rather than pay dividends. As a result, dividend income is
not
expected to be a significant component of the Fund's total return. The Fund
will
make investments in stocks that may at times have limited market liquidity and
whose purchase or sale would result in above average transaction costs.
Another
factor which would increase the fundamental risk of investing in smaller
companies is the lack of publicly available information due to their
relatively
short operating record as public companies. The Fund is suitable for investors
who have a long term investment horizon and wish to broaden their common stock
investments through an actively managed fund that specializes in stocks with
smaller market capitalizations. The Fund may not be appropriate for all
investors.
Portfolio Transactions. Portfolio securities transactions on behalf of
the
Fund are placed by the Adviser with a number of brokers and dealers, including
Smith Barney. Smith Barney has advised the Fund that in transactions with the
Fund, Smith Barney charges a commission rate at least as favorable as the rate
Smith Barney charges its comparable unaffiliated customers in similar
transactions.
The Fund intends generally to purchase securities for long-term capital
appreciation. The Fund's annual portfolio turnover rate is not expected to
exceed 150%. The Fund's portfolio turnover rate will vary from year to year.
Short-term gains realized from portfolio transactions are taxable to
shareholders as ordinary income. In addition, higher portfolio turnover rates
may result in corresponding increases in brokerage commissions. The Adviser
considers these effects when evaluating the anticipated benefits of short-term
investing.
- ------------------------------------------------------------------------------
- --
Valuation of Shares
- ------------------------------------------------------------------------------
- --
The Fund's net asset value per share is determined as of the close of
regular trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number
of
shares of the Class outstanding.
Generally, the Fund's investments are valued at market value, or in the
absence of market value with respect to any securities, at fair value as
determined by or under the direction of the Fund's Board of Directors.
Short-term investments that mature in 60 days or less are valued at amortized
cost whenever the Directors determine that amortized cost reflects fair value
of
those investments.
13
<PAGE>
- ------------------------------------------------------------------------------
- --
Dividends, Distributions and Taxes
- ------------------------------------------------------------------------------
- --
DIVIDENDS AND DISTRIBUTIONS
The Fund declares and pays income dividends at least annually on shares
of
the Fund and makes annual distributions of capital gains, if any, on such
shares.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the
same
Class at net asset value, subject to no sales charge or CDSC.
Income dividends and capital gain distributions that are invested are
credited to shareholders' accounts in additional shares at the net asset value
as of the close of business on the payment date. A shareholder may change the
option at any time by notifying his or her Smith Barney Financial Consultant.
Accounts held directly by First Data should notify First Data in writing at
least five business days prior to the payment date to permit the change to be
entered in the shareholder's account.
The per share dividends on Class B and Class C shares of the Fund may be
lower than the per share dividends on Class A and Class Y shares principally
as
a result of the distribution fee applicable with respect to Class B and Class
C
shares. The per share dividends on Class A shares of the Fund may be lower
than
the per share dividends on Class Y shares principally as a result of the
service
fee applicable to Class A shares. Distributions of capital gains, if any, will
be in the same amount for Class A, Class B, Class C and Class Y shares.
TAXES
The Fund has qualified and intends to qualify each year as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986 as
amended to be relieved of Federal income tax on that part of its net
investment
income and realized capital gains which it pays out to its shareholders. To
continue to qualify, the Fund must meet certain tests, including distributing
at
least 90% of its investment company taxable income, and deriving less than 30%
of its gross income from the sale or other disposition of certain investments
held for less than three months.
Dividends from net investment income and distributions of realized
short-term capital gains on the sale of securities, whether paid in cash or
automatically invested in additional shares of the Fund, are taxable to
shareholders as ordinary income. A portion of the Fund's dividends from
investment income may qualify for the dividends deduction for corporations.
Dividends and distributions declared by the Fund may also be subject to state
and local taxes. Distributions out of net long-term capital gains (i.e., net
long-term capital gains in excess of net short-term capital losses) are
taxable
to shareholders as long-term capital gains. Information as to the tax status
of
dividends paid or deemed paid in each calendar year will be mailed to
shareholders as early in the succeeding year as practical but not later than
January 31.
In determining gain or loss, a shareholder who redeems or exchanges
shares
in the Fund within 90 days of the acquisition of such shares will not be
entitled to include in tax basis the sales charges incurred in acquiring such
shares to the extent of any
14
<PAGE>
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- --
Dividends, Distributions and Taxes (continued)
- ------------------------------------------------------------------------------
- --
subsequent reduction in sales charges for investing in the Fund, such as
pursuant to the rights discussed in "Exchange Privilege."
The Fund is required to withhold and remit to the U.S. Treasury 31% of
dividends, distributions and redemption proceeds to shareholders who fail to
provide a correct taxpayer identification number (the Social Security number
in
the case of an individual) or to make the required certifications, or who have
been notified by the Internal Revenue Service that they are subject to backup
withholding and who are not otherwise exempt. The 31% withholding tax is not
an
additional tax, but is creditable against a shareholder's federal income tax
liability.
Prior to investing in shares of the Fund, investors should consult with
their tax advisors concerning the federal, state and local tax consequences of
such an investment.
- ------------------------------------------------------------------------------
- --
Purchase of Shares
- ------------------------------------------------------------------------------
- --
GENERAL
The Fund offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Fund shareholders at the time of conversion to open-end status
receive Class A shares without an initial sales charge. Class Y shares are
sold
without an initial sales charge or CDSC and are available only to investors
investing a minimum of $5,000,000 (except for purchases of Class Y shares by
Smith Barney Concert Allocation Series Inc., for which there is no minimum
purchase amount). See "Prospectus Summary -- Alternative Purchase
Arrangements"
for a discussion of factors to consider in selecting which Class of shares to
purchase.
Purchases of Fund shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. In addition, certain investors, including qualified
retirement plans and certain other institutional investors, may purchase
shares
directly from the Fund through First Data. When purchasing shares of the Fund,
investors must specify whether the purchase is for Class A, Class B, Class C
or
Class Y shares. Smith Barney and other broker/dealers may charge their
customers
an annual account maintenance fee in connection with a brokerage account
through
which an investor purchases or holds shares. Accounts held directly at First
Data are not subject to a maintenance fee.
Investors in Class A, Class B and Class C shares may open an account by
making an initial investment of at least $1,000 for each account, or $250 for
an
IRA or a Self-Employed Retirement Plan, in the Fund. Investors in Class Y
shares
may open an account by making an initial investment of $5,000,000. Subsequent
investments of at
15
<PAGE>
- ------------------------------------------------------------------------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
least $50 may be made for all Classes. For participants in
retirement plans qualified under Section 403(b)(7) or Section 401(a) of the
Code, the minimum initial investment requirement for Class A, Class B and
Class
C shares and the subsequent investment requirement for all Classes in the Fund
is $25. For shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
for Class A, Class B and Class C shares and the subsequent investment
requirement for all Classes is $25. For shareholders purchasing shares of the
Fund through the Systematic Investment Plan on a quarterly basis, the minimum
initial investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes is $50. There are no minimum
investment requirements in Class A shares for employees of Travelers and its
subsidiaries, including Smith Barney, Directors or Trustees, of any of the
Smith
Barney Mutual Funds, and their immediate family. The Fund reserves the right
to
waive or change minimums, to decline any order to purchase its shares and to
suspend the offering of shares from time to time. Shares purchased will be
held
in the shareholder's account by the Fund's transfer agent, First Data. Share
certificates are issued only upon a shareholder's written request to First
Data.
The minimum initial investment requirement in the fund for an account
established under the Uniform Gifts to Minors Act is $250 and
the subsequent investment requirement is $50.
Purchase orders received by the Fund or Smith Barney prior to the close
of
regular trading on the NYSE, on any day the Fund calculates its net asset
value,
are priced according to the net asset value determined on that day (the "trade
date"). Orders received by dealers or introducing brokers prior to the close
of
regular trading on the NYSE on any day the Fund calculates its net asset
value,
are priced according to the net asset value determined on that day, provided
the
order is received by the Fund or Smith Barney prior to Smith Barney's close of
business. For shares purchased through Smith Barney or Introducing Brokers
purchasing through Smith Barney, payment for Fund shares is due on the third
business day (the "settlement date") after the trade date. In all other cases,
payment must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by
purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on
a
quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder to provide systematic additions to
the
shareholder's Fund account. A shareholder who has insufficient funds to
complete
the transfer will be charged a fee of up to $25 by Smith Barney or First Data.
The Systematic Investment Plan also authorizes Smith Barney to apply cash held
in the shareholder's Smith Barney brokerage account or redeem the
shareholder's
shares of a Smith Barney money market fund to make additions to the account.
Additional information is available from the Fund or a Smith Barney Financial
Consultant.
16
<PAGE>
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- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund
are
as follows:
Dealers'
Sales Charge Sales Charge Reallowance
% of as % of as % of
Amount of Investment Offering Price Amount Invested Offering Price
- ------------------------------------------------------------------------------
- --
Less than $ 25,000 5.00% 5.26% 4.50%
$ 25,000 - 49,999 4.00 4.17 3.60
50,000 - 99,999 3.50 3.63 3.15
100,000 - 249,999 3.00 3.09 2.70
250,000 - 499,999 2.00 2.04 1.80
500,000 and over * * *
========================================================================
========
* Purchases of Class A shares of $500,000 or more, will be made at net asset
value without any initial sales charge, but will be subject to a CDSC of 1.00%
on redemptions made within 12 months of purchase. The CDSC on Class A shares
is
payable to Smith Barney, which compensates Smith Barney Financial Consultants
and other dealers whose clients make purchases of $500,000 or more. The CDSC
is
waived in the same circumstances in which the CDSC applicable to Class B and
Class C shares is waived. See "Deferred Sales Charge Alternatives" and
"Waivers
of CDSC."
Members of the selling group may receive up to 90% of the sales charge
and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of
1933, as amended.
The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the Fund made at one time by "any person," which includes
an individual and his or her immediate family, or a trustee or other fiduciary
of a single trust estate or single fiduciary account.
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a
sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board Members and employees); the immediate families
of
such persons (including the surviving spouse of a deceased Board Member or
employee); and to a pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the National Association of
Securities
Dealers, Inc., provided such sales are made upon the assurance of the
purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other investment company to effect the combination of such
company
with the Fund by merger, acquisition of assets or otherwise; (c) purchases of
Class A shares by any client of a newly employed Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the Financial
Consultant's employment with Smith Barney), on the condition the pur-
17
<PAGE>
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- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
chase of Class A shares is made with the proceeds of the redemption of shares
of
a mutual fund which (i) was sponsored by the Financial Consultant's prior
employer, (ii) was sold to the client by the Financial Consultant and (iii)
was
subject to a sales charge; (d) purchases by shareholders who have redeemed
Class
A shares in the Fund (or Class A shares of another fund of the Smith Barney
Mutual Funds that are sold with a maximum 5.00% sales charge) and who wish to
reinvest their redemption proceeds in the Fund, provided the reinvestment is
made within 60 calendar days of the redemption; (e) purchases by accounts
managed by registered investment advisory subsidiaries of Travelers; (f)
purchases of Class A shares by Section 403(b) or Section 401(a) or (k)
accounts
associated with Copeland Retirement Programs; (g) direct rollovers by plan
participants of distributions from a 401(k) plan offered to employees of
Travelers or its subsidiaries or a 401(k) plan enrolled in the Smith Barney
401(k) Program (Note: subsequent investments will be subject to the applicable
sales charge); (h) purchases by separate accounts used to fund certain
unregistered variable annuity contracts; and (i) purchases by investors
participating in a Smith Barney fee-based arrangement. In order to obtain such
discounts, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase would qualify for the
elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by
aggregating
the dollar amount of the new purchase and the total net asset value of all
Class
A shares of the Fund and of funds sponsored by Smith Barney which are offered
with a sales charge listed under "Exchange Privilege" then held by such person
and applying the sales charge applicable to such aggregate. In order to obtain
such discount, the purchaser must provide sufficient information at the time
of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes
the
minimum initial investment required. The sales charge applicable to purchases
by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative --Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds
offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan
meeting certain require-
18
<PAGE>
- ------------------------------------------------------------------------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
ments. One such requirement is that the plan must be open to specified
partners
or employees of the employer and its subsidiaries, if any. Such plan may, but
is
not required to, provide for payroll deductions, IRAs or investments pursuant
to
retirement plans under Sections 401 or 408 of the Code. Smith Barney may also
offer a reduced sales charge or net asset value purchase for aggregating
related
fiduciary accounts under such conditions that Smith Barney will realize
economies of sales efforts and sales related expenses. An individual who is a
member of a qualified group may also purchase Class A shares at the reduced
sales charge applicable to the group as a whole. The sales charge is based
upon
the aggregate dollar value of Class A shares offered with a sales charge that
have been previously purchased and are still owned by the group, plus the
amount
of the current purchase. A "qualified group" is one which (a) has been in
existence for more than six months, (b) has a purpose other than acquiring
Fund
shares at a discount and (c) satisfies uniform criteria which enable Smith
Barney to realize economies of scale in its costs of distributing shares. A
qualified group must have more than 10 members, must be available to arrange
for
group meetings between representatives of the Fund and the members, and must
agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to
permit
verification that the purchase qualifies for the reduced sales charge.
Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more
provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes
purchases of all Class A shares of the Fund and other funds of the Smith
Barney
Mutual Funds offered with a sales charge over the 13 month period based on the
total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the 13
month
period starting up to 90 days before the date of execution of a Letter of
Intent. Each investment made during the period receives the reduced sales
charge
applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charges applicable to the purchases made and the charges previously
paid,
or an appropriate number of escrowed shares will be redeemed. Please contact a
Smith Barney Financial Consultant or First Data to obtain a Letter of Intent
application.
Class Y Shares. A Letter of Intent may also be used as a way for
investors
to
19
<PAGE>
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- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class Y shares of the
Fund and agree to purchase a total of $5,000,000 of Class Y shares of the same
Fund within six months from the date of the Letter. If a total investment of
$5,000,000 is not made within the six-month period, all Class Y shares
purchased
to date will be transferred to Class A shares, where they will be subject to
all
fees (including a service fee of 0.25%) and expenses applicable to the Fund's
Class A shares, which may include a CDSC of 1.00%. Please contact a Smith
Barney
Financial Consultant or First Data for further information.
DEFERRED SALES CHARGE ALTERNATIVES
CDSC Shares are sold at net asset value next determined without an
initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class
C
shares; and (c) Class A shares that were purchased without an initial sales
charge but subject to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their net asset value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a
CDSC
to the extent that the value of such shares represents: (a) capital
appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions;
(c)
with respect to Class B shares, shares redeemed more than five years after
their
purchase; or (d) with respect to Class C shares and Class A shares that are
CDSC
Shares, shares redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
the amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case
of
Class B shares held under the Smith Barney 401(k) Program, as described below.
See "Purchase of Shares --Smith Barney 401(k) and ExecChoice(TM) Programs."
20
<PAGE>
- ------------------------------------------------------------------------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
Year Since Purchase
Payment Was Made CDSC
- ------------------------------------------------------------------------------
- --
First 5.00%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
========================================================================
========
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will also be converted at that time
such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend Shares)
owned
by the shareholder. See "Prospectus Summary -- Alternative Purchase
Arrangements
- -- Class B Shares Conversion Feature."
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain
distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have
been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation
or
dividend and capital gain distribution reinvestments in such other funds. For
Federal income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption.
The
amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be
$1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount
which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month
21
<PAGE>
- ------------------------------------------------------------------------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
of the value of the shareholder's shares at the time the withdrawal plan
commences (see "Automatic Cash Withdrawal Plan") (provided, however, that
automatic cash withdrawals in amounts equal to or less than 2.00% per month of
the value of the shareholder's shares will be permitted for withdrawal plans
that were established prior to November 7, 1994); (c) redemptions of shares
within twelve months following the death or disability of the shareholder; (d)
redemption of shares made in connection with qualified distributions from
retirement plans or IRAs upon the attainment of age 59 1/2; (e) involuntary
redemptions; and (f) redemptions of shares to effect a combination of the Fund
with any investment company by merger, acquisition of assets or otherwise. In
addition, a shareholder who has redeemed shares from other funds of the Smith
Barney Mutual Funds may, under certain circumstances, reinvest all or part of
the redemption proceeds within 60 days and receive pro rata credit for any
CDSC
imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data in
the case of all other shareholders) of the shareholder's status or holdings,
as
the case may be.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k)
Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below, are offered to all plans
participating ("Participating Plans") in these programs.
The Fund offers to Participating Plans Class A and Class C shares as
investment alternatives under the Smith Barney 401(k) and ExecChoice(TM)
Programs. Class A and Class C shares acquired through the Participating Plans
are subject to the same service and/or distribution fees as the Class A and
Class C shares acquired by other investors; however, they are not subject to
any
initial sales charge or CDSC. Once a Participating Plan has made an initial
investment in the Fund, all of its subsequent investments in the Fund must be
in
the same Class of shares, except as otherwise described below.
Class A Shares. Class A shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney Mutual Funds.
Class C Shares. Class C shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000
of
Class C shares of one or more funds of the Smith Barney Mutual Funds.
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If, at
the end of the fifth year after the date the Participating Plan enrolled in
the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, a
Participating Plan's total Class C holdings in all non-money market Smith
Barney
22
<PAGE>
- ------------------------------------------------------------------------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of
the
Fund. (For Participating Plans that were originally established through a
Smith
Barney retail brokerage account, the five-year period will be calculated from
the date the retail brokerage account was opened.) Such Participating Plans
will
be notified of the pending exchange in writing within 30 days after the fifth
anniversary of the enrollment date and, unless the exchange offer has been
rejected in writing, the exchange will occur on or about the 90th day after
the
fifth anniversary date. If the Participating Plan does not qualify for the
five-year exchange to Class A shares, a review of the Participating Plan's
holdings will be performed each quarter until either the Participating Plan
qualifies or the end of the eighth year.
401(k) Plans Opened Prior to June 21, 1996. In any year after the date a
Participating Plan enrolled in the Smith Barney 401(k) Program, if its total
Class C holdings in all non-money market Smith Barney Mutual Funds equal at
least $500,000 as of the calendar year-end, the Participating Plan will be
offered the opportunity to exchange all of its Class C shares for Class A
shares
of the Fund. Such Plans will be notified in writing within 30 days after the
last business day of the calendar year and, unless the exchange offer has been
rejected in writing, the exchange will occur on or about the last business day
of the following March.
Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM)
Program, whether opened before or after June 21, 1996, that has not previously
qualified for an exchange into Class A shares will be offered the opportunity
to
exchange all of its Class C shares for Class A shares of the Fund regardless
of
asset size, at the end of the eighth year after the date the Participating
Plan
enrolled in the Smith Barney 401(k) or ExecChoice(TM) Program. Such Plans will
be notified of the pending exchange in writing approximately 60 days before
the
eighth anniversary of the enrollment date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the eighth
anniversary
date. Once an exchange has occurred, a Participating Plan will not be eligible
to acquire additional Class C shares of the Fund but instead may acquire Class
A
shares of the Fund. Any Class C shares not converted will continue to be
subject
to the distribution fee.
Participating Plans wishing to acquire shares of the Fund through the
Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
such shares directly from the Transfer Agent. For further information
regarding
these Programs, investors should contact a Smith Barney Financial Consultant.
Existing 401(k) Plans Investing in Class B Shares. Class B shares of the
Fund are not available for purchase by Participating Plans opened on or after
June 21, 1996, but may be purchased by any Participating Plan in the
Smith Barney 401(k) Program opened prior to such date and originally investing
in such Class. Class B shares acquired are subject to a CDSC of 3.00% of
redemption proceeds if the Participating Plan terminates within eight years of
the date the
23
<PAGE>
- ------------------------------------------------------------------------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
Participating Plan first enrolled in the Smith Barney 401(k) Program.
At the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) Program, the Participating Plan will be
offered the opportunity to exchange all of its Class B shares for Class A
shares
of the Fund. Such Participating Plan will be notified of the pending exchange
in
writing approximately 60 days before the eighth anniversary of the enrollment
date and, unless the exchange has been rejected in writing, the exchange will
occur on or about the eighth anniversary date. Once the exchange has occurred,
a
Participating Plan will not be eligible to acquire additional Class B shares
of
the Fund but instead may acquire Class A shares of the Fund. If the
Participating Plan elects not to exchange all of its Class B shares at that
time, each Class B share held by the Participating Plan will have the same
conversion feature as Class B shares held by other investors. See "Purchase of
Shares -- Deferred Sales Charge Alternatives."
No CDSC is imposed on redemptions of Class B shares to the extent that
the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital
gain
distributions, plus the current net asset value of Class B shares purchased
more
than eight years prior to the redemption, plus increases in the net asset
value
of the shareholder's Class B shares above the purchase payments made during
the
preceding eight years. Whether or not the CDSC applies to the redemption by a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to redemptions by other shareholders, which depends
on
the number of years since those shareholders made the purchase payment from
which the amount is being redeemed.
The CDSC will be waived on redemptions of Class B shares in connection
with
lump-sum or other distributions made by a Participating Plan as a result of:
(a)
the retirement of an employee in the Participating Plan; (b) the termination
of
employment of an employee in the Participating Plan; (c) the death or
disability
of an employee in the Participating Plan; (d) the attainment of age 591 1/42
by
an employee in the Participating Plan; (e) hardship of an employee in the
Participating Plan to the extent permitted under Section 401(k) of the Code;
or
(f) redemptions of shares in connection with a loan made by the Participating
Plan to an employee.
- ------------------------------------------------------------------------------
- --
Exchange Privilege
- ------------------------------------------------------------------------------
- --
Except for Fund shareholders at the time of conversion of the Fund to
open-end status who will not be able to exchange their A shares for Class A
shares of any other Fund in the Smith Barney family of mutual funds until
January 1, 1998 and as otherwise noted below, shares of each Class may be
exchanged for shares of the same Class in the following funds of the Smith
Barney Mutual Funds, to the extent
24
<PAGE>
- ------------------------------------------------------------------------------
- --
Exchange Privilege (continued)
- ------------------------------------------------------------------------------
- --
shares are offered for sale in the shareholder's state of residence. Exchanges
of Class A, Class B and Class C shares are subject to minimum investment
requirements and all shares are subject to the other requirements of the fund
into which exchanges are made.
FUND NAME
- ------------------------------------------------------------------------------
- --
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Equity Income Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++ Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities
Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
25
<PAGE>
- ------------------------------------------------------------------------------
- --
Exchange Privilege (continued)
- ------------------------------------------------------------------------------
- --
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- Income Portfolio
Money Market Funds
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
+++ Smith Barney Municipal Money Market Fund, Inc.
+++ Smith Barney Muni Funds -- California Money Market Portfolio
+++ Smith Barney Muni Funds -- New York Money Market Portfolio
========================================================================
========
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A and Class B shares of the Fund. In
addition, shareholders who own Class C shares of the Fund through the
Smith Barney 401(k) Program may exchange those shares for Class C shares
of this fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, participating plans opened prior to June 21, 1996 and
investing
in Class C shares may exchange Fund shares for Class C shares of this
fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
26
<PAGE>
- ------------------------------------------------------------------------------
- --
Exchange Privilege (continued)
- ------------------------------------------------------------------------------
- --
Class B Exchanges. In the event a Class B shareholder wishes to exchange
all or a portion of his or her shares in any of the funds imposing a CDSC
higher
than that imposed by the Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Fund
that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will be
deemed
to have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Fund
who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without
imposition of any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can
be detrimental to the Fund's performance and its shareholders. The Manager may
determine that a pattern of frequent exchanges is excessive and contrary to
the
best interests of the Fund's other shareholders. In this event, the Fund may,
at
its discretion, decide to limit additional purchases and/or exchanges by the
shareholder. Upon such a determination, the Fund will provide notice in
writing
or by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15 day period the shareholder will be
required
to (a) redeem his or her shares in the Fund or (b) remain invested in the Fund
or exchange into any of the funds of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in
determining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. Redemption
procedures
discussed below are also applicable for exchanging shares, and exchanges will
be
made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
27
<PAGE>
- ------------------------------------------------------------------------------
- --
Redemption of Shares
- ------------------------------------------------------------------------------
- --
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per
share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close
of
regular trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for
redemption
must specify the Class being redeemed. In the event of a failure to specify
which Class, or if the investor owns fewer shares of the Class than specified,
the redemption request will be delayed until the Fund's transfer agent
receives
further instructions from Smith Barney, or if the shareholder's account is not
with Smith Barney, from the shareholder directly. The redemption proceeds will
be remitted on or before the third business day following receipt of proper
tender, except on any days on which the NYSE is closed or as permitted under
the
1940 Act in extraordinary circumstances. Generally, if the redemption proceeds
are remitted to a Smith Barney brokerage account, these funds will not be
invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified or official
bank
check, will be remitted upon clearance of the check, which may take up to ten
days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than
those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Disciplined Small Cap Fund, Inc.
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or
dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are
registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power)
and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $2,000 must be guaranteed by an eligible guarantor
institution, such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period or the redemption proceeds are to be sent to an
address other than the address of record.
28
<PAGE>
- ------------------------------------------------------------------------------
- --
Redemption of Shares (continued)
- ------------------------------------------------------------------------------
- --
Unless otherwise directed, redemption proceeds will be mailed to an investor's
address of record. First Data may require additional supporting documents for
redemptions made by corporations, executors, administrators, trustees or
guardians. A redemption request will not be deemed properly received until
First
Data receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under
which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on
exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived
on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not
exceed
2.00% per month of the value of the shareholder's shares subject to the CDSC.)
For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should
contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a
signature guarantee, that will be provided by First Data upon request.
(Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making
his/her
initial investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares, may be made by eligible shareholders by calling First
Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day the NYSE is open. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value
next determined. Redemptions of shares (i) by retirement plans or (ii) for
which
certificates have been issued are not permitted under this program.
A shareholder will have the option of having the redemption proceeds
mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case
may be, on the next business day following the redemption request. In order to
use
29
<PAGE>
- ------------------------------------------------------------------------------
- --
Redemption of Shares (continued)
- ------------------------------------------------------------------------------
- --
the wire procedures, the bank receiving the proceeds must be a member of the
Federal Reserve System or have a correspondent relationship with a member
bank.
The Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00
p.m.
(New York City time) on any day on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange
Program.
Neither the Fund nor its agents will be liable for following instructions
communicated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller and legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded). The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and exchange program or to impose a charge for this service at any time
following at least seven (7) days prior notice to shareholders.
- ------------------------------------------------------------------------------
- --
Minimum Account Size
- ------------------------------------------------------------------------------
- --
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
this Fund, each account must satisfy the minimum account size.) The Fund,
however, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
- ------------------------------------------------------------------------------
- --
Performance
- ------------------------------------------------------------------------------
- --
From time to time the Fund may advertise the Portfolio's total return and
average annual total return in advertisements. In addition, in other types of
sales literature the Fund may include the Portfolio's current dividend return.
These figures are computed separately for Class A, Class B, Class C and Class
Y
shares of the Fund. These figures are based on historical earnings and are not
intended to indicate future
30
<PAGE>
- ------------------------------------------------------------------------------
- --
Performance (continued)
- ------------------------------------------------------------------------------
- --
performance. Total return is computed for a specified period of time assuming
deduction of the maximum sales charge from the initial amount invested and
reinvestment of all income dividends and capital gain distributions on the
reinvestment dates at prices calculated as stated in this Prospectus, then
dividing the value of the investment at the end of the period so calculated by
the initial amount invested and subtracting 100%. The standard average annual
total return, as prescribed by the SEC is derived from this total return,
which
provides the ending redeemable value. Such standard total return information
may
also be accompanied with nonstandard total return information for differing
periods computed in the same manner but without annualizing the total return
or
taking sales charges into account. The Fund calculates current dividend return
for each Class by dividing the current dividend by the net asset value or the
maximum public offering price (including sales charge) on the last day of the
period for which current dividend return is presented. The current dividend
return for each Class may vary from time to time depending on market
conditions,
the composition of the investment portfolio and operating expenses. These
factors and possible differences in the methods used in calculating current
dividend return should be considered when comparing a Class' current return to
yields published for other investment companies and other investment vehicles.
The Fund may also include comparative performance information in advertising
or
marketing its shares. Such performance information may include data from
Lipper
Analytical Services, Inc. and other financial publications.
- ------------------------------------------------------------------------------
- --
Management of the Fund
- ------------------------------------------------------------------------------
- --
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. The Directors approve all significant
agreements between the Fund and the companies that furnish services to the
Fund
and the Fund, including agreements with the Fund's distributor, investment
manager, custodian and transfer agent. The day-to-day operations of the Fund
are
delegated to the Fund's investment adviser and administator. The Statement of
Additional Information contains background information regarding each Director
and executive officer of the Fund.
ADVISER
The Adviser, located at One Tower Square, Hartford, CT 06183-2030 serves
as
the Fund's investment adviser and manages the day-to-day operations of the
Fund
pursuant to an advisory agreement entered into by the Adviser and the Fund.
The
Adviser, a registered investment adviser since 1971, has been in the
investment
counseling business since 1967 and renders investment advice to a
31
<PAGE>
- ------------------------------------------------------------------------------
- --
Management of the Fund (continued)
- ------------------------------------------------------------------------------
- --
number of institutional accounts as well as various registered investment
companies and insurance company separate accounts that had total assets under
management as of December 31, 1996 in excess of $1.3 billion. Subject to the
supervision and direction of the Fund's Board of Directors, the Adviser
manages
the Fund in accordance with the Fund's stated investment objective and
policies,
makes investment decisions for the Fund, places orders to purchase and sell
securities and employs professional portfolio managers and securities analysts
who provide research services to the Fund.
Investment advisory fees are computed daily and paid monthly at the
annual
rate of 0.65% of the Fund's average daily net assets.
PORTFOLIO MANAGEMENT
The investment management team of the Fund's Adviser is headed by Sandip
Bhagat and Kent Kelley, president and chief executive officer, respectively,
of
the Adviser. Messrs. Bhagat and Kelley are primarily responsible for the
day-to-day operations of the Fund, including making all investment decisions.
Management's discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended December 31. 1996
were included in the Annual Report dated December 31, 1996. A copy of the
Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.
ADMINISTRATOR
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves
as
the Fund's administrator and oversees all aspects of the Fund's administration
and operation. Administration fees are computed daily and paid monthly at the
annual rate of 0.10% of the Fund's average daily net assets.
- ------------------------------------------------------------------------------
- --
Distributor
- ------------------------------------------------------------------------------
- --
Smith Barney Inc. ("Smith Barney") distributes shares of the Fund as
principal underwriter and as such conducts a continuous offering pursuant to a
"best efforts" arrangement requiring Smith Barney to take and pay for only
such
securities as may be sold to the public. Pursuant to a plan of distribution
adopted by the Fund under Rule 12b-1 under the 1940 Act (the "Plan"), Smith
Barney is paid a service fee with respect to Class A, Class B and Class C
shares
of the Fund at the annual rate of 0.25% of the average daily net assets
attributable to these Classes. Smith Barney is also paid a distribution fee
with
respect to Class B and Class C shares at the annual rate of
32
<PAGE>
- ------------------------------------------------------------------------------
- --
Distributor (continued)
- ------------------------------------------------------------------------------
- --
0.75% of the average daily net assets attributable to these Classes. Class B
shares that automatically convert to Class A shares eight years after the date
of original purchase will no longer be subject to a distribution fee. The fees
are used by Smith Barney to pay its Financial Consultants for servicing
shareholder accounts and, in the case of Class B and Class C shares, to cover
expenses primarily intended to result in the sale of those shares. These
expenses include: advertising expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and expenses of Smith Barney
Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying charges;
and indirect and overhead costs of Smith Barney associated with the sale of
Fund
shares, including lease, utility, communications and sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of
a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder services expenses actually incurred by Smith Barney and the
payments
may exceed distribution expenses actually incurred. The Fund's Board of
Directors will evaluate the appropriateness of the Plan and its payment terms
on
a continuing basis and in so doing will consider all relevant factors,
including
expenses borne by Smith Barney, amounts received under the Plan and proceeds
of
the CDSC.
- ------------------------------------------------------------------------------
- --
Additional Information
- ------------------------------------------------------------------------------
- --
The Fund, an open-end management investment company, was incorporated in
Maryland on October 4, 1989 as a non-diversified, closed-end company and
converted to open-end diversified status on June 23, 1997 pursuant to
shareholder approval on April 18, 1997 and Securities and Exchange Commission
declaration of effectiveness on June 23, 1997. The Fund has an authorized
capital stock of 100,000,000 shares per class with a par value of $.001 per
share. The Board of Directors has authorized the issuance of four classes of
shares, and may authorize the issuance of additional classes of shares in the
future. Class A, Class B, Class C and Class Y shares of the Fund represent
interests in the assets of the Fund and have identical voting, dividend,
liquidation and other rights on the same terms and conditions except that
expenses related to the distribution of each Class of shares are borne solely
by
each class and each Class of shares has exclusive voting rights with respect
to
provisions of the Fund's Rule 12b-1 distribution plan which pertains to a
particular Class. As described under "Voting" in the Statement of Additional
Information, the Fund ordinarily will not hold meetings of shareholders
annually; however,
33
<PAGE>
- ------------------------------------------------------------------------------
- --
Additional Information (continued)
- ------------------------------------------------------------------------------
- --
shareholders have the right to call a meeting upon a vote of 10% of the Fund's
outstanding shares for the purpose of voting to remove directors, and the Fund
will assist shareholders in calling such a meeting as required by the 1940
Act.
Shares do not have cumulative voting rights or preemptive rights and are fully
paid, transferable and nonassessable when issued for payment as described in
this Prospectus.
The PNC Bank, N.A. located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania 19103, serves as custodian of the Fund's investments.
First Data, located at Exchange Place, Boston, Massachusetts 02109,
serves
as the Fund's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited
annual
report, which include listings of the investment securities held by the Fund
at
the end of the period covered. In an effort to reduce the Fund's printing and
mailing costs, the Fund plans to consolidate the mailing of its semi-annual
and
annual reports by household. This consolidation means that a household having
multiple accounts with the identical address of record will receive a single
copy of each report. Shareholders who do not want this consolidation to apply
to
their account should contact their Smith Barney Financial Consultant or the
Fund's transfer agent.
34
<PAGE>
Smith
Barney
A Member of
TravelersGroup[LOGO]
Smith
Barney
Disciplined
Small
Cap
Fund,
Inc.
388 Greenwich
Street
New York, New York
10013
FD 01305 6/97
PART B
STATEMENT OF ADDDITIONAL INFORMATION
Smith Barney
DISCIPLINED SMALL CAP GROWTH FUND, INC.
388 Greenwich Street
New York, New York 10013
(800)-451-2010
Statement of Additional
Information
June 23,
1997
This Statement of Additional Information expands upon and supplements
the information contained in the current Prospectus of Smith Barney
Disciplined Small Cap Growth Fund, Inc. (formerly The Inefficient-Market Fund,
Inc. (the "Fund"), dated June 23, 1997, as amended or supplemented from
time to time, and should be read in conjunction with the Fund's Prospectus.
The Fund's Prospectus may be obtained from any Smith Barney Financial
Consultant, or by writing or calling the Fund at the address or telephone
number set forth above. This Statement of Additional Information, although not
in itself a prospectus, is incorporated by reference into the Prospectus in
its entirety.
TABLE OF CONTENTS
For ease of reference, the same section headings are used in both the
Prospectus and this Statement of Additional Information, except where shown
below:
Management of the
Fund.......................................................................2
.........
Administration of the
Fund.......................................................................3
...
Investment Objective and Management
Policies.............................................. 4
Purchase of
Shares.......................................................................9
.
.................
Redemption of
Shares........................................................................
9
.............
Distributor................................................................10
......................................
Valuation of
Shares........................................................................
11
................
Exchange
Privilege.....................................................................
11
....................
Performance Data (See in the Prospectus
"Performance'')................................ 12
Taxes (See in the Prospectus "Dividends, Distributions and
Taxes'')................ 14
Additional
Information...............................................................15.
....................
Financial
Statements.................................................................15
......................
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund. These organizations are as
follows:
Name Service
Smith Barney Inc.
("Smith
Barney'')..................
...........................
............... Distributor
Travelers Investment Management Company
("TIMCO')..................
...........................
.......................
Investment Adviser
Smith Barney Funds Management Inc.
...............
...........................
......................
Administrator
PNC Bank, National Association ("PNC").......................
Custodian
First Data Investor Services Group, Inc. ("First Data").....
Transfer Agent
These organizations and the functions they perform for the Fund are
discussed in the Prospectus and in this Statement of Additional Information.
Directors and Executive Officers of the Fund
The Directors and executive officers of the Fund, together with
information
as to their principal business occupations during the past five years, are
shown below. Each Director who is an "interested person" of the Fund, as
defined in the Investment Company Act of 1940, as amended (the "1940 Act"), is
indicated by an asterisk.
Jessica
Bibliowicz*
Executive Vice President of Smith Barney Inc., Chairman
of the Board of Smith Barney Mutual Funds Management
(SBMFM"); President of forty two investment companies
and Director of twelve investment companies associated
with Smith Barney. Prior to January 1994, Director of
Sales and Marketing for Prudential Mutual Funds; 37.
Joseph H. Fleiss
Retired; Director of ten investment companies
associated with Smith Barney. Formerly Senior Vice
President of Citibank, Manager of Citibank's Bond
Investment Portfolio and Money Desk, and a Director of
Citicorp Securities Co., Inc.; 79.
Donald R. Foley
Retired; Director of ten investment companies
associated with Smith Barney. Formerly Vice President
of Edwin Bird Wilson, Incorporated(advertising);74
Paul Hardin
Interim President of University of Alabama at
Birmingham; Professor of Law at the University of North
Carolina at Chapel Hill; Director of twelve investment
companies associated with Smith Barney and a Director
of The Summit Bancorporation. Formerly, Chancellor of
the University of North Carolina at Chapel Hill; 65.
Francis P.
Martin
Practicing physician; Director of ten investment
companies associated with Smith Barney; formerly
President of the Nassau Physicians' Fund, Inc.; 72
Heath B.
McLendon*
Managing Director of Smith Barney; Director of forty
two investment companies associated with Smith Barney;
Chairman of the Board of Smith Barney Strategy Advisers
Inc.: and President of SBMFM and Director of TIMCO.
Prior to July 1993, Senior Executive Vice President of
Shearson Lehman Brothers Inc.; Vice Chairman of
Shearson Asset Management; 63
John P. Toolan
Retired; Director of ten investment companies
associated with Smith Barney. Director of John Hancock
Funds. Formerly Director and Chairman of the Smith
Barney Trust Company, Director of Smith Barney Inc. and
the Manager. Prior to 1992, Senior Executive Vice
President, Director and Member of the Executive
Committee of Smith Barney; 66
Roderick C.
Rasmussen
Investment Counselor; Director of ten investment
companies associated with Smith Barney. Formerly Vice
President of Dresdner and Company Inc. (investment
counselors); 70
Bruce D.
Sargent*
Managing Director of Smith Barney, and Vice President
and Director of SBMFM, Smith Barney Funds, Inc., and
Smith Barney World Funds, Inc.; 53
Christina T.
Sydor
Secretary. Managing Director of Smith Barney; General
Counsel and Secretary of SBMFM and Secretary of the
other investment companies associated with Smith
Barney; 46.
.
Lewis Daidone
Senior Vice President and Treasurer. Managing Director
of Smith Barney; Director and Senior Vice President of
SBMFM; Senior Vice President and Treasurer of the other
investment companies associated with Smith Barney; 38
Thomas M.
Reynolds
Controller and Assistant Secretary. Director of Smith
Barney in the Asset Management Division and Controller
of and Assistant Controller of certain other investment
companies associated with Smith Barney.
As of February 10, 1997, the Directors and Officers of the Fund owned in
the aggregate less than 1% of the outstanding shares of the Fund. No officer,
director or employee of Smith Barney or any parent or subsidiary receives any
compensation from the Fund for serving as an officer or Director of the Fund.
The Fund pays each Director who is not an officer, director or employee of
Smith Barney or any of its affiliates a fee of $42,000 per annum plus $100 per
meeting attended and reimburses them for travel and out-of-pocket expenses.
For the Fund's fiscal year ended December 31, 1996, such fees and expenses
totaled $5,000.
For the fiscal year ended December 31, 1996, the Directors of the Fund were
paid the following compensation:
Compensation Table
Name of Person
Aggregate
Compensat
ion
from Fund
Pension or
Retirement
Benefits Accrued
as part
of Fund Expenses
Total
Compensation
from Fund and
Fund Complex
Paid to
Directors
Number of
Funds for Which
Director Serves
Within Fund
Complex
Jessica
Bibliowicz*
$ 0
$ 0
$ 0
12
Joseph H.
Fleiss+
828
0
58,500
10
Donald R.
Foley+
828
0
58,300
10
Paul Hardin+
956
0
76,850
12
Heath B.
McLendon*
0
0
0
42
Francis P.
Martin
856
0
58,300
10
Roderick C.
Rasmussen
856
0
58,500
10
Bruce D.
Sargent*
0
0
0
3
John P.
Toolan+
856
0
58,500
10
C. Richard
Youngdahl
856
0
58,500
10
* Designates an interested director".
+ Pursuant to the Fund's deferred compensation plan, the indicated Directors
have elected to defer the following payment of some or all of their
compensation: Joseph H. Fleiss: $828, Donald P. Foley : $828, Paul Hardin:
$956 and John P. Toolan: $856.
Investment Adviser -TIMCO
Travelers Investment Management Company (TIMCO") serves as investment
adviser to the Fund pursuant to a written agreement (the "Advisory
Agreement"). The services provided by TIMCO under the Advisory Agreement are
described in the Prospectus under "Management of the Fund." TIMCO bears all
of its expenses of its employees and overhead in connection with its duties
under the Advisory Agreement. TIMCO is a wholly owned subsidiary of Smith
Barney Holdings Inc. ("Holdings"), which is in turn a wholly owned subsidiary
of Travelers Group Inc. ("Travelers").
As compensation for investment advisory services, the Fund pays TIMCO a
fee
computed daily and paid monthly at the annual rate of 0.65% of the value of
the Fund's average daily net assets. For the 1996, 1995 and 1994 fiscal years,
the Fund paid $416,000, $418,000 and $402,000, respectively, in investment
advisory fees.
Administrator - SBMFM serves as administrator to the Fund pursuant to a
written agreement (the "Administration Agreement"). The services provided by
SBMFM under the Administration Agreement are described in the Prospectus under
"Management of the Fund." SBMFM pays the salary of any officer and employee
who is employed by both it and the Fund and bears all expenses in connection
with the performance of its services.
As compensation for administration services rendered to the Fund, SBMFM
receives a fee at the annual rate of 0.10% of the value of the Fund's average
daily net assets. For the 1996, 1995 and 1994 fiscal period, the Fund paid
SBMFM $138,000 , $139,000 and $134,000 in administration fees.
The Investment Advisory Agreement provides that except for the expenses
specifically assumed by TIMCO, the Fund bears expenses incurred in its
operation, including: fees of the directors not affiliated with the Adviser or
its affiliates and board meeting expenses; fees of the Adviser and of Smith
Barney Mutual Funds Management Inc. (or any successor) as the Administrator;
interest charges; taxes; charges and expenses of the Funds legal counsel and
independent accountants, and of the transfer agent, registrar and dividend
disbursing agent of the Fund; expenses of issue, repurchase or redemption of
Shares; expenses of printing and mailing stockholder reports, notices, proxy
statements and reports to governmental offices; brokerage and other expenses
connected with the execution, recording and settlement of portfolio security
transactions; expenses connected with negotiating, effecting purchases or
sales or registering privately issued portfolio securities; fees and expenses
of the Funds custodians for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
fidelity bonding and other insurance premiums; expenses of stockholders
meetings; filing fees and expenses related to the registration and
qualification of the Funds shares and the Fund under Federal of State
Securities laws and maintaining such registrations and qualifications
(including the printing of the Funds registration statements and
prospectuses); fees payable to the National Association of Securities Dealers,
Inc. in connection with this offering; and its other business and operating
expenses.
TIMCO has agreed that if in any fiscal year the aggregate expenses of
the
Fund (including fees paid pursuant to the Advisory and Agreements, but
excluding interest, taxes, brokerage, fees paid pursuant to the Fund's
services and distribution plan, and, with the prior written consent of the
necessary state securities commissions, extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over the Fund, TIMCO will,
to the extent required by state law, reduce its management fee by such excess
expense. Such a fee reduction, if any, will be reconciled on a monthly basis.
The most restrictive state limitation applicable to the Fund would require
TIMCO to reduce its fees in any year that such excess expenses exceed 2.5% of
the first $30 million of average net assets, 2% of the next $70 million of
average net assets and 1.5% of the remaining average net assets.
Counsel and Auditors
Sullivan & Cromwell serves as counsel to the Fund. The Directors who are
not "interested persons" of the Fund have selected Sullivan & Cromwell as
their legal counsel.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has
been
selected as the Funds independent auditor to examine and report on the Funds
financial statements and highlights for the fiscal year ending December 31,
1997.
Investment Objective and Management Policies
The Prospectus discusses the Fund's investment objective and the
policies
it employs to achieve its objective. The following discussion supplements the
description of the Fund's investment objective and management policies in the
Prospectus.
Leveraging
The Fund may from time to time leverage its investments by purchasing
securities with borrowed money. The Fund may borrow money only from banks and
in an amount not to exceed 33 1/3% of the total value of its assets less its
liabilities. The amount of the Fund's borrowings also may be limited by the
availability and cost of credit and by restrictions imposed by the Federal
Reserve Board.
The Fund is required under the 1940 Act to maintain at all times an
asset
coverage of 300% of the amount of its borrowings. If, as a result of market
fluctuations or for any other reason, the Fund's asset coverage drops below
300%, the Fund must reduce its outstanding bank debt within three business
days so as to restore its asset coverage to the 300% level.
Any gain in the value of securities purchased with borrowed money that
exceeds the interest paid on the amount borrowed would cause the net asset
value of the Fund's shares to increase more rapidly than otherwise would be
the case. Conversely, any decline in the value of securities purchased would
cause the net asset value of the Fund's shares to decrease more rapidly than
otherwise would be the case. Borrowed money thus creates an opportunity for
greater capital gain but at the same time increases exposure to capital risk.
The net cost of any borrowed money would be an expense that otherwise would
not be incurred, and this expense could restrict or eliminate the Fund's net
investment income in any given period.
Lending of Portfolio Securities
As stated in the Prospectus, the Fund has the ability to lend securities
from its portfolio to brokers, dealers and other financial organizations. The
Fund may not lend its portfolio securities to Smith Barney or its affiliates
unless it has applied for and received specific authority from the SEC. Loans
of portfolio securities by the Fund will be collateralized by cash, letters of
credit or securities issued or guaranteed by the United States government, its
agencies or instrumentalitys ("U.S. government securities") which will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. From time to time, the Fund may return
a part of the interest earned from the investment of collateral received for
securities loaned to the borrower and/or a third party, which is unaffiliated
with the Fund or with Smith Barney, and which is acting as a "finder."
In lending its portfolio securities, the Fund can increase its income by
continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in short-term instruments or obtaining yield in
the form of interest paid by the borrower when government securities are used
as collateral. Requirements of the SEC, which may be subject to future
modifications, currently provide that the following conditions must be met
whenever portfolio securities are loaned: (a) the Fund must receive at least
100% cash collateral or equivalent securities from the borrower; (b) the
borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (c) the Fund must be able
to terminate the loan at any time; (d) the Fund must receive reasonable
interest on the loan, as well as an amount equal to any dividends, interest or
other distributions on the loaned securities, and any increase in market
value; (e) the Fund may pay only reasonable custodian fees in connection with
the loan; and (f) voting rights on the loaned securities may pass to the
borrower; however, if a material event adversely affecting the investment
occurs, the Fund's Board of Directors must terminate the loan and regain the
right to vote the securities. The risks in lending portfolio securities, as
with other extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the securities or
possible loss of rights in the collateral should the borrower fail
financially.
Short Term Instruments
As stated in the Prospectus, the Fund may invest in short term and money
market instruments. Money market instruments in which the Fund may invest
include: U.S. government securities; certificates of deposit, time deposits
and bankers' acceptances issued by domestic banks (including their branches
located outside the United States and subsidiaries located in Canada),
domestic branches of foreign banks, savings and loan associations and similar
institutions; high grade commercial paper; and repurchase agreements with
respect to the foregoing types of instruments. The following is a more
detailed description of such money market instruments.
Bank Obligations. Certificates of deposits ("CDs") are short-term,
negotiable obligations of commercial banks. Time deposits ("TDs") are non-
negotiable deposits maintained in banking institutions for specified periods
of time at stated interest rates. Bankers' acceptances are time drafts drawn
on commercial banks by borrowers, usually in connection with international
transactions.
Domestic commercial banks organized under Federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System and to be insured by the Federal Deposit Insurance
Corporation (the "FDIC"). Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. Most state banks are
insured by the FDIC (although such insurance may not be of material benefit to
the Fund, depending upon the principal amount of CDs of each bank held by the
Fund) and are subject to Federal examination and to a substantial body of
Federal law and regulation. As a result of governmental regulations, domestic
branches of domestic banks are, among other things, generally required to
maintain specified levels of reserves, and are subject to other supervision
and regulation designed to promote financial soundness.
Obligations of foreign branches of domestic banks, such as CDs and TDs,
may
be general obligations of the parent bank in addition to the issuing branch,
or may be limited by the terms of a specific obligation and governmental
regulation. Such obligations are subject to different risks than are those of
domestic banks or domestic branches of foreign banks. These risks include
foreign economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the
obligations, foreign exchange controls and foreign withholding and other taxes
on interest income. Foreign branches of domestic banks are not necessarily
subject to the same or similar regulatory requirements that apply to domestic
banks, such as mandatory reserve requirements, loan limitations, and
accounting, auditing and financial recordkeeping requirements. In addition,
less information may be publicly available about a foreign branch of a
domestic bank than about a domestic bank. CDs issued by wholly owned Canadian
subsidiaries of domestic banks are guaranteed as to repayment of principal and
interest (but not as to sovereign risk) by the domestic parent bank.
Obligations of domestic branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by governmental regulation
as well as governmental action in the country in which the foreign bank has
its head office. A domestic branch of a foreign bank with assets in excess of
$1 billion may or may not be subject to reserve requirements imposed by the
Federal Reserve System or by the state in which the branch is located if the
branch is licensed in that state. In addition, branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may or may not be required to: (a) pledge to the regulator by
depositing assets with a designated bank within the state, an amount of its
assets equal to 5% of its total liabilities; and (b) maintain assets within
the state in an amount equal to a specified percentage of the aggregate amount
of liabilities of the foreign bank payable at or through all of its agencies
or branches within the state. The deposits of State Branches may not
necessarily be insured by the FDIC. In addition, there may be less publicly
available information about a domestic branch of a foreign bank than about a
domestic bank.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign branches of domestic banks or by domestic branches of
foreign banks, TIMCO will carefully evaluate such investments on a case-by-
case basis.
Savings and loans associations whose CDs may be purchased by the Fund
are
supervised by the Office of Thrift Supervision and are insured by the Savings
Association Insurance Fund which is administered by the FDIC and is backed by
the full faith and credit of the United States government. As a result, such
savings and loan associations are subject to regulation and examination.
Investment Restrictions
The Fund has adopted the following restrictions and fundamental
policies that cannot be changed without approval by the holders of a majority
of the Fund's outstanding shares defined as the lesser of (a) more than
50% of the outstanding shares of the Fund or (b) 67% or more of the
Fund's shares present at a meeting, if the holders of more than 50% of
the outstanding shares are present in porson or proxy.
1. Invest 25% or more of the value of its total assets in any one
industry;
2. Borrow money (including borrowing through entering into reverse
repurchase agreements) in excess of 31/3% of its total assets (including
the amount of borrowed but excluding any liabilities and indebtedness
constituting senior securities) except that the Fund may borrow up to an
additional 5% of its total assets for temporary purposes; or pledge its
assets other than to secure such borrowings or in connection with
Hedging Transactions, short sales, when-issued and forward commitment
transaction and similar investment strategies.
3. Issue any senior security if such issuance is specifically
prohibited by
the 1940 Act or the rules and regulations thereunder (for the purpose of
this restriction, collateral arrangements with respect to options,
futures contracts and options on futures contracts and collateral
arrangements with respect to initial and variation margin are not deemed
to be the issuance of a senior security);
4. Make loans, except the Fund may purchase debt obligations, may
enter
into repurchase agreements and may lend its securities;
5. Underwrite the securities of other issuers, except to the extent
that in
connection with the he disposition of portfolio securities the Fund may
be deemed to be an underwriter;
6. Invest for the purpose of exercising control over management of
any
company;
7. Purchase real estate or interests therein other than securities
secured
by real estate, participation therein or real estate investment trusts
and similar instruments;
8. Purchase or sell commodities or commodities contracts except for
hedging
purposes; or
9. Make any short sale of securities except in conformity with
applicable
laws, rules and regulations and unless, giving effect to such sale, the
market value of all securities sold short does not exceed 25% of the
value of the Fund's total assets and the Fund's aggregate short sales of
a particular class of an issuer's securities do not exceed 25% of the
then outstanding securities of that class of the issuer's securities.
10. Purchase any security (other than U.S. obligations) such that (a)
more
than 25% of the Fund's total assets would be invested in securities of a
single issuer or (b) as to 75% of the Fund's total assets (I) more than
5% of the Fund's total assets would then be invested in securities of a
single issuer or (ii) the Fund would own more than 10% of the voting
securities of a single issuer.
Certain restrictions listed above permit the Fund without shareholder
approval to engage in investment practices that the Fund does not currently
pursue. The Fund has no present intention of altering its current investment
practices as otherwise described in the Prospectus and this Statement of
Additional Information and any future change in these practices would require
Board approval. If any percentage restriction described above is complied with
at the time of an investment, a later increase or decrease in percentage
resulting from a change in values or assets will not constitute a violation of
such restriction. The Fund may make commitments more restrictive than the
restrictions listed above so as to permit the sale of Fund shares in certain
states. Should the Fund determine that any such commitment is no longer in the
best interests of the Fund and its shareholders, it will revoke the commitment
by terminating sales of its shares in the state involved.
Portfolio Turnover
The Fund's investment policies may result in its experiencing a greater
portfolio turnover rate than those of investment companies that seek to
produce income or to maintain a balanced investment position. Although the
Fund's portfolio turnover rate cannot be predicted and will vary from year to
year, TIMCO expects that the Fund's annual portfolio turnover rate may exceed
100%, but will not exceed [150]%. A 100% portfolio turnover rate would occur,
for instance, if all securities in the Fund's portfolio were replaced once
during a period of one year. A high rate of portfolio turnover in any year
will increase brokerage commissions paid and could result in high amounts of
realized investment gain subject to the payment of taxes by shareholders. Any
realized short-term investment gain will be taxed to shareholders as ordinary
income. For the 1996, 1995 and 1994 fiscal years, the Fund's portfolio
turnover rates were 151%, 177% and 45% respectively.
Portfolio Transactions and Brokerage
Decisions to buy and sell securities for the Fund are made by TIMCO,
subject to the overall supervision and review of the Fund's Board of
Directors. Portfolio securities transactions for the Fund are effected by or
under the supervision of TIMCO.
Transactions on stock exchanges involve the payment of negotiated
brokerage
commissions. There is generally no stated commission in the case of securities
traded in the over-the-counter markets, but the price of those securities
includes an undisclosed commission or mark-up. The cost of securities
purchased from underwriters includes an underwriting commission or concession,
and the prices at which securities are purchased from and sold to dealers
include a dealer's mark-up or mark-down. For the 1996, 1995 and 1994 fiscal
years, the Fund paid $176,000, $155,000 and $190,000 respectively, in
brokerage commissions.
In executing portfolio transactions and selecting brokers or dealers, it
is
the Fund's policy to seek the best overall terms available. The Advisory
Agreement between the Fund and TIMCO provides that, in assessing the best
overall terms available for any transaction, TIMCO shall consider the factors
it deems relevant, including the breadth of the market in the security, the
price of the security, the financial condition and execution capability of the
broker or dealer, and the reasonableness of the commission, if any, for the
specific transaction and on a continuing basis. In addition, the Advisory
Agreement authorizes TIMCO, in selecting brokers or dealers to execute a
particular transaction and in evaluating the best overall terms available, to
consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934) provided to the Fund
and/or other accounts over which TIMCO or an affiliate exercises investment
discretion.
The Fund's Board of Directors will periodically review the commissions
paid
by the Fund to determine if the commissions paid over representative periods
of time were reasonable in relation to the benefits inuring to the Fund. It is
possible that certain of the services received will primarily benefit one or
more other accounts for which investment discretion is exercised. Conversely,
the Fund may be the primary beneficiary of services received as a result of
portfolio transactions effected for other accounts. TIMCO's fee under the
Advisory Agreement is not reduced by reason of TIMCO's receiving such
brokerage and research services.
The Fund's Board of Directors has determined that any portfolio
transaction
for the Fund may be executed through Smith Barney if, in TIMCO's judgment, the
use of Smith Barney is likely to result in price and execution at least as
favorable as those of other qualified brokers, and if, in the transaction,
Smith Barney charges the Fund a commission rate consistent with that charged
by Smith Barney to comparable unaffiliated customers in similar transactions.
In addition, under SEC rules, Smith Barney may directly execute such
transactions for the Fund on the floor of any national securities exchange,
provided (a) the Board of Directors has expressly authorized Smith Barney to
effect such transactions and (b) Smith Barney annually advises the Fund of the
aggregate compensation it earned on such transactions. Smith Barney will not
participate in commissions from brokerage given by the Fund to other brokers
or dealers and will not receive any reciprocal brokerage business resulting
therefrom. Over-the-counter purchases and sales are transacted directly with
principal market makers except in those cases in which better prices and
executions may be obtained elsewhere. For the 1996, 1995 and 1994 fiscal
years, the Fund paid $7,375, $32,635 and $5,400, respectively, in brokerage
commissions to Smith Barney. For the 1996 fiscal year, Smith Barney received
4.2% of the brokerage commissions paid by the Fund and effected 29% of the
total dollar amount of transactions for the Fund involving the payment of
brokerage commissions.
Even though investment decisions for the Fund are made independently
from
those of the other accounts managed by TIMCO, investments of the kind made by
the Fund also may be made by those other accounts. When the Fund and one or
more accounts managed by TIMCO are prepared to invest in, or desire to dispose
of, the same security, available investments or opportunities for sales will
be allocated in a manner believed by TIMCO to be equitable. In some cases,
this procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained for or disposed of by the Fund.
Purchase of Shares
Volume Discounts
The schedule of sales charges on Class A shares described in the
Prospectus
applies to purchases made by any "purchaser," which is defined to include the
following: (a) an individual; (b) an individual's spouse and his or her
children purchasing shares for his or her own account; (c) a trustee or other
fiduciary purchasing shares for a single trust estate or single fiduciary
account; (d) a pension, profit-sharing or other employee benefit plan
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and qualified employee benefit plans of employers who
are "affiliated persons" of each other within the meaning of the 1940 Act; (e)
tax-exempt organizations enumerated in Section 501(c)(3) or (13) of the Code;
and (f) a trustee or other professional fiduciary (including a bank, or an
investment adviser registered with the SEC under the Investment Advisers Act
of 1940, as amended) purchasing shares of the Fund for one or more trust
estates or fiduciary accounts. Purchasers who wish to combine purchase orders
to take advantage of volume discounts should contact a Smith Barney Financial
Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedule in the Prospectus,
apply to any purchase of Class A shares if the aggregate investment in Class A
shares of the Fund and in Class A shares of other funds of the Smith Barney
Mutual Funds that are offered with a sales charge, including the purchase
being made, of any purchaser is $25,000 or more. The reduced sales charge is
subject to confirmation of the shareholder's holdings through a check of
appropriate records. The Fund reserves the right to terminate or amend the
combined rights of accumulation at any time after written notice to
shareholders. For further information regarding the right of accumulation,
shareholders should contact a Smith Barney Financial Consultant.
Determination of Public Offering Price
The Fund offers its shares to the public on a continuous basis. The
public
offering price for a Class A and Class Y share of the Fund is equal to the net
asset value per share at the time of purchase, plus for Class A shares an
initial sales charge based on the aggregate amount of the investment. The
public offering price for a Class B and Class C share (and Class A share
purchases, including applicable rights of accumulation, equaling or exceeding
$500,000), is equal to the net asset value per share at the time of purchase
and no sales charge is imposed at the time of purchase. A contingent deferred
sales charge ("CDSC"), however, is imposed on certain redemptions of Class B
and Class C shares, and of Class A shares when purchased in amounts equaling
or exceeding $500,000. The method of computation of the public offering price
is shown in the Fund's financial statements incorporated by reference in their
entirety into this Statement of Additional Information.
Redemption of Shares
The right of redemption may be suspended or the date of payment
postponed
(a) for any period during which the NYSE is closed (other than for customary
weekend or holiday closings), (b) when trading in markets the Fund normally
utilizes is restricted, or an emergency exists, as determined by the SEC, so
that disposal of the Fund's investments or determination of net asset value is
not reasonably practicable or (c) for such other periods as the SEC by order
may permit for the protection of the Fund's shareholders.
Distributions in Kind
If the Board of Directors of the Fund determines that it would be detrimental
to the best interests of the remaining shareholders of the Fund to make a
redemption payment wholly in cash, the Fund may pay, in accordance with SEC
rules, any portion of a redemption in excess of the lesser of $250,000 or 1%
of the Fund's net assets by distribution in kind of portfolio securities in
lieu of cash. Securities issued as a distribution in kind may incur brokerage
commissions when shareholders subsequently sell those securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Withdrawal Plan") is available to
shareholders who own shares with a value of at least $10,000 ($5,000 for
retirement plan accounts) and who wish to receive specific amounts of cash
monthly or quarterly. Withdrawals of at least $100 may be made under the
Withdrawal Plan by redeeming as many shares of the Fund as may be necessary to
cover the stipulated withdrawal payment. Any applicable CDSC will not be
waived on amounts withdrawn by shareholders that exceed 1.00% per month of the
value of a shareholder's shares at the time the Withdrawal Plan commences.
(With respect to Withdrawal Plans in effect prior to November 7, 1994 any
applicable CDSC will be waived on amounts withdrawn that do not exceed 2.00%
per month of the value of a shareholder's shares at the time the Withdrawal
Plan commences.) To the extent withdrawals exceed dividends, distributions and
appreciation of a shareholder's investment in the Fund, there will be a
reduction in the value of the shareholder's investment and continued
withdrawal payments will reduce the shareholder's investment and ultimately
may exhaust it. Withdrawal payments should not be considered as income from
investment in the Fund. Furthermore, as it generally would not be advantageous
to a shareholder to make additional investments in the Fund at the same time
that he or she is participating in the Withdrawal Plan, purchases by such
shareholders in amounts of less than $5,000 ordinarily will not be permitted.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates with
First Data as agent for Withdrawal Plan members. All dividends and
distributions on shares in the Withdrawal Plan are reinvested automatically at
net asset value in additional shares of the Fund. A shareholder who purchases
shares directly through First Data may continue to do so and applications for
participation in the Withdrawal Plan must be received by First Data no later
than the eighth day of the month to be eligible for participation beginning
with that month's withdrawal. For additional information, shareholders should
contact a Smith Barney Financial Consultant.
Distribution
To compensate Smith Barney for the services it provides and for the
expense
it bears under the Distribution Agreement, the Fund has adopted a services and
distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. See
Distribution" in the Prospectus. Under the Plan, the Fund pays Smith Barney a
service fee, accrued daily and paid monthly, calculated at the annual rate of
0.25% of the value of the Fund's average daily net assets attributable to the
Class A, Class B and Class C shares. In addition, the Fund pays Smith Barney a
distribution fee with respect to Class B and Class C shares primarily intended
to compensate Smith Barney for its initial expense of paying Financial
Consultants a commission upon sales of those shares. The Class B and Class C
distribution fee is calculated at the annual rate of 0.75% of the value of the
Fund's average net assets attributable to the shares of the respective Class.
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Board of Directors, including
a majority of the Directors who are not interested persons of the Fund and who
have no direct or indirect financial interest in the operation of the Plan or
in the Distribution Agreement (the "Independent Directors"). The Plan may not
be amended to increase the amount of the service and distribution fees without
shareholder approval, and all material amendments of the Plan also must be
approved by the Directors and Independent Directors in the manner described
above. The Plan may be terminated with respect to a Class of the Fund at any
time, without penalty, by vote of a majority of the Independent Directors or
by vote of a majority of the outstanding voting securities of the Class (as
defined in the 1940 Act). Pursuant to the Plan, Smith Barney will provide the
Fund's Board of Directors with periodic reports of amounts expended under the
Plan and the purpose for which such expenditures were made.
Valuation of Shares
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except days on which the NYSE is closed. The NYSE currently is
scheduled to be closed on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on
the preceding Friday or subsequent Monday when one of these holidays falls on
a Saturday or Sunday, respectively. Because of the differences in distribution
fees and Class-specific expenses, the per share net asset value of each Class
may differ. The following is a description of the procedures used by the Fund
in valuing its assets.
Securities listed on a national securities exchange will be valued on
the
basis of the last sale on the date on which the valuation is made or, in the
absence of sales, at the mean between the closing bid and asked prices. Over-
the-counter securities will be valued on the basis of the bid price at the
close of business on each day, or, if market quotations for those securities
are not readily available, at fair value, as determined in good faith by the
Fund's Board of Directors. Short-term obligations with maturities of 60 days
or less are valued at amortized cost, which constitutes fair value as
determined by the Fund's Board of Directors. Amortized cost involves valuing
an instrument at its original cost to the Fund and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of
the effect of fluctuating interest rates on the market value of the
instrument. All other securities and other assets of the Fund will be valued
at fair value as determined in good faith by the Fund's Board of Directors.
Exchange Privilege
Shareholders of any fund of the Smith Barney Mutual Funds may exchange all
or part of their shares for shares of the same class of other funds of the
Smith Barney Mutual Funds, to the extent such shares are offered for sale in
the shareholder's state of residence, on the basis of relative net asset value
per share at the time of exchange, except that Class B shares of the Fund
exchanged for Class B shares of another fund will be subject to the higher
applicable CDSC of the two funds and, for purposes of calculating CDSC rates
and conversion periods, will be deemed to have been held since the date the
shares being exchanged were deemed to be purchased.
Dealers other than Smith Barney must notify First Data of the investor's
prior ownership of Class A shares of Smith Barney High Income Fund and the
account number in order to accomplish an exchange of shares of Smith Barney
High Income Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares of the
same
Class in a fund with different investment objectives when they believe that a
shift between funds is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the fund shares being
acquired may legally be sold. Prior to any exchange, the shareholder should
obtain and review a copy of the current prospectus of each fund into which an
exchange is being considered. Prospectuses may be obtained from a Smith Barney
Financial Consultant.
Upon receipt of proper instructions and all necessary supporting
documents,
shares submitted for exchange are redeemed at the then-current net asset value
and, subject to any applicable CDSC, the proceeds are immediately invested, at
a price as described above, in shares of the fund being acquired. Smith Barney
reserves the right to reject any exchange request. The exchange privilege may
be modified or terminated at any time after written notice to shareholders.
IRA AND OTHER PROTOTYPE RETIREMENT PLANS
Copies of the following plans with custody or trust agreements have been
approved by the Internal Revenue Service and are available from the Fund or
Smith Barney; investors should consult with their own tax or retirement
planning advisors prior to the establishment of a plan.
IRA, Rollover IRA and Simplified Employee Pension - IRA
The Small Business Job Protection Act of 1996 changed the eligibility
requirements for participants in Individual Retirement Accounts ("IRAs").
Under these new provisions, if you or your spouse have earned income, each of
you may establish an IRA and make maximum annual contributions equal to the
lesser of earned income or $2,000. As a result of this legislation, married
couples where one spouse is non-working may now contribute a total of $4,000
annually to their IRAs.
If you or your spouse is an active participant in an employer-sponsored
retirement plan, a deduction for contributions to an IRA might still be
allowed in full or in part, depending on your combined adjusted gross income.
For married couples filing jointly, a full deduction for contributions to an
IRA will be allowed where the couples' adjusted gross income is below $40,001
($25,001 for an unmarried individual); a partial deduction will be allowed
when adjusted gross income is between $40,001 - $50,000 ($25,001-$35,000 for
an unmarried individual); and no deduction when adjusted gross income is
$50,000 ($35,000 for an unmarried individual).
A Rollover IRA is available to defer taxes on lump sum payments and
other qualifying rollover amounts (no maximum) received from another
retirement plan.
An employer who has established a Simplified Employee Pension - IRA
("SEP-
IRA") on behalf of eligible employees may make a maximum annual contribution
to each participant's account of 15% (up to $24,000) of each participant's
compensation. Compensation is capped at $160,000 for 1997.
Performance Data
From time to time, the Fund may quote total return of the Classes in
advertisements or in reports and other communications to shareholders. The
Fund may include comparative performance information in advertising or
marketing the Fund's shares. Such performance information may include data
from the following industry and financial publications: Barron's, Business
Week, CDA Investment Technologies, Inc., Changing Times, Forbes, Fortune,
Institutional Investor, Investors Daily, Money, Morningstar Mutual Fund
Values, The New York Times, USA Today and The Wall Street Journal. To the
extent any advertisement or sales literature of the Fund describes the
expenses or performance of Class A, Class B, Class C or Class Y, it will also
disclose such information for the other Classes.
Average Annual Total Return
"Average annual total return" figures are computed according to a
formula
prescribed by the SEC. The formula can be expressed as follows:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000
investment
made at the beginning of a 1-, 5-, or 10-year period at the
end of the 1-, 5-, or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions.
Average annual total return was as follows for the periods indicated:
20.56% for the one-year period beginning on January 1, 1996 through
December
31, 1996;
11.64% per annum during the five-year period beginning on January 1, 1992
through December 31, 1996; and
since August 1, 1995 when TIMCO became investment adviser to the Fund
through December 31, 1996 the Funds Aggregate Annual Total Return was 22.74%.
Aggregate Total Return
"Aggregate total return" figures represent the cumulative change in the
value of an investment in the Class for the specified period and are computed
by the following formula:
ERV-P
AGGREGATE TOTAL RETURN = P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment
made at the beginning of the 1-, 5-, or 10-year period at
the end of the 1-, 5-, or 10-year period (or fractional
portion thereof), assuming reinvestment of all dividends and
distributions.
Aggregate total return was as follows for the periods indicated:
20.56% for the one-year period from January 1, 1996 through December 31,
1996.
73.42% for the five-year period from January 1, 1992 through December
31,1996; and
since August 1, 1995 when TIMCO became the Fund's investment adviser
through December 31, 1996 the Fund's Aggregate Annual Total Return was 33.83%.
Performance will vary from time to time depending upon market
conditions,
the composition of the Fund's portfolio, operating expenses and the expenses
exclusively attributable to the Class. Consequently, any given performance
quotation should not be considered representative of the Class' performance
for any specified period in the future. Because performance will vary, it may
not provide a basis for comparing an investment in the Class with certain bank
deposits or other investments that pay a fixed yield for a stated period of
time. Investors comparing the Class' performance with that of other mutual
funds should give consideration to the quality and maturity of the respective
investment companies' portfolio securities.
It is important to note that the total return figures set forth above
are
based on historical earnings and are not intended to indicate future
performance.
Taxes
The following is a summary of certain Federal income tax considerations
that may affect the Fund and its shareholders. The summary is not intended as
a substitute for individual tax advice and investors are urged to consult
their own tax advisors as to the tax consequences of an investment in the
Fund.
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Provided that the Fund (a) is a
regulated investment company and (b) distributes at least 90% of its net
investment income (including, for this purpose, net realized short-term
capital gains), the Fund will not be liable for Federal income taxes to the
extent its net investment income and its net realized long- and short-term
capital gains, if any, are distributed to its shareholders. Although the Fund
expects to be relieved of all or substantially all Federal, state, and local
income or franchise taxes, depending upon the extent of its activities in
states and localities in which its offices are maintained, in which its agents
or independent contractors are located, or in which it is otherwise deemed to
be conducting business, that portion of the Fund's income which is treated as
earned in any such state or locality could be subject to state and local
taxes. Any such taxes paid by the Fund would reduce the amount of income and
gains available for distribution to shareholders. All net investment income
and net capital gains earned by the Fund will be reinvested automatically in
additional shares of the same Class of the Fund at net asset value, unless the
shareholder elects to receive dividends and distributions in cash.
Gains or losses on the sales of securities by the Fund generally will be
long-term capital gains or losses if the Fund has held the securities for more
than one year. Gains or losses on the sales of securities held for not more
than one year generally will be short-term capital gains or losses. If the
Fund acquires a debt security at a substantial discount, a portion of any gain
upon the sale or redemption will be taxed as ordinary income, rather than
capital gain to the extent it reflects accrued market discount.
Dividends of net investment income and distributions of net realized
short-
term capital gains will be taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in
additional shares. Dividends received by corporate shareholders will qualify
for the dividends-received deduction only to the extent that the Fund
designates the amount distributed as a dividend and the amount so designated
does not exceed the aggregate amount of dividends received by the Fund from
domestic corporations for the taxable year. The Federal dividends-received
deduction for corporate shareholders may be further reduced or disallowed if
the shares with respect to which dividends are received are treated as debt
financed or are deemed to have been held for less than 46 days.
Distributions of long-term capital gains will be taxable to shareholders
as
such, whether paid in cash or reinvested in additional shares and regardless
of the length of time that the shareholder has held his or her interest in the
Fund. If a shareholder receives a distribution taxable as long-term capital
gain with respect to his or her investment in the Fund and redeems or
exchanges the shares before he or she has held them for more than six months,
any loss on the redemption or exchange that is less than or equal to the
amount of the distribution will be treated as a long-term capital loss.
If a shareholder (a) incurs a sales charge in acquiring or redeeming
shares
of the Fund, (b) disposes of those shares within 90 days and (c) acquires
shares in a mutual fund for which the otherwise applicable sales charge is
reduced by reason of a reinvestment right (i.e., exchange privilege), the
original sales charge increases the shareholder's tax basis in the original
shares only to the extent the otherwise applicable sales charge for the second
acquisition is not reduced. The portion of the original sales charge that does
not increase the shareholder's tax basis in the original shares would be
treated as incurred with respect to the second acquisition and, as a general
rule, would increase the shareholder's tax basis in the newly acquired shares.
Furthermore, the same rule also applies to a disposition of the newly acquired
or redeemed shares made within 90 days of the second acquisition. This
provision prevents a shareholder from immediately deducting the sales charge
by shifting his or her investment in a family of mutual funds.
Investors considering buying shares of the Fund on or just prior to a
record date for a taxable dividend or capital gain distribution should be
aware that, regardless of whether the price of the Fund shares to be purchased
reflects the amount of the forthcoming dividend or distribution payment, any
such payment will be a taxable dividend or distribution payment.
If a shareholder fails to furnish a correct taxpayer identification
number,
fails to report dividend and interest income in full, or fails to certify that
he or she has provided a correct taxpayer identification number and that he or
she is not subject to such withholding, the shareholder may be subject to a
31% "backup withholding" tax with respect to (a) any taxable dividends and
distributions and (b) any proceeds of any redemption of Fund shares. An
individual's taxpayer identification number is his or her social security
number. The backup withholding tax is not an additional tax and may be
credited against a shareholder's regular Federal income tax liability.
The foregoing is only a summary of certain tax considerations generally
affecting the Fund and its shareholders and is not intended as a substitute
for careful tax planning. Shareholders are urged to consult their tax advisors
with specific reference to their own tax situations, including their state and
local tax liabilities.
Additional Information
The Fund, an open end management investment company, was incorporated on
October 4 1989 in Maryland under the name The Inefficient-Market Fund Inc.
(the "Fund") as a non-diversified closed end company and converted to open-end
diversified status on June 20, 1997 pursuant to shareholder approval on April
18, 1997 and Securities and Exchange Declaration of Effectiveness on June 20,
1997.
PNC Bank is located at 17th Chestnut Street, Philadelphia, PA 19103,
and
serves as the custodian of the Fund. Under its agreement with the Fund, PNC
Bank holds the Fund's portfolio securities and keeps all necessary accounts
and records. For its services, PNC Bank receives a monthly fee based upon the
month-end market value of securities held in custody and also receives
securities transaction charges. PNC Bank is authorized to establish separate
accounts for foreign securities owned by the Fund to be held with foreign
branches of other domestic banks as well as with certain foreign banks and
securities depositories. The assets of the Fund are held under bank
custodianship in compliance with the 1940 Act.
First Data is located at Exchange Place, Boston, Massachusetts 02109,
and
serves as the Fund's transfer agent. Under the transfer agency agreement,
First Data maintains the shareholder account records for the Fund, handles
certain communications between shareholders and the Fund and distributes
dividends and distributions payable by the Fund. For these services, First
Data receives a monthly fee computed on the basis of the number of shareholder
accounts it maintains for the Fund during the month and is reimbursed for out-
of-pocket expenses.
Financial Statements
The Fund's Annual Report for the fiscal year ended December 31, 1996,
(accession #91155-97-000137 filed on March 10, 1997) accompanies this
Statement of Additional Information and is incorporated
herein by reference in its entirety..
Smith Barney
Disciplined Small
Cap Fund, Inc.
Statement of
Additional
Information
June 23, 1997
Smith Barney
Disciplined Small Cap Fund, Inc.
388 Greenwich Street
New York, NY 10013
...................................Fund ........................
SMITH BARNEY
A Member of Travelers Group
