February 27, 1998
As Amended August 27, 1998
STATEMENT OF ADDITIONAL INFORMATION
SMITH BARNEY WORLD FUNDS, INC.
388 Greenwich Street
New York, New York 10013
Shares of Smith Barney World Funds, Inc. (the "Fund") are
offered with a choice of six Portfolios:
The Global Government Bond Portfolio seeks as high a level
of current income and capital appreciation as is
consistent with its policy of investing principally in
high quality bonds of the United States and foreign
governments.
The International Equity Portfolio seeks a total return on
its assets from growth of capital and income. The
Portfolio seeks to achieve its objective principally
through a diversified portfolio of equity securities of
established non-United States issuers.
The Pacific Portfolio seeks long-term capital appreciation
by investing primarily in a diversified portfolio of
equity securities of companies in the Asian Pacific
Countries.
The European Portfolio seeks long-term capital
appreciation by investing primarily in equity securities
of issuers based in countries of Europe.
The International Balanced Portfolio seeks a competitive
total return on its assets from growth of capital and
income through a portfolio invested primarily in
securities of established non-United States issuers.
The Emerging Markets Portfolio seeks long-term capital
appreciation on its assets through a portfolio invested
primarily in securities of emerging country issuers.
The Fund offers three classes of shares which may be purchased at the
next-determined net asset value per share plus a sales charge which,
at the election of the investor, may be imposed (i) at the time of
purchase (Class A shares) or (ii) on a deferred basis (Class B and
Class C shares). A fourth class of shares (the Class Y shares) is sold
at net asset value and is available only to investors investing a
minimum of $5,000,000 with respect to the International Equity
Portfolio and $15,000,000 with respect to each of the other
Portfolios. A fifth class of shares of the International Equity
Portfolio (the Class Z shares) are offered only to tax-exempt
retirement plans of Smith Barney Inc. These alternatives permit an
investor to choose the method of purchasing shares that is most
beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other circumstances.
This Statement of Additional Information is not a prospectus. It is
intended to provide more detailed information about Smith Barney World
Funds, Inc. as well as matters already discussed in the Prospectus of
the applicable Portfolio and therefore should be read in conjunction
with each Prospectus dated February 27, 1998 for the International
Equity Portfolio, the Global Government Bond Portfolio, the Pacific
Portfolio, the European Portfolio, the International Balanced
Portfolio and the Emerging Markets Portfolio, which may be obtained
from the Fund or your Smith Barney Financial Consultant.
TABLE OF CONTENTS
Page
Directors, Advisory Director and Officers 3
Investment Policies 5
Investment Restrictions 16
Additional Tax Information 20
IRA and Other Prototype Retirement Plans 22
Performance Information 23
Determination of Net Asset Value 27
Redemption of Shares 27
Investment Management Agreement and Other Services 27
Custodian 31
Independent Auditors 31
Voting 31
Financial Statements 35
Appendix - Ratings of Debt Obligations A-1
DIRECTORS, ADVISORY DIRECTOR AND OFFICERS
VICTOR K. ATKINS, Director
Retired; 120 Montgomery Street, San Francisco, CA. Former President of
Lips Propellers, Inc., a ship propeller repair company. Director of
two investment companies associated with Smith Barney; 76.
ABRAHAM E. COHEN, Director (Age 61)
Consultant to MeesPierson, Inc., a Dutch investment bank; Consultant
to and Board Member, Chugai Pharmaceutical Co. Ltd.; Director of
Agouron Pharmaceuticals, Inc., Akzo Nobel NV, Vasomedical, Inc., Teva
Pharmaceutical Ind., Ltd., Neurobiological Technologies Inc., Vion
Pharmaceuticals, Inc., BlueStone Capital Partners, LP. and The
Population Council, an international public interest organization.
ROBERT A. FRANKEL, Director
Managing Partner of Robert A. Frankel Managing Consultants, 102 Grand
Street, Croton-on-Hudson, NY. Director of seven investment companies
associated with Smith Barney. Former Vice President of The Readers
Digest Association, Inc.; 70.
RAINER GREEVEN, Director
Partner of the law firm of Greeven & Ercklentz; 630 Fifth Avenue, New
York, NY. Director of two investment companies associated with Smith
Barney; 62.
SUSAN M. HEILBRON, Director
Attorney; Lacey & Heilbron, 3 East 54th Street, New York, NY. Prior
to November 1990, Vice President and General Counsel of MacMillan,
Inc. and Executive Vice President of The Trump Organization. Director
of two investment companies associated with Smith Barney; 53.
*HEATH B. McLENDON, Chairman of the Board, President and Chief
Executive Officer
Managing Director of Smith Barney; Director of forty-two investment
companies associated with Smith Barney; Director and President of the
Manager and Travelers Investment Adviser, Inc. ("TIA"); Chairman of
Smith Barney Strategy Advisers Inc.; prior to July 1993, Senior
Executive Vice President of Shearson Lehman Brothers, Inc., Vice
Chairman of Shearson Asset Management, Director of PanAgora Asset
Management, Inc. and PanAgora Asset Management Limited; 64
*MAURITS E. EDERSHEIM, Chairman of the Fund and Advisory Director
Deputy Chairman of Smith Barney International Incorporated; Director
and President of Amstel Hudson Management Corp. (offshore investment
management); Director Esfinco NV (U.S. subsidiary of Spanish
Construction Company). Formerly Deputy Chairman and Director of
Drexel Burnham Lambert Incorporated, The Drexel Burnham Lambert Group
Inc., and various of their subsidiaries; 79.
*LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Smith Barney, and Senior Vice President and
Treasurer of forty-two investment companies associated with Smith
Barney; and Director and Senior Vice President of the Manager and TIA;
40
*JAMES B. CONHEADY, Vice President and Investment Officer
Managing Director of Smith Barney. Formerly First Vice President of
Drexel Burnham Lambert Incorporated; 62.
*JEFFREY RUSSELL, Vice President and Investment Officer
Managing Director of Smith Barney. Formerly Vice President of Drexel
Burnham Lambert Incorporated; 40.
*REIN VAN DER DOES, Vice President and Investment Officer
Managing Director of Smith Barney. Formerly Managing Director of
Drexel Burnham Lambert Incorporated; 58.
*SCOTT KALB, Vice President and Investment Officer
Managing Director of Smith Barney. Formerly Vice President of Drexel
Burnham Lambert Incorporated; 41
*VICTOR S. FILATOV, Vice President and Investment Officer
Managing Director of Smith Barney, President and Director of Smith
Barney Global Capital Management Inc. Formerly Vice President of J.P.
Morgan Securities Inc.; 46.
*SIMON R. HILDRETH, Vice President and Investment Officer
Senior Vice President of Smith Barney, Managing Director of Smith
Barney Global Capital Management Inc. Formerly Director of Mercury
Asset Management Ltd; 43.
*DENIS P. MANGAN, Vice President and Investment Officer
Vice President of Smith Barney Global Capital Management Inc.
Formerly Vice President of J.P. Morgan and Citibank; 44.
*DONALD ELEFSON, Vice President and Investment Officer
Vice President of Smith Barney; Formerly Analyst of emerging markets
at Merrill Lynch Asset Management; 38.
*DAVID S. ISHIBASHI, Vice President and Investment Officer
Vice President of Smith Barney; Formerly Head of Japanese equities
desk at SG Warburg; 42
*IRVING DAVID, Controller
Director of Smith Barney. Formerly Assistant Treasurer of First
Investment Management Company; 37.
*CHRISTINA T. SYDOR, Secretary
Managing Director of Smith Barney and Secretary of forty-two
investment companies associated with Smith Barney; Secretary and
General Counsel of the Manager and TIA; 47.
* Designates an "interested person" as defined in the Investment
Company Act of 1940, as amended (the "1940 Act") whose business
address is 388 Greenwich Street, New York, New York 10013. Such
person is not separately compensated for services as a Fund officer or
director.
On February 6, 1998 the directors and officers owned, in the
aggregate, less than 1% of the outstanding shares of each of the
Portfolios.
The following table shows the compensation paid by the Fund to
each director during the Fund's last fiscal year. None of the
officers of the Fund received any compensation from the Fund for such
period. Officers and interested directors of the Fund are compensated
by Smith Barney.
COMPENSATION TABLE
Name of Person
Aggregate
Compensation
from the
Fund
Total
Pension
or
Retirement
Benefits
Accrued as
Part of Fund
Expenses
Compensation
from Fund
and Complex
Paid
to Directors
Number of
Funds for
Which
Director
Serves
Within
Fund Complex
Victor Atkins
$11,946
0
$27,400
2
Alger B.
Chapman1
9,078
0
20,600
2
A. E. Cohen2
0
0
13,700
2
Robert A.
Frankel
11,946
0
65,900
8
Ranier Greeven
11,346
0
25,600
2
Susan M.
Heilbron
11,946
0
27,400
2
Heath B.
McLendon
0
0
0
42
Bruce D.
Sargent3
0
0
0
3
James M. Shuart4
11,946
0
27,400
2
INVESTMENT POLICIES
Except as described under "INVESTMENT RESTRICTIONS," the
investment policies described in the Prospectuses and in this
Statement of Additional Information are not fundamental and the Board
of Directors may change such policies without shareholder approval.
The Fund effects transactions with a view towards attaining each
Portfolio's investment objective, and although it is not limited by a
predetermined rate of portfolio turnover, it is expected that the
annual turnover rate for each of the International Equity Portfolio,
the Global Government Bond Portfolio, the European Portfolio, the
Pacific Portfolio and the equity portion of each of the International
Balanced Portfolio and the Emerging Markets Portfolio will not exceed
100% in normal circumstances and that the annual turnover rate for the
debt portion of each of the International Balanced Portfolio and the
Emerging Markets Portfolio will not exceed 200% in normal
circumstances. A high portfolio turnover results in correspondingly
greater transaction costs in the form of brokerage commissions or
dealer spreads that a Portfolio will bear directly, and may result in
the realization of net capital gains which are taxable when
distributed to shareholders. See "Investment Management Agreement and
Other Services--Brokerage and Portfolio Transactions" in this
Statement of Additional Information.
Each of the following investment policies is subject to the
limitations set forth under "Investment Restrictions."
Repurchase Agreements. As described in the applicable Prospectus,
each Portfolio may enter into repurchase agreements. A repurchase
agreement is a contract under which a Portfolio acquires a security
for a relatively short period (usually not more than one week) subject
to the obligation of the seller to repurchase and the Portfolio to
resell such security at a fixed time and price (representing the
Portfolio's cost plus interest). It is each Portfolio's present
intention to enter into repurchase agreements only upon receipt of
fully adequate collateral and only with commercial banks (whether U.S.
or foreign) and registered broker-dealers. Repurchase agreements may
also be viewed as loans made by a Portfolio which are collateralized
primarily by the securities subject to repurchase. A Portfolio bears
a risk of loss in the event that the other party to a repurchase
agreement defaults on its obligations and the Portfolio is delayed or
prevented from exercising its rights to dispose of the collateral
securities. Pursuant to policies established by the Board of
Directors, the investment adviser monitors the creditworthiness of all
issuers with which each Portfolio enters into repurchase agreements.
Reverse Repurchase Agreements. The Fund does not currently intend to
commit more than 5% of a Portfolio's net assets to reverse repurchase
agreements. The Fund may enter into reverse repurchase agreements
with broker/dealers and other financial institutions. Such agreements
involve the sale of Portfolio securities with an agreement to
repurchase the securities at an agreed-upon price, date and interest
payment and are considered to be borrowings by a Portfolio and are
subject to the borrowing limitations set forth under "Investment
Restrictions." Since the proceeds of reverse repurchase agreements
are invested, this would introduce the speculative factor known as
"leverage." The securities purchased with the funds obtained from the
agreement and securities collateralizing the agreement will have
maturity dates no later than the repayment date. Generally the effect
of such a transaction is that the Fund can recover all or most of the
cash invested in the portfolio securities involved during the term of
the reverse repurchase agreement, while in many cases it will be able
to keep some of the interest income associated with those securities.
Such transactions are only advantageous if the Portfolio has an
opportunity to earn a greater rate of interest on the cash derived
from the transaction than the interest cost of obtaining that cash.
Opportunities to realize earnings from the use of the proceeds equal
to or greater than the interest required to be paid may not always be
available, and the Fund intends to use the reverse repurchase
technique only when the Manager believes it will be advantageous to
the Portfolio. The use of reverse repurchase agreements may
exaggerate any interim increase or decrease in the value of the
participating Portfolio's assets. The Fund's custodian bank will
maintain a separate account for the Portfolio with securities having a
value equal to or greater than such commitments.
Restricted Securities. Each Portfolio may invest in securities the
disposition of which is subject to legal or contractual restrictions.
The sale of restricted securities often requires more time and
results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading
on a national securities exchange that are not subject to restrictions
on resale. Restricted securities often sell at a price lower than
similar securities that are not subject to restrictions on resale.
Securities Lending. Each Portfolio may seek to increase its net
investment income by lending its securities provided such loans are
callable at any time and are continuously secured by cash or U.S.
Government Obligations equal to no less than the market value,
determined daily, of the securities loaned. Each Portfolio will
receive amounts equal to dividends or interest on the securities
loaned. It will also earn income for having made the loan because
cash collateral pursuant to these loans will be invested in short-term
money market instruments. In connection with lending of securities
the Fund may pay reasonable finders, administrative and custodial
fees. Management will limit such lending to not more than one-third
of the value of the total assets of each Portfolio. Where voting or
consent rights with respect to loaned securities pass to the borrower,
management will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such voting or
consent rights if the issues involved have a material effect on the
Portfolio's investment in the securities loaned. Apart from lending
its securities and acquiring debt securities of a type customarily
purchased by financial institutions, no Portfolio will make loans to
other persons.
Commercial Bank Obligations. For the purposes of each Portfolio's
investment policies with respect to bank obligations, obligations of
foreign branches of U.S. banks and of foreign banks may be general
obligations of the parent bank in addition to the issuing bank, or may
be limited by the terms of a specific obligation and by government
regulation. As with investment in non-U.S. securities in general,
investments in the obligations of foreign branches of U.S. banks and
of foreign banks may subject the Portfolio to investment risks that
are different in some respects from those of investments in
obligations of domestic issuers. Although a Portfolio will typically
acquire obligations issued and supported by the credit of U.S. or
foreign banks having total assets at the time of purchase in excess of
U.S. $1 billion (or the equivalent thereof), this U.S. $1 billion
figure is not a fundamental investment policy or restriction of the
Portfolio. For calculation purposes with respect to the U.S. $1
billion figure, the assets of a bank will be deemed to include the
assets of its U.S. and non-U.S. branches.
Commercial Paper. Commercial paper consists of short-term (usually
from 1 to 270 days) unsecured promissory notes issued by corporations
in order to finance their current operations. A variable amount
master demand note (which is a type of commercial paper) represents a
direct borrowing arrangement involving periodically fluctuating rates
of interest under a letter agreement between a commercial paper issuer
and an institutional lender, such as one of the Portfolios, pursuant
to which the lender may determine to invest varying amounts. Transfer
of such notes is usually restricted by the issuer, and there is no
secondary trading market for such notes. Each Portfolio, therefore,
may not invest in a master demand note, if as a result more than 15%
of the value of the Portfolio's total assets would be invested in such
notes and other illiquid securities.
ADRs, EDRs and GDRs. Each Portfolio may also purchase American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs")
and Global Depositary Receipts ("GDRs") or other securities
representing underlying shares of foreign companies. ADRs are
publicly traded on exchanges or over-the-counter in the United States
and are issued through "sponsored" or "unsponsored" arrangements. In
a sponsored ADR arrangement, the foreign issuer assumes the obligation
to pay some or all of the depository's transaction fees, whereas under
an unsponsored arrangement, the foreign issuer assumes no obligation
and the depository's transaction fees are paid by the ADR holders. In
addition, less information is available in the United States about an
unsponsored ADR than about a sponsored ADR, and the financial
information about a company may not be as reliable for an unsponsored
ADR as it is for a sponsored ADR. The Portfolios may invest in ADRs
through both sponsored and unsponsored arrangements.
Writing Covered Call Options. Each Portfolio may write (sell) covered
call options for hedging purposes. Covered call options will
generally be written on securities and currencies which, in the
opinion of the investment adviser, are not expected to make any major
price moves in the near future but which, over the long term, are
deemed to be attractive investments for the Portfolio.
A call option gives the holder (buyer) the right to purchase a
security or currency at a specified price (the exercise price) at any
time until a certain date (the expiration date). So long as the
obligation of the writer of a call option continues, he may be
assigned an exercise notice by the broker-dealer through whom such
option was sold, requiring him to deliver the underlying security or
currency against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier
time at which the writer effects a closing purchase transaction by
purchasing an option identical to that previously sold. The Manager
and the Fund believe that writing of covered call options is less
risky than writing uncovered or "naked" options, which the Portfolios
will not do.
Portfolio securities or currencies on which call options may be
written will be purchased solely on the basis of investment
considerations consistent with each Portfolio's investment objective.
When writing a covered call option, the Portfolio, in return for the
premium, gives up the opportunity for profit from a price increase in
the underlying security or currency above the exercise price and
retains the risk of loss should the price of the security or currency
decline. Unlike one who owns securities or currencies not subject to
an option, the Portfolio has no control over when it may be required
to sell the underlying securities or currencies, since the option may
be exercised at any time prior to the option's expiration. If a call
option which the Portfolio has written expires, the Portfolio will
realize a gain in the amount of the premium; however, such gain may be
offset by a decline in the market value of the underlying security or
currency during the option period. If the call option is exercised,
the Portfolio will realize a gain or loss from the sale of the
underlying security or currency. The security or currency covering
the call option will be maintained in a segregated account of the
Portfolio's custodian.
The premium the Portfolio receives for writing a call option is
deemed to constitute the market value of an option. The premium the
Portfolio will receive from writing a call option will reflect, among
other things, the current market price of the underlying security or
currency, the relationship of the exercise price to such market price,
the implied price volatility of the underlying security or currency,
and the length of the option period. In determining whether a
particular call option should be written on a particular security or
currency, the Manager will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market
will exist for those options. The premium received by the Portfolio
for writing covered call options will be recorded as a liability in
the Portfolio's statement of assets and liabilities. This liability
will be adjusted daily to the option's current market value, which
will be calculated as described in "Determination of Net Asset Value"
in the Prospectus. The liability will be extinguished upon expiration
of the option or delivery of the underlying security or currency upon
the exercise of the option. The liability with respect to a listed
option will also be extinguished upon the purchase of an identical
option in a closing transaction.
Closing transactions will be effected in order to realize a
profit or to limit losses on an outstanding call option, to prevent an
underlying security or currency from being called, or to permit the
sale of the underlying security or currency. Furthermore, effecting a
closing transaction will permit the Portfolio to write another call
option on the underlying security or currency with either a different
exercise price, expiration date or both. If the Portfolio desires to
sell a particular security or currency from its portfolio on which it
has written a call option or purchases a put option, it will seek to
effect a closing transaction prior to, or concurrently with, the sale
of the security or currency. There is no assurance that the Portfolio
will be able to effect such closing transactions at a favorable price.
If the Portfolio cannot enter into such a transaction, it may be
required to hold a security or currency that it might otherwise have
sold, in which case it would continue to be a market risk with respect
to the security or currency.
Each Portfolio will pay transaction costs in connection with the
writing of options and in entering into closing purchase contracts.
Transaction costs relating to options activity are normally higher
than those applicable to purchases and sales of portfolio securities.
Call options written by each Portfolio, other than the
International Balanced Portfolio, will normally have expiration dates
of less than nine months from the date written. Call options written
by the International Balanced Portfolio will normally have expiration
dates of less than twelve months from the date written. The exercise
price of the options may be below, equal to or above the current
market values of the underlying securities or currencies at the time
the options are written. From time to time, the Portfolio may
purchase an underlying security or currency for delivery in accordance
with the exercise of an option, rather than delivering such security
or currency from its portfolio. In such cases, additional costs will
be incurred.
Each Portfolio will realize a profit or loss from a closing
purchase transaction if the cost of the transaction is less or more,
respectively, than the premium received from the writing of the
option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a call
option is likely to be offset in whole or in part by appreciation of
the underlying security or currency owned by the Portfolio.
See "Additional Tax Information" for a discussion of federal
income tax treatment of covered call options.
Purchasing Put Options. Each Portfolio may purchase put options. As
the holder of a put option, the Portfolio has the right to sell the
underlying security or currency at the exercise price at any time
during the option period. The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit
them to expire.
Each Portfolio may purchase a put option on an underlying
security or currency (a "protective put") owned by the Portfolio as a
hedging technique in order to protect against an anticipated decline
in the value of the security or currency. Such hedge protection is
provided only during the life of the put option when the Portfolio, as
the holder of the put option, is able to sell the underlying security
or currency at the put exercise price regardless of any decline in the
underlying security's market price or currency's exchange value. For
example, a put option may be purchased in order to protect unrealized
appreciation of a security or currency when the Manager deems it
desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any
transaction costs would reduce any capital gain otherwise available
for distribution when the security or currency is eventually sold.
Each Portfolio may also purchase put options at a time when the
Portfolio does not own the underlying security or currency. By
purchasing put options on a security or currency it does not own, the
Portfolio seeks to benefit from a decline in the market price of the
underlying security or currency. If the put option is not sold when
it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise
price during the life of the put option, the Portfolio will lose its
entire investment in the put option. In order for the purchase of a
put option to be profitable, the market price of the underlying
security or currency must decline sufficiently below the exercise
price to cover the premium and transaction costs, unless the put
option is sold in a closing sale transaction.
The premium paid by a Portfolio when purchasing a put option
will be recorded as an asset in the Portfolio's statement of assets
and liabilities. This asset will be adjusted daily to the option's
current market value, which will be calculated as described in
"Determination of Net Asset Value" in the Prospectus. The asset will
be extinguished upon expiration of the option or the delivery of the
underlying security or currency upon the exercise of the option. The
asset with respect to a listed option will also be extinguished upon
the writing of an identical option in a closing transaction.
Purchasing Call Options. Each Portfolio may purchase call options.
As the holder of a call option, a Portfolio has the right to purchase
the underlying security or currency at the exercise price at any time
during the option period. The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit
them to expire. Call options may be purchased by the Portfolio for
the purpose of acquiring the underlying security or currency for its
portfolio. Utilized in this fashion, the purchase of call options
enables the Portfolio to acquire the security or currency at the
exercise price of the call option plus the premium paid. At times the
net cost of acquiring the security or currency in this manner may be
less than the cost of acquiring the security or currency directly.
This technique may also be useful to the Portfolio in purchasing a
large block of securities that would be more difficult to acquire by
direct market purchases. So long as it holds such a call option
rather than the underlying security or currency itself, the Portfolio
is partially protected from any unexpected decline in the market price
of the underlying security or currency and in such event could allow
the call option to expire, incurring a loss only to the extent of the
premium paid for the option.
Each Portfolio may also purchase call options on underlying
securities or currencies it owns in order to protect unrealized gains
on call options previously written by it. A call option would be
purchased for this purpose where tax considerations make it
inadvisable to realize such gains through a closing purchase
transaction. Call options may also be purchased at times to avoid
realizing losses that would result in a reduction of the Portfolio's
current return.
Interest Rate and Currency Futures Contracts. Each Portfolio may
enter into interest rate or currency futures contracts ("Futures" or
"Futures Contracts") as a hedge against changes in prevailing levels
of interest rates or currency exchange rates in order to establish
more definitely the effective return on securities or currencies held
or committed to be acquired by the Portfolio. A Portfolio's hedging
may include holding Futures as an offset against anticipated changes
in interest or currency exchange rates. A Portfolio may also enter
into Futures Contracts based on financial indices including any index
of U.S. Government securities, foreign government securities or
corporate debt securities.
A Futures Contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific
financial instrument or currency for a specified price at a designated
date, time and place. The purchaser of a Futures Contract on an index
agrees to take or make delivery of an amount of cash equal to the
difference between a specified dollar multiple of the value of the
index on the expiration date of the contract ("current contract
value") and the price at which the contract was originally struck. No
physical delivery of the debt securities underlying the index is made.
Brokerage fees are incurred when a Futures Contract is bought or
sold, and margin deposits must be maintained at all times that the
Futures Contract is outstanding.
Although techniques other than sales and purchases of Futures
Contracts could be used to reduce the Portfolio's exposure to interest
rate and currency exchange rate fluctuations, the Portfolio may be
able to hedge its exposure more effectively and at a lower cost
through using Futures Contracts.
Although Futures Contracts typically require future delivery of
and payment for financial instruments or currencies, Futures Contracts
are usually closed out before the delivery date. Closing out an open
Futures Contract sale or purchase is effected by entering into an
offsetting Futures Contract purchase or sale, respectively, for the
same aggregate amount of the identical financial instrument or
currency and the same delivery date. If the offsetting purchase price
is less than the original sale price, the Portfolio realizes a gain;
if it is more, the Portfolio realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the
Portfolio realizes a gain; if it is less, the Portfolio realizes a
loss. The transaction costs must also be included in these
calculations. There can be no assurance, however, that the Portfolio
will be able to enter into an offsetting transaction with respect to a
particular Futures Contract at a particular time. If the Portfolio is
not able to enter into an offsetting transaction, the Portfolio will
continue to be required to maintain the margin deposits of the
underlying financial instrument or currency on the relevant delivery
date. The Fund intends to enter into Futures transactions only on
exchanges or boards of trade where there appears to be a liquid
secondary market. However, there can be no assurance that such a
market will exist for a particular contract at a particular time.
As an example of an offsetting transaction, the contractual
obligations arising from the sale of one Futures Contract of September
Treasury Bills on an exchange may be fulfilled at any time before
delivery under the Futures Contract is required (i.e., on a specific
date in September, the "delivery month") by the purchase of another
Futures Contract of September Treasury Bills on the same exchange. In
such instance the difference between the price at which the Futures
Contract was sold and the price paid for the offsetting purchase,
after allowance for transaction costs, represents the profit or loss
to the Portfolio.
Persons who trade in Futures Contracts may be broadly classified
as "hedgers" and "speculators." Hedgers, whose business activity
involves investment or other commitment in securities or other
obligations, use the Futures markets to offset unfavorable changes in
value that may occur because of fluctuations in the value of the
securities and obligations held or committed to be acquired by them or
fluctuations in the value of the currency in which the securities or
obligations are denominated. Debtors and other obligors may also
hedge the interest cost of their obligations. The speculator, like
the hedger, generally expects neither to deliver nor to receive the
financial instrument underlying the Futures Contract, but, unlike the
hedger, hopes to profit from fluctuations in prevailing interest rates
or currency exchange rates.
Each Portfolio's Futures transactions will be entered into for
traditional hedging purposes; that is, Futures Contracts will be sold
to protect against a decline in the price of securities or currencies
that the Portfolio owns, or Futures Contracts will be purchased to
protect a Portfolio against an increase in the price of securities or
currencies it has committed to purchase or expects to purchase. The
International Equity Portfolio, the Pacific Portfolio, the
International Balanced Portfolio and the Emerging Market Portfolio may
each also enter into Futures transactions for non-hedging purposes,
subject to applicable law.
"Margin" with respect to Futures Contracts is the amount of
funds that must be deposited by the Portfolio with a broker in order
to initiate Futures trading and to maintain the Portfolio's open
positions in Futures Contracts. A margin deposit made when the
Futures Contract is entered into ("initial margin") is intended to
assure the Portfolio's performance of the Futures Contract. The
margin required for a particular Futures Contract is set by the
exchange on which the Futures Contract is traded, and may be
significantly modified from time to time by the exchange during the
term of the Futures Contract. Futures Contracts are customarily
purchased and sold on margins, which may be 5% or less of the value of
the Futures Contract being traded.
If the price of an open Futures Contract changes (by increase in
the case of a sale or by decrease in the case of a purchase) so that
the loss on the Futures Contract reaches a point at which the margin
on deposit does not satisfy margin requirements, the broker will
require an increase in the margin deposit ("variation margin"). If,
however, the value of a position increases because of favorable price
changes in the Futures Contract so that the margin deposit exceeds the
required margin, it is anticipated that the broker will pay the excess
to the Portfolio. In computing daily net asset values, the Portfolio
will mark to market the current value of its open Futures Contracts.
Each Portfolio expects to earn interest income on its margin deposits.
Risks of Using Futures Contracts. The prices of Futures Contracts are
volatile and are influenced, among other things, by actual and
anticipated changes in interest rates, which in turn are affected by
fiscal and monetary policies and national and international political
and economic events.
At best, the correlation between changes in prices of Futures
Contracts and of the securities or currencies being hedged can be only
approximate. The degree of imperfection of correlation depends upon
circumstances such as: variations in speculative market demand for
Futures and for debt securities or currencies, including technical
influences in Futures trading; and differences between the financial
instruments being hedged and the instruments underlying the standard
Futures Contracts available for trading, with respect to interest rate
levels, maturities, and creditworthiness of issuers. A decision of
whether, when, and how to hedge involves skill and judgment, and even
a well-conceived hedge may be unsuccessful to some degree because of
unexpected market behavior or interest rate trends.
Because of the low margin deposits required, Futures trading
involves an extremely high degree of leverage. As a result, a
relatively small price movement in a Futures Contract may result in
immediate and substantial loss, as well as gain, to the investor. For
example, if at the time of purchase, 10% of the value of the Futures
Contract is deposited as margin, a subsequent 10% decrease in the
value of the Futures Contract would result in a total loss of the
margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss
equal to 150% of the original margin deposit, if the Futures Contract
were closed out. Thus, a purchase or sale of a Futures Contract may
result in losses in excess of the amount invested in the Futures
Contract. A Portfolio, however, would presumably have sustained
comparable losses if, instead of the Futures Contract, it had invested
in the underlying financial instrument and sold it after the decline.
Where a Portfolio enters into Futures transactions for non-hedging
purposes, it will be subject to greater risks and could sustain losses
which are not offset by gains on other portfolio assets.
Furthermore, in the case of a Futures Contract purchase, in
order to be certain that each Portfolio has sufficient assets to
satisfy its obligations under a Futures Contract, the Portfolio
segregates and commits to back the Futures Contract an amount of cash,
U.S. Government securities and other liquid, high-grade debt
securities equal in value to the current value of the underlying
instrument less the margin deposit.
Most U.S. Futures exchanges limit the amount of fluctuation
permitted in Futures Contract prices during a single trading day. The
daily limit establishes the maximum amount that the price of a Futures
Contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been
reached in a particular type of Futures Contract, no trades may be
made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may
prevent the liquidation of unfavorable positions. Futures Contract
prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing
prompt liquidation of Futures positions and subjecting some Futures
traders to substantial losses.
See "Additional Tax Information" for a discussion of federal tax
treatment of Futures Contracts.
Options on Futures Contracts. Options on Futures Contracts are
similar to options on securities or currencies except that options on
Futures Contracts give the purchaser the right, in return for the
premium paid, to assume a position in a Futures Contract (a long
position if the option is a call and a short position if the option is
a put), rather than to purchase or sell the Futures Contract, at a
specified exercise price at any time during the period of the option.
Upon exercise of the option, the delivery of the Futures position by
the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's
Futures margin account which represents the amount by which the market
price of the Futures Contract, at exercise, exceeds (in the case of a
call) or is less than (in the case of a put) the exercise price of the
option on the Futures Contract. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement
will be made entirely in cash equal to the difference between the
exercise price of the option and the closing level of the securities
or currencies upon which the Futures Contracts are based on the
expiration date. Purchasers of options who fail to exercise their
options prior to the exercise date suffer a loss of the premium paid.
As an alternative to purchasing call and put options on Futures,
each Portfolio may purchase call and put options on the underlying
securities or currencies themselves (see "Purchasing Put Options" and
"Purchasing Call Options" above). Such options would be used in a
manner identical to the use of options on Futures Contracts.
To reduce or eliminate the leverage then employed by the
Portfolio or to reduce or eliminate the hedge position then currently
held by the Portfolio, the Portfolio may seek to close out an option
position by selling an option covering the same securities or currency
and having the same exercise price and expiration date. The ability
to establish and close out positions on options on Futures Contracts
is subject to the existence of a liquid market. It is not certain
that this market will exist at any specific time.
In order to assure that the Portfolios will not be deemed to be
"commodity pools" for purposes of the Commodity Exchange Act,
regulations of the Commodity Futures Trading Commission ("CFTC")
require that each Portfolio enter into transactions in Futures
Contracts and options on Futures Contracts only (i) for bona fide
hedging purposes (as defined in CFTC regulations), or (ii) for non-
hedging purposes, provided that the aggregate initial margin and
premiums on such non-hedging positions does not exceed 5% of the
liquidation value of the Portfolio's assets. The Global Government
Bond Portfolio and the European Portfolio will enter into transactions
in Futures Contracts and options on Futures Contracts only for hedging
purposes.
Forward Currency Contracts and Options on Currency. A forward
currency contract is an obligation to purchase or sell a currency
against another currency at a future date and price as agreed upon by
the parties. A Portfolio may either accept or make delivery of the
currency at the maturity of the forward contract or, prior to
maturity, enter into a closing transaction involving the purchase or
sale of an offsetting contract. Each Portfolio engages in forward
currency transactions in anticipation of, or to protect itself
against, fluctuations in exchange rates. A Portfolio might sell a
particular foreign currency forward, for example, when it holds bonds
denominated in that currency but anticipates, and seeks to be
protected against, decline in the currency against the U.S. dollar.
Similarly, a Portfolio might sell the U.S. dollar forward when it
holds bonds denominated in U.S. dollars but anticipates, and seeks to
be protected against, a decline in the U.S. dollar relative to other
currencies. Further, a Portfolio might purchase a currency forward to
"lock in" the price of securities denominated in that currency which
it anticipates purchasing.
The matching of the increase in value of a forward contract and
the decline in the U.S. dollar equivalent value of the foreign
currency denominated asset that is the subject of the hedge generally
will not be precise. In addition, a Portfolio may not always be able
to enter into foreign currency forward contracts at attractive prices
and this will limit the Portfolio's ability to use such contract to
hedge or cross-hedge its assets. Also, with regard to a Portfolio's
use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue. Thus, at any time poor
correlation may exist between movements in the exchange rates of the
foreign currencies underlying the Portfolio's cross-hedges and the
movements in the exchange rates of the foreign currencies in which the
Portfolio's assets that are the subject of such cross-hedges are
denominated.
Forward contracts are traded in an interbank market conducted
directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit
requirement and is consummated without payment of any commission.
Each Portfolio, however, may enter into forward contracts with deposit
requirements or commissions.
A put option gives a Portfolio, as purchaser, the right (but not
the obligation) to sell a specified amount of currency at the exercise
price until the expiration of the option. A call option gives a
Portfolio, as purchaser, the right (but not the obligation) to
purchase a specified amount of currency at the exercise price until
its expiration. A Portfolio might purchase a currency put option, for
example, to protect itself during the contract period against a
decline in the value of a currency in which it holds or anticipates
holding securities. If the currency's value should decline, the loss
in currency value should be offset, in whole or in part, by an
increase in the value of the put. If the value of the currency
instead should rise, any gain to the Portfolio would be reduced by the
premium it had paid for the put option. A currency call option might
be purchased, for example, in anticipation of, or to protect against,
a rise in the value of a currency in which the Portfolio anticipates
purchasing securities.
Each Portfolio's ability to establish and close out positions in
foreign currency options is subject to the existence of a liquid
market. There can be no assurance that a liquid market will exist for
a particular option at any specific time. In addition, options on
foreign currencies are affected by all of those factors that influence
foreign exchange rates and investments generally.
A position in an exchange-listed option may be closed out only
on an exchange that provides a secondary market for identical options.
Exchange markets for options on foreign currencies exist but are
relatively new, and the ability to establish and close out positions
on the exchanges is subject to maintenance of a liquid secondary
market. Closing transactions may be effected with respect to options
traded in the over-the-counter ("OTC") markets (currently the primary
markets for options on foreign currencies) only by negotiating
directly with the other party to the option contract or in a secondary
market for the option if such market exists. Although each Portfolio
intends to purchase only those options for which there appears to be
an active secondary market, there is no assurance that a liquid
secondary market will exist for any particular option at any specific
time. In such event, it may not be possible to effect closing
transactions with respect to certain options, with the result that the
Portfolio would have to exercise those options which it has purchased
in order to realize any profit. The staff of the Securities and
Exchange Commission ("SEC") has taken the position that, in general,
purchased OTC options and the underlying securities used to cover
written OTC options are illiquid securities. However, a Portfolio may
treat as liquid the underlying securities used to cover written OTC
options, provided it has arrangements with certain qualified dealers
who agree that the Portfolio may repurchase any option it writes for a
maximum price to be calculated by a predetermined formula. In these
cases, the OTC option itself would only be considered illiquid to the
extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
Swap Agreements. Among the hedging transactions into which the
Portfolios may enter are interest rate swaps and the purchase or sale
of interest rate caps and floors. Each Portfolio expects to enter
into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio or to protect
against any increase in the price of securities the Portfolio
anticipates purchasing at a later date. Each Portfolio intends to use
these transactions as a hedge and not as a speculative investment.
Each Portfolio will not sell interest rate caps or floors that it does
not own. Interest rate swaps involve the exchange by a Portfolio with
another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate
cap. The purchase of an interest rate floor entitles the purchaser,
to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal
amount from the party selling such interest rate floor.
A Portfolio may enter into interest rate swaps, caps and floors
on either an asset-based or liability-based basis, depending on
whether it is hedging its assets or its liabilities, and will usually
enter into interest rate swaps on a net basis, i.e., the two payment
streams are netted but, with the Portfolio receiving or paying, as the
case may be, only the net amount of the two payments. Inasmuch as
these hedging transactions are entered into for good faith hedging
purposes, the investment adviser and the Portfolios believe such
obligations do not constitute senior securities and, accordingly will
not treat them as being subject to its borrowing restrictions. The
net amount of the excess, if any, of a Portfolio's obligations over
its entitlement with respect to each interest rate swap will be
accrued on a daily basis and an amount of cash or liquid securities
having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by a custodian that
satisfies the requirements of the Investment Company Act of 1940 (the
"1940 Act"). The Portfolios will not enter into any interest rate
swap, cap or floor transaction unless the unsecured senior debt or the
claims-paying ability of the other party thereto is rated in the
highest rating category of at least one nationally recognized rating
organization at the time of entering into such transaction. If there
is a default by the other party to such a transaction, a Portfolio
will have contractual remedies pursuant to the agreements related to
the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing swap documentation. As a
result, the swap market has become relatively liquid. Caps and floors
are more recent innovations for which standardized documentation has
not yet been developed and, accordingly, they are less liquid than
swaps.
New options and Futures Contracts and various combinations
thereof continue to be developed and the Portfolios may invest in any
such options and contracts as may be developed to the extent
consistent with its investment objective and regulatory requirements
applicable to investment companies.
The Articles of Incorporation of the Fund permit the Board of
Directors to establish additional Portfolios of the Fund from time to
time. The investment objectives, policies and restrictions applicable
to additional Portfolios would be established by the Board of
Directors at the time such Portfolios were established and may differ
from those set forth in the Prospectus and this Statement of
Additional Information.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and fundamental
policies that cannot be changed without approval by a "vote of a
majority of the outstanding voting securities" of each Portfolio
affected by the change as defined in the 1940 Act and Rule 18f-2
thereunder (see "Voting").
Without the approval of a majority of its outstanding voting
securities, the Global Government Bond Portfolio may not:
1. Change its subclassification as an open-end fund.;
2. Change its subclassification as a non-diversified company;
3. Invest more than 25% of its total assets in securities, the
issuers of which conduct their principal business activities
in the same industry. For purposes of this limitation,
securities of the U.S. government (including its agencies and
instrumentalities) and securities of state or municipal
governments and their political subdivisions are not
considered to be issued by members of any industry.
4. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction
shall not prevent the Portfolio from (a) investing in
securities of issuers engaged in the real estate business or
the business of investing in real estate (including interests
in limited partnerships owning or otherwise engaging in the
real estate business or the business of investing in real
estate) and securities which are secured by real estate or
interests therein; (b) holding or selling real estate
received in connection with securities it holds or held; (c)
trading in futures contracts and options on futures contracts
(including options on currencies to the extent consistent
with the Portfolios' investment objective and policies); or
(d) investing in real estate investment trust securities.
5. Borrow money, except that (a) the Portfolio may borrow from
banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might
otherwise require the untimely disposition of securities, and
(b) the Portfolio may, to the extent consistent with its
investment policies, enter into reverse repurchase
agreements, forward roll transactions and similar investment
strategies and techniques. To the extent that it engages in
transactions described in (a) and (b), the Portfolio will be
limited so that no more than 33 1/3% of the value of its
total assets (including the amount borrowed), valued at the
lesser of cost or market, less liabilities (not including the
amount borrowed) valued at the time the borrowing is made, is
derived from such transactions.
6. Issue senior securities.
7. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Portfolio may
invest consistent with its investment objectives and
policies; (b) repurchase agreements; and (c) loans of its
portfolio securities, to the fullest extent permitted under
the 1940 Act.
8. Engage in the business of underwriting securities issued by
other persons, except to the extent that the Portfolio may
technically be deemed to be an underwriter under the
Securities Act of 1933, as amended, in disposing of
portfolio securities.
9. Enter into a Futures Contract or a commodity option other
than for bona fide hedging purposes and, if, as a result
thereof, more than 5% of the Portfolio's total assets (taken
at market value at the time of entering into the contract or
commodity option) would be committed to initial margin on
futures contracts and premiums on commodity options all
within the meaning of Regulation 4.5 of the CFTC.
In addition, the following policies have also been adopted by
the Global Government Bond Portfolio but are not fundamental and
accordingly may be changed by approval of the Board of Directors. The
Portfolio may not:
1. Purchase any securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and
sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this
restriction, the deposit or payment by the Portfolio of
underlying securities and other assets in escrow and
collateral agreements with respect to initial or maintenance
margin in connection with futures contracts and related
options and options on securities, indexes or similar items
is not considered to be the purchase of a security on margin.
2. Have more than 15% of its total assets at any time invested
in or subject to puts, calls or combinations thereof.
3. Invest in companies for the purpose of exercising control or
management.
4. Purchase or otherwise acquire any security if, as a result,
more than 15% of its net assets would be invested in
securities that are illiquid.
5. Invest in securities of another investment company except as
permitted by Section 12(d)(1)(a) of the 1940 Act, or as part
of a merger, consolidation, or acquisition.
6. Invest in securities of an issuer if the investment would
cause the Portfolio to own more than 10% of any class of
securities of any one issuer.
7. Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that
the Portfolio may invest in, or sponsor such programs.
8. Invest more than 5% of its total assets in securities of
companies having, together with their predecessors, a record
of less than three years of continuous operation.
Without the approval of a majority of its outstanding voting
securities, the International Equity Portfolio, the Pacific Portfolio,
the European Portfolio, the International Balanced Portfolio and the
Emerging Markets Portfolio each may not:
1. With respect to each of the European Portfolio, the
International Equity Portfolio and the Pacific Portfolio,
invest in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder
2. With respect to each of the Emerging Markets Portfolio and
the International Balanced Portfolio, deviate from its
subclassification as a non-diversified company.
3. Invest more than 25% of its total assets in securities, the
issuers of which conduct their principal business activities
in the same industry. For purposes of this limitation,
securities of the U.S. government (including its agencies and
instrumentalities) and securities of state or municipal
governments and their political subdivisions are not
considered to be issued by members of any industry.
4. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction
shall not prevent the Portfolio from (a) investing in
securities of issuers engaged in the real estate business or
the business of investing in real estate (including interests
in limited partnerships owning or otherwise engaging in the
real estate business or the business of investing in real
estate) and securities which are secured by real estate or
interests therein; (b) holding or selling real estate
received in connection with securities it holds or held; (c)
trading in futures contracts and options on futures contracts
(including options on currencies to the extent consistent
with the Portfolios' investment objective and policies); or
(d) investing in real estate investment trust securities.
5. With respect to each of the Emerging Markets Portfolio and
the European Portfolio, borrow money, except that (a) the
Portfolio may borrow from banks for temporary or emergency
(not leveraging) purposes, including the meeting of
redemption requests which might otherwise require the
untimely disposition of securities, and (b) the Portfolio
may, to the extent consistent with its investment policies,
enter into reverse repurchase agreements, forward roll
transactions and similar investment strategies and
techniques. To the extent that it engages in transactions
described in (a) and (b), the Portfolio will be limited so
that no more than 33 1/3% of the value of its total assets
(including the amount borrowed), valued at the lesser of cost
or market, less liabilities (not including the amount
borrowed) valued at the time the borrowing is made, is
derived from such transactions.
6. With respect to each of the International Balanced Portfolio,
the International Equity Portfolio and the Pacific Portfolio,
borrow money, except that (a) the Portfolio may borrow from
banks under certain circumstances where the Portfolio's
Manager reasonably believes that (i) the cost of borrowing
and related expenses will be exceeded by the Portfolio's
return from investments of the proceeds of the borrowing in
portfolio securities, or (ii) the meeting of redemption
requests might otherwise require the untimely disposition of
securities, in an amount not exceeding 33 1/3% of the value
of the Portfolio's total assets (including the amount
borrowed), valued at the lesser of cost or market, less
liabilities (not including the amount borrowed) valued at the
time the borrowing is made and (b) the Portfolio may, to the
extent consistent with its investment policies, enter into
reverse repurchase agreements, forward roll transactions and
similar investment strategies and techniques.
7. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Portfolio may
invest consistent with its investment objectives and
policies; (b) repurchase agreements; and (c) loans of its
portfolio securities, to the fullest extent permitted under
the 1940 Act.
8. Engage in the business of underwriting securities issued by
other persons, except to the extent that the Portfolio may
technically be deemed to be an underwriter under the
Securities Act of 1933, as amended, n disposing of portfolio
securities.
9. Issue "senior securities" as defined in the 1940 Act and the
rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
In addition, the following policies have also been adopted by
the Emerging Markets Portfolio, the International Balanced Portfolio,
the International Equity Portfolio and the Pacific Portfolio, but are
not fundamental and accordingly may be changed by approval of the
Board of Directors. The Portfolios' may not:
1. Purchase any securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and
sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this
restriction, the deposit or payment by the Portfolio of
underlying securities and other assets in escrow and
collateral agreements with respect to initial or maintenance
margin in connection with futures contracts and related
options and options on securities, indexes or similar items
is not considered to be the purchase of a security on margin.
2. Purchase interests in oil, gas and/or mineral exploration or
development programs (including mineral leases), except for
purchases of currencies and futures and options and other
related contracts as described in the Prospectus from time to
time and except for the purchase of marketable securities
issued by companies that have such interests.
3. Purchase securities of any other registered investment
company, except in connection with a merger, consolidation,
reorganization or acquisition of assets; provided, however,
that each of the Portfolios may also purchase shares of other
investment companies pursuant to Section 12(d)(1)(A) of the
1940 Act.
4. Make investments in securities for the purpose of exercising
control over or managing the issuer.
5. Purchase securities of any issuer (including any predecessor)
which has been in operation for less than three years if
immediately after such purchase more than 5% of the value of
the total assets of the Portfolio would be invested in such
securities.
6. Purchase or otherwise acquire any security if, as a result,
more than 15% of its net assets would be invested in
securities that are illiquid.
7. Purchase warrants if as a result the Portfolio would then
have more than 5% of its net assets (determined at the time
of investment) invested in warrants. Warrants will be valued
at the lower of cost or market and investment in warrants
which are not listed on the New York Stock Exchange ("NYSE")
or American Stock Exchange ("AMEX") will be limited to 2% of
the Portfolio's net assets (determined at the time of
investment). For the purpose of this limitation, warrants
acquired in units or attached to securities are deemed to be
without value.
ADDITIONAL TAX INFORMATION
The following is a summary of the material federal tax
considerations affecting a Portfolio of the Fund. In addition to the
considerations described below there may be other federal, state,
local or foreign tax applications to consider. Because taxes are a
complex matter, prospective shareholders are urged to consult their
tax advisors for more detailed information with respect to the tax
consequences of any investment.
General
Each Portfolio intends to qualify, as it has in prior years,
under Subchapter M of the Internal Revenue Code (the "Code") for tax
treatment as a regulated investment company. In each taxable year
that each Portfolio qualifies, so long as such qualification is in the
best interest of its shareholders, each Portfolio will pay no federal
income tax on its net investment income and long-term capital gain
that is distributed to shareholders.
To so qualify, a Portfolio must, among other things, (i) derive
at least 90% of its gross income in each taxable year from dividends,
interest, proceeds from loans of stock and securities, gains from the
sale or other disposition of stock, securities or foreign currency, or
certain other income (including but not limited to gains from options,
Futures and forward contracts) derived from its business of investing
in stock, securities or currency; and (ii) diversify its holdings so
that, at the end of each quarter of its taxable year, the following
two conditions are met: (a) at least 50% of the market value of the
Portfolio's total assets is represented by cash, U.S. Government
securities, securities of other regulated investment companies and
other securities, with such other securities limited, in respect of
any one issuer, to an amount not greater than 5% of the Portfolio's
assets and not more than 10% of the outstanding voting securities of
such issuer; and (b) not more than 25% of the value of the Portfolio's
assets is invested in securities of any one issuer (other than U.S.
Government securities or securities of other regulated investment
companies). The diversification requirements described above may
limit the Portfolio's ability to engage in hedging transactions by
writing or buying options or by entering into Futures or forward
contracts.
Foreign currency gains that are not directly related to a
Portfolio's principal business of investing in stock or securities, or
options or forward contracts thereon, might be excluded by regulations
from income that counts toward the 90% gross income requirement
described above.
As a regulated investment company, each Portfolio will not be
subject to U.S. federal income tax on net investment income and net
long-term capital gains distributed to shareholders if, as is
intended, the Portfolio distributes at least 90% of its ordinary
income and net short-term capital gains to the Portfolio's
shareholders each year.
Each Portfolio, however, will generally be subject to a
nondeductible excise tax of 4% to the extent that it does not meet
certain minimum distribution requirements as of the end of each
calendar year. Each Portfolio intends to make timely distributions of
its income (including any net capital gains) in compliance with these
requirements. As a result, it is anticipated that each Portfolio will
not be subject to the excise tax.
For federal income tax purposes, dividends declared by each
Portfolio in October, November or December as of a record date in such
month and which are actually paid in January of the following year
will be treated as if they were paid on December 31. These dividends
will be taxable to shareholders in the year declared, and not in the
year in which shareholders actually receive the dividend.
Gains or losses that a Portfolio recognizes upon the sale or
other disposition of stock or securities will be treated as long-term
capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where the Portfolio sells
the stock or security short or acquires a put or writes a call
thereon. Other gains or losses on the sale of stock or securities
will be short-term capital gains or losses. Gains and losses on the
sale, lapse or other termination of options on stock or securities
will generally be treated as gains and losses from the sale of stock
or securities. If an option written for a Portfolio lapses or is
terminated through a closing transaction the Portfolio may realize a
short-term capital gain or loss, depending on whether the premium
income is greater or less than the amount paid in the closing
transaction. If a Portfolio sells stock or securities pursuant to the
exercise of a call option written by it, the Portfolio will add the
premium received to the sale price of the stock or securities
delivered in determining the amount of gain or loss on the sale. The
requirement that a Portfolio derive less than 30% of its gross income
from gains from the sale of stock or securities held for less than
three months may limit the Portfolio's ability to acquire put options
or make short sales.
Under the Code, gains or losses attributable to foreign currency
contracts, or to fluctuations in exchange rates between the time a
Portfolio accrues income or receivables or expenses or other
liabilities denominated in a foreign currency and the time the
Portfolio actually collects such income or pays such liabilities, are
treated as ordinary income or ordinary loss. Similarly, gains or
losses on the disposition of debt securities held by the Portfolio
denominated in foreign currency, to the extent attributable to
fluctuations in exchange rates between the acquisition and disposition
dates, are also treated as ordinary income or loss.
Forward currency contracts, options and Futures contracts
entered into by a Portfolio may create "straddles" for federal income
tax purposes and this may affect the character and timing of gains or
losses realized by the Portfolio on such contracts or options or on
the underlying securities. Under regulations yet to be issued,
straddles may also result in the loss of the holding period of
underlying property, and therefore, the Portfolio's ability to enter
into forward currency contracts, options and Futures contracts may be
limited by the 30% of gross income test described above.
Certain options, Futures and foreign currency contracts held by
a Portfolio at the end of each fiscal year will be required to be
"marked to market" for federal income tax purposes; that is, treated
as having been sold at market value. Sixty percent of any capital
gain or loss recognized on these deemed sales and on actual
dispositions will be treated as long-term capital gain or loss, and
the remainder will be treated as short-term capital gain or loss
regardless of how long the Portfolio has held such options or
contracts.
If a Portfolio purchases shares in certain foreign investment
entities, referred to as "passive foreign investment companies," the
Portfolio itself may be subject to U.S. federal income tax and an
additional charge in the nature of interest on a portion of any
"excess distribution" from such company or gain from the disposition
of such shares, even if the distribution or gain is distributed by the
Portfolio to its shareholders in a manner that satisfies the
requirements described above. If the Portfolio were able and elected
to treat a passive foreign investment company as a "qualified electing
fund," in lieu of the treatment described above, the Portfolio would
be required each year to include in income, and distribute to
shareholders in accordance with the distribution requirements
described above, the Portfolio's pro rata share of the ordinary
earnings and net capital gains of the company, whether or not actually
received by the Portfolio.
Distributions
If the net asset value of shares of a Portfolio is reduced below
a shareholder's cost as a result of distribution by the Portfolio,
such distribution will be taxable even though it represents a return
of invested capital.
Redemption of Shares
Any gain or loss realized on the redemption or exchange of
Portfolio shares by a shareholder who is not a dealer in securities
will be treated as long-term capital gain or loss if the shares have
been held for more than one year, and otherwise as short-term capital
gain or loss.
However, any loss realized by a shareholder upon the redemption
or exchange of Portfolio shares held six months or less will be
treated as long-term capital loss to the extent of any long-term
capital gain distributions received by the shareholder with respect to
such shares. Additionally, any loss realized on a redemption or
exchange of Portfolio shares will be disallowed to the extent the
shares disposed of are replaced within a period of 61 days beginning
30 days before and ending 30 days after such disposition, such as
pursuant to reinvestment of dividends in Portfolio shares.
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.
The Taxpayer Relief Act of 1997 has changed the requirements for
determining whether or not you are eligible to make a deductible IRA
contribution. Under the new rules effective beginning January 1,
1998, if you are considered an active participant in an employer-
sponsored retirement plan, you may still be eligible for a full or
partial deduction depending upon your combined adjusted gross income*
("AGI"). For married couples filing jointly, a full deduction is
permitted if your combined AGI is $50,000 or less ($30,000 for
unmarried individuals); a partial deduction will be allowed when AGI
is between $50,000-$60,000 ($30,000-$40,000 for an unmarried
individual); and no deduction when AGI is $60,000 ($40,000 for an
unmarried individual). However, if you are married and your spouse is
covered by a employer-sponsored retirement plan, but you are not, you
will be eligible for a full deduction if your combined AGI is $150,000
or less. A partial deduction is permitted if your combined AGI is
between $150,000-$160,000 and no deduction is permitted after
$160,000.
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.
Paired Defined Contribution Prototype
Corporations (including Subchapter S corporations) and non-
corporate entities may purchase shares of the Fund through the Smith
Barney Prototype Paired Defined Contribution Plan (the "Prototype").
The Prototype permits adoption of profit-sharing provisions, money
purchase pension provisions, or both, to provide benefits for eligible
employees and their beneficiaries. The Prototype provides for a
maximum annual tax deductible contribution on behalf of each
Participant of up to 25% of compensation, but not to exceed $30,000
(provided that a money purchase pension plan or both a profit-sharing
plan and a money purchase pension plan are adopted thereunder).
PERFORMANCE INFORMATION
From time to time the Fund may advertise a Portfolio's total
return, average annual total return and yield in advertisements. In
addition, in other types of sales literature the Fund may include a
Portfolio's current dividend return. These figures are based on
historical earnings and are not intended to indicate future
performance. The total return shows what an investment in the
Portfolio would have earned over a specified period of time (one, five
or ten years) assuming the payment of the maximum sales load when the
investment was first made, that all distributions and dividends by the
Portfolio were invested on the reinvestment dates during the period
less all recurring fees. The average annual total return is derived
from this total return, which provides the ending redeemable value.
The Fund may also quote the Portfolio's total return for present
shareholders that eliminates the sales charge on the initial
investment. The following chart reflects the financial performance of
the Portfolios through the period ended October 31, 1997 for the one,
and five year periods and since inception:
Average Annual Total Returns
SEC Returns
5 Year
Since Inception
Name of Portfolio
Clas
s
1 Year
Annualiz
ed
Cumulati
ve
Annualiz
ed
Cumulati
ve
International Equity1
inception: 11-22-91 A
inception: 11-7-94 B
inception: 1-4-93 C
inception: 6-16-94
Y
inception: 11-7-94
Z
3.85%
3.42%
7.43%
9.68%
9.69%
10.55%
--
--
--
--
65.08%
--
10.95%*
2.60%
10.83%
5.45%
4.71%
237.55%*
7.97%
64.21%
19.64%
14.73%
Global Government Bond
inception: 7-22-91 A
inception: 11-18-94
B
inception: 1-4-93 C
inception: 2-19-93
Y
3.35%
3.22%
6.75%
8.61%
7.47%
--
--
--
43.34
--
--
--
8.16%
8.76%
8.35%
8.62%
63.69%
28.15%
47.27%
47.45%
International Balanced
inception: 8-25-94 A
inception: 11-7-94 B
inception: 8-25-94
C
inception: 2-7-96 Y
(6.62)%
(7.27)%
(3.42)%
(1.28)%
--
--
--
--
--
--
--
--
4.41%
4.58%
5.29%
3.88%
14.74%
14.31%
17.84%
6.82%
Pacific
inception: 2-7-94 A
inception: 11-7-94 B
inception: 2-11-94
C
(21.08)%
(21.70)%
(18.56)%
--
--
--
--
--
--
(11.17)%
(14.21)%
(10.68)%
(35.71)%
(36.69)%
(34.32)%
European
inception: 2-7-94 A
inception: 11-7-94 B
inception: 2-14-94
C
7.22%
7.08%
11.06%
--
--
--
--
--
--
11.34%
14.36%
12.23%
49.31%
49.22%
53.45%
Emerging Markets
inception: 5-12-95 A
inception: 5-12-95
B
inception: 5-12-95
C
(2.12)%
(2.82)%
1.26%
--
--
--
--
--
--
(0.58)%
(0.51)%
0.74%
(1.43)%
(1.25)%
1.83%
The International Equity Portfolio's performance record includes
the performance of the Fenimore International Fund through November
22, 1991. The shareholders of the Fenimore International Fund
approved a reorganization with the Portfolio at their October 31, 1991
shareholder's meeting. As a result, all shares of the Fenimore
International Fund were exchanged at the close of business on November
22, 1991 for shares of the Portfolio. Prior to November 22, 1991 the
Portfolio had not made an offering of its shares.
* These numbers represent the financial performance for the ten-year
period ended October 31, 1997.
Note that, prior to November 7, 1994, (i) with respect to each
Portfolio, Class C shares were designated as Class B shares; and (ii)
with respect to Global Government Bond Portfolio, Class Y shares were
designated as Class C shares. Note further, that effective October 3,
1994, with respect to the International Equity, International
Balanced, European and Pacific Portfolios, Class C shares of each such
Portfolio were reclassified as additional Class A shares.
The Global Government Bond Portfolio's yield is computed by
dividing the net investment income per share earned during a specified
thirty day period by the maximum offering price per share on the last
day of such period and analyzing the result. For purposes of the
yield calculation, interest income is determined based on a yield to
maturity percentage for each long-term debt obligation in the
portfolio; income on short-term obligations is based on current
payment rate.
The Fund calculates current dividend return for each Portfolio
by dividing the dividends from investment income declared during the
most recent twelve months 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. From time to time,
the Fund may include the Portfolio's current dividend return in
information furnished to present or prospective shareholders and in
advertisements.
Each Portfolio's current dividend return may vary from time to
time depending on market conditions, the composition of its investment
portfolio and operating expenses. These factors and possible
differences in the methods used in calculating current dividend return
should be considered when comparing the Portfolio's current dividend
return to yields published for other investment companies and other
investment vehicles. Current dividend return should also be
considered relative to changes in the value of the Portfolio's shares
and to the risks associated with the Portfolio's investment objective
and policies. For example, in comparing current dividend returns with
those offered by Certificates of Deposit ("CDs"), it should be noted
that CDs are insured (up to $100,000) and offer a fixed rate of
return.
Performance information may be useful in evaluating a Portfolio
and for providing a basis for comparison with other financial
alternatives. Since the performance of the Portfolio changes in
response to fluctuations in market conditions, interest rates and
Portfolio expenses, no performance quotation should be considered a
representation as to the Portfolio's performance for any future
period.
A Portfolio may from time to time compare its investment results
with the following:
(1) Various Salomon Smith Barney World Bond Indices and
J.P. Morgan Global Bond Indices, which measure the total
return performance of high-quality securities in major
sectors of the worldwide bond markets.
(2) The Shearson Lehman Government/Corporate Bond Index,
which is a comprehensive measure of all public obligations
of the U.S. Treasury (excluding flower bonds and foreign
targeted issues), all publicly issued debt of agencies of
the U.S. Government (excluding mortgage-backed
securities), and all public, fixed-rate, non-convertible
investment grade domestic corporate debt rated at least
Baa by Moody's Investors Service ("Moody's") or BBB by
Standard and Poor's Ratings Group ("S&P"), or, in the case
of nonrated bonds, BBB by Fitch Investors Service
(excluding Collateralized Mortgage Obligations).
(3) Average of Savings Accounts, which is a measure of all
kinds of savings deposits, including longer-term
certificates (based on figures supplied by the U.S. League
of Savings Institutions). Savings accounts offer a
guaranteed rate of return on principal, but no opportunity
for capital growth. During a portion of the period, the
maximum rates paid on some savings deposits were fixed by
law.
(4) The Consumer Price Index, which is a measure of the
average change in prices over time in a fixed market
basket of goods and services (e.g., food, clothing,
shelter, fuels, transportation fares, charges for doctors'
and dentists' services, prescription medicines, and other
goods and services that people buy for day-to-day living).
(5) Data and mutual fund rankings published or prepared by
Lipper Analytical Services, Inc., which ranks mutual funds
by overall performance, investment objectives and assets.
(6) Ibbottson Associates International Bond Index, which
provides a detailed breakdown of local market and currency
returns since 1960.
(7) Standard & Poor's 500 Index ("S&P 500") which is a
widely recognized index composed of the capitalization-
weighted average of the price of 500 of the largest
publicly traded stocks in the U.S.
(8) Salomon Smith Barney Broad Investment Grade Bond Index
which is a widely used index composed of U.S. domestic
government, corporate and mortgage-back fixed income
securities.
(9) Dow Jones Industrial Average which is a price-weighted
average of 30 actively traded stocks of highly reputable
companies prepared by Dow Jones & Co.
(10) Financial News Composite Index.
(11) Morgan Stanley Capital International World Indices,
including, among others, the Morgan Stanley Capital
International Europe, Australia, Far East Index ("EAFE
Index"). The EAFE Index is an unmanaged index of more
than 800 companies of Europe, Australia and the Far East.
(12) Data and comparative performance rankings published
or prepared by CDA Investment Technologies, Inc.
(13) Data and comparative performance rankings published
or prepared by Wiesenberger Investment Company Service.
Indices prepared by the research departments of such financial
organizations as Salomon Smith Barney, Inc., Merrill Lynch, Bear
Stearns & Co., Inc., Morgan Stanley, and Ibbottson Associates may be
used, as well as information provided by the Federal Reserve Board.
In addition, performance rankings and ratings reported periodically in
national financial publications, including but not limited to Money
Magazine, Forbes, Business Week, The Wall Street Journal and Barron's
may also be used.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Portfolio's shares will be
determined on any day that the NYSE is open. The NYSE is closed for
the following holidays: New Year's Day, Martin Luther King Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
REDEMPTION OF SHARES
In conformity with applicable rules of the SEC, redemptions may
be paid in portfolio securities, in cash or any combination of both,
as the Board of Directors may deem advisable; however, payments shall
be made wholly in cash unless the Board of Directors believes that
economic conditions exist that would make such a practice detrimental
to the best interests of the Fund and its remaining shareholders. If
a redemption is paid in portfolio securities, such securities will be
valued in accordance with the procedures described under
"Determination of Net Asset Value" in the Prospectus and a shareholder
would incur brokerage expenses if these securities were then converted
to cash.
INVESTMENT MANAGEMENT AGREEMENT AND OTHER SERVICES
Manager
The Management Agreement for the Global Government Bond
Portfolio provides for an annual fee calculated at the rate of 0.75%
of the Portfolio's average daily net assets, paid monthly; each of the
Management Agreements for the International Equity Portfolio, the
Pacific Portfolio, the European Portfolio and the International
Balanced Portfolio provides for an annual fee calculated at the rate
of 0.85% of the Portfolio's average daily net assets, paid monthly;
and the Management Agreement for the Emerging Markets Portfolio
provides for an annual fee calculated at the rate of 1.00% of the
Portfolio's average daily net assets, paid monthly.
For the fiscal years 1995, 1996 and 1997 the management fees for
each Portfolio were as follows:
Portfolio
1995
1996
1997
International Equity
$8,452,273
$10,047,384
$11,766,569
Global Government
Bond
901,693
1,150,340
l,123,627
European
202,500
314,805
390,268
Pacific
74,052
82,839
79,628
International
Balanced
213,800
274,278
471,084
Emerging Markets
69,254
227,869
380,979
For the year ended October 31, 1995, the manager waived $8,684,
$74,052, $87,233 and $64,107 of management fees for European, Pacific,
International Balanced and Emerging Markets Portfolios, respectively,
and agreed to reimburse the Pacific Portfolio for expenses in the
amount of $30,862.
Each Management Agreement further provides that all other
expenses not specifically assumed by the Manager under the Management
Agreement on behalf of the Portfolio are borne by the Fund. Expenses
payable by the Fund include, but are not limited to, all charges of
custodians (including sums as custodian and sums for keeping books and
for rendering other services to the Fund) and shareholder servicing
agents, expenses of preparing, printing and distributing all
prospectuses, proxy material, reports and notices to shareholders, all
expenses of shareholders' and directors' meetings, filing fees and
expenses relating to the registration and qualification of the Fund's
shares and the Fund under Federal or state securities laws and
maintaining such registrations and qualifications (including the
printing of the Fund's registration statements), fees of auditors and
legal counsel, costs of performing portfolio valuations, out-of-pocket
expenses of directors and fees of directors who are not "interested
persons" as defined in the Act, interest, taxes and governmental fees,
fees and commissions of every kind, expenses of issue, repurchase or
redemption of shares, insurance expense, association membership dues,
all other costs incident to the Fund's existence and extraordinary
expenses such as litigation and indemnification expenses. Direct
expenses are charged to each Portfolio; general corporate expenses are
allocated on the basis of the relative net assets. Mutual Management
Corp., the investment manager of the Fund, also acts as investment
adviser to numerous other open-end investment companies. Smith Barney
also advises profit-sharing and pension accounts. Smith Barney and
its affiliates may in the future act as investment advisers for other
accounts.
Distributor
For the year ended October 31, 1997, the table below represents
the fees which have been accrued and/or paid to Smith Barney under the
Plans of Distribution pursuant to Rule 12b-1 for the Fund's
Portfolios. The distribution expenses for 1997 included compensation
of financial consultants and printing costs of prospectuses and
marketing materials.
Pursuant to a Plan of Distribution adopted by the Fund on behalf
of each Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"),
Smith Barney incurs the expenses of distributing the Fund's Class A,
Class B and Class C shares. See "Management of the Fund--Distributor"
in the Prospectus.
Portfolio
Class A
Class B
Class C
Total
International
Equity
$1,282,917
$2,375,547
$2,261,441
$5,919,905
Global Government
Bond
249,862
169,569
25,078
444,509
European
32,501
302,094
27,521
362,116
Pacific
9,943
37,798
16,217
63,958
International
Balanced
34,903
56,286
42,281
133,470
Emerging Markets
37,470
189,861
41,594
268,925
During the fiscal years 1995, 1996 and 1997 aggregate sales
commissions of $1,929,000, $1,438,000, and $1,613,000, respectively,
were paid to Smith Barney by the purchasers of Fund shares. A
contingent deferred sales charge ("CDSC") may be imposed on certain
redemptions of Class A, Class B shares and Class C shares. The amount
of the CDSC will depend on the number of years since the shareholder
made the purchase payment from which the amount is being redeemed. For
Class B shares, for each of the Fund's Portfolios except the Global
Government Bond Portfolio, the maximum CDSC is 5.00% of redemption
proceeds, declining by 1.00% each year after the date of purchase to
zero. For Class B shares of the Global Government Bond Portfolio the
maximum CDSC is 4.50% of redemption proceeds, declining by 0.50% the
first year after purchase and by 1.00% each year thereafter to zero. A
CDSC of 1.00% is imposed on redemptions of Class A shares that were
purchased without an initial sales charge but subject to a CDSC if
such redemptions occur within 12 months from the date such investment
was made. Any sales charge imposed on redemptions is paid to the
distributor of the Fund shares.
Smith Barney will pay for the printing, at printer's overrun cost, of
prospectuses and periodic reports after they have been prepared, set
in type and mailed to shareholders, and will also pay the cost of
distributing such copies used in connection with the offering to
prospective investors and will also pay for supplementary sales
literature and other promotional costs. Such expenses incurred by
Smith Barney are distribution expenses within the meaning of the Plan
and may be paid from amounts received by Smith Barney from the Fund
under the Plan.
Brokerage and Portfolio Transactions
The Manager is responsible for allocating the Fund's brokerage.
Orders may be directed to any broker including, to the extent and in
the manner permitted by applicable law, Smith Barney . No Portfolio
will deal with Smith Barney in any transaction in which Smith Barney
acts as principal.
The Fund attempts to obtain the most favorable execution of each
portfolio transaction in the International Equity Portfolio, the
Pacific Portfolio, the European Portfolio, the International Balanced
Portfolio and the Emerging Markets Portfolio, that is, the best
combination of net price and prompt reliable execution. In the
opinion of the Manager, however, it is not possible to determine in
advance that any particular broker will actually be able to effect the
most favorable execution because, in the context of a constantly
changing market, order execution involves judgments as to price,
commission rates, volume, the direction of the market and the
likelihood of future change. In making its decision as to which
broker or brokers are most likely to provide the most favorable
execution, the management of the Fund takes into account the relevant
circumstances. These include, in varying degrees, the size of the
order, the importance of prompt execution, the breadth and trends of
the market in the particular security, anticipated commission rates,
the broker's familiarity with such security including its contacts
with possible buyers and sellers and its level of activity in the
security, the possibility of a block transaction and the general
record of the broker for prompt, competent and reliable service in all
aspects of order processing, execution and settlement.
Commissions are negotiated and take into account the difficulty
involved in execution of a transaction, the time it took to conclude,
the extent of the broker's commitment of its own capital, if any, and
the price received. Anticipated commission rates are an important
consideration in all trades and are weighed along with the other
relevant factors affecting order execution set forth above. In
allocating brokerage among those brokers who are believed to be
capable of providing equally favorable execution, the Fund takes into
consideration the fact that a particular broker may, in addition to
execution capability, provide other services to the Fund such as
research and statistical information. It is not possible to place a
dollar value on such services nor does their availability reduce the
Manager's expenses in a determinable amount. These various services
may, however, be useful to the Manager or Smith Barney in connection
with its services rendered to other advisory clients and not all such
services may be used in connection with the Fund.
The Board of Directors of the Fund has adopted certain policies
and procedures incorporating the standard of Rule 17e-1 issued by the
SEC under the 1940 Act which requires that the commissions paid to
Smith Barney must be "reasonable and fair compared to the commission
fee or other remuneration received or to be received by other brokers
in connection with comparable transactions involving similar
securities during a comparable period of time." The Rule and the
policy and procedures also contain review requirements and require the
Manager to furnish reports to the Board of Directors and to maintain
records in connection with such reviews.
In placing orders for the Global Government Bond Portfolio's
transactions, the Manager seeks to obtain the best net results. The
Manager has no agreement or commitment to place orders with any
broker-dealer. Debt securities are generally traded on a "net" basis
with a dealer acting as principal for its own account without stated
commission, although the price of the security usually includes a
profit to the dealer. United States and foreign government securities
and money market instruments are generally traded in the OTC markets.
In underwritten offerings, securities are usually purchased at a
fixed price which includes an amount of compensation to the
underwriter. On occasion, securities may be purchased directly from
an issuer, in which case no commissions or discounts are paid.
Dealers may receive commissions on Futures, currency and options
transactions purchased on behalf of the Portfolio. Commissions or
discounts in foreign securities exchanges or OTC markets typically are
fixed and generally are higher than those in U.S. securities exchanges
or OTC markets.
Shown below are the total brokerage fees paid by the Fund on
behalf of the International Equity Portfolio, European Portfolio,
Pacific Portfolio, International Balanced Portfolio and the Emerging
Markets Portfolio during 1995, 1996 and 1997. Also shown is the
portion paid to Smith Barney and the portion paid to other brokers for
the execution of orders allocated in consideration of research and
statistical services or solely for their ability to execute the order.
During fiscal year 1997, the total amount of commissionable
transactions was $1,215,395,099 of which $14,300,215 (1%) was directed
to Smith Barney and executed by unaffiliated brokers and
$1,201,094,884 (99%) of which was directed to other brokers.
Commissions
For Execution Only
Total
To Smith Barney
To Others
1995........
.........
$2,907,454
$38,786* (1.33%)
$2,868,668 (98.67%)
1996........
.........
3,971,236
31,857* (.80%)
3,939,379 (99.20%)
1997........
.........
3,310,496
52,098*
(1.57%)
3,258,398 (98.43%)
_________________
* Directed to Smith Barney and executed by unaffiliated brokers.
CUSTODIAN
Portfolio securities and cash owned by the Fund are held in the
custody of The Chase Manhattan Bank, Chase Metrotech Center, Brooklyn,
New York 11245.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has
been selected as the Fund's independent auditors to examine and report
on the financial statements and financial highlights of the Fund for
its fiscal year ending October 31, 1998.
VOTING
As permitted by Maryland law, there will normally be no meetings of
shareholders for the purpose of electing directors unless and until
such time as less than a majority of the directors holding office have
been elected by shareholders. At that time, the directors then in
office will call a shareholders' meeting for the election of
directors. The directors must call a meeting of shareholders for the
purpose of voting upon the question of removal of any director when
requested in writing to do so by the record holders of not less than
10% of the outstanding shares of the Fund. At such a meeting, a
director may be removed after the holders of record of not less than a
majority of the outstanding shares of the Fund have declared that the
director be removed either by declaration in writing or by votes cast
in person or by proxy. The Fund will assist shareholders in calling
such a meeting as required by the Act. Except as set forth above, the
directors shall continue to hold office and may appoint successor
directors.
As used in the Prospectus and this Statement of Additional
Information, a "vote of a majority of the outstanding voting
securities" means the affirmative vote of the lesser of (a) more than
50% of the outstanding shares of the Fund (or the affected Portfolio
or class) or (b) 67% or more of such shares present at a meeting if
more than 50% of the outstanding shares of the Fund (or the affected
Portfolio or class) are represented at the meeting in person or by
proxy.
The following table contains a list of shareholders who of
record or beneficially owned at least 5% of the outstanding shares of
a particular class of shares of a Portfolio of the Fund as of
February 6, 1998.
Global Government Bond Portfolio
Class A
Srs. of Providence Community
Support Trust - Intl Inv
Generalate - Finance Office
Owens Hall
St Mary of the W IN 47876-1096
owned 500,318,344(6.5778%) shares
Class C
Richard J. Horbal & Linda
Horbal TTEES FBO Richard J. Horbal
MD PC EMP. Retirement
Plan UAD 12/01/82
4196 Old Pine Trail
Midland, MI 48642-8892
owned 39,524.368 (15.2563%) shares
Class Y
Smith Barney Concert Series, Inc.
Balanced Portfolio PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113-1522
owned 1,747,519.597 (71.6142%) shares
Smith Barney Concert Series, Inc.
Conservative Portfolio PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113-1522
owned 451,650.086 (18.5088%) shares
Smith Barney Concert Series, Inc
Select Balanced Portfolio PNC Bank
Attn: Beverly Timpson
200 Steven Drive Suite 440
Lester, PA 19113-1522
owned 195,285.214 (8.0028) shares
International Balanced Portfolio
Class C
NR Ernest H Lorch
200 East End Avenue
New York, NY 10128-7831
owned 14,569.774 (5.9117%) shares
Class Y
Smith Barney Concert Series, Inc.
Balanced Portfolio PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113-1522
owned 3,033,105.860 (78.9382%) shares
Smith Barney Concert Series, Inc.
Conservative Portfolio PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113-1522
owned 416,763.846 (10.8465%) shares
Smith Barney Concert Series, Inc.
Select Balanced Portfolio PNC Bank
Attn: Beverly Timson
200 Steven Drive
Suite 440
Lester, PA 19113-1522
owned 351,002.485 (9.1350) shares
International Equity Portfolio
Class Y
Smith Barney Concert Series, Inc.
High Growth Portfolio PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19133-1522
owned 5,275,866.243 (31.8316) shares
Smith Barney Concert Series, Inc.
Growth Portfolio PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113-1522
owned 3,398,089.846 (20.5021) shares
Wachovia Bank of North Carolina, NA
Successor Trustee U/A DRD 7-1-95
For USAA Savings & Investment Plan
Attn: Mutual Funds
301 North Main Street- MC: NC-31051
Winston-Salem, NC 27150
owned 2,380,027.838 (14.3597%) shares
Wachovia Bank of North Carolina, NA
USAA Retirement Trust
Smith Barney Internat'l Equity
Attn: Mutual Funds Mc: NC-31051
301 North Main Street
Winston-Salem, NC 27150
owned 2,061,044.665 (12.4351) shares
Class Z
Citibank N A TTEE
Travelers Group Master Trust
Smith Barney 401K Savings Plan
111 Wall Street - 20th Floor
Attn: N. Kronenberg
New York, NY 10043
owned 6,170,398.219 (99.9928) shares
Pacific Portfolio
Class A
Phil D. Pitchford
87 Aspen Way
Rolling Hills EST CA 90274-3429
owned 38,472.812 (12.0999) shares
Clyde Pitchford TTEE
FBO The Miller Survivor's
Trust U/A/D 9/8/75
595 Market Street Suite 1470
San Francisco, CA 94105-2821
owned 17,359.820 (5.4597) shares
Michael F. Konak
Holanda 337, D-805
Santiago, Chile
owned 16,920.056 (5.3214) shares
FINANCIAL STATEMENTS
The following financial information is hereby incorporated by
reference to the indicated pages of the Fund's 1997 Annual Report to
Shareholders, copies of which are furnished with this Statement of
Additional Information.
Page(s) in
Annual Report
(Global
Government Bond,
International
Balanced and
International
Equity
Portfolios)
Page(s) in
Annual Report
(Emerging
Markets,
European and
Pacific
Portfolios)
5,11,15
6,12,18
Average Annual Total Return
Line Graph Showing Growth of
$10,000 Investment
6,12,16
7,13,19
Statements of Assets and
Liabilities
31
32
Statements of Operations
32
33
Statement of Changes in Net Assets
33-34
34-35
Notes to Financial Statements
35-43
36-41
Financial Highlights
44-56
42-50
Independent Auditor's Report
57
51
APPENDIX - RATINGS OF DEBT OBLIGATIONS
BOND (AND NOTE) RATINGS
Moody's Investors Service, Inc. ("Moody's")
Aaa - Bonds that are rated "Aaa" are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected
by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds that are rated "Aa" are judged to be of high quality
by all standards. Together with the "Aaa" group they comprise what
are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in
"Aaa" securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present that make the
long term risks appear somewhat larger than in "Aaa" securities.
A - Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate but elements may be present that suggest a susceptibility to
impairment sometime in the future.
Baa - Bonds that are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this
class.
B - Bonds that are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long period
of time may be small.
Caa - Bonds that are rated Caa are of poor standing. These
issues may be in default or present elements of danger may exist with
respect to principal or interest.
Ca - Bonds that are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked short-comings.
C - Bonds that are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 in each
generic rating classification from Aa through B. The modifier 1
indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Standard & Poor's Ratings Group ("Standard & Poors")
AAA - Debt rated "AAA" has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated "AA" has a very strong capacity to pay interest
and repay principal and differs from the highest rated issues only in
small degree.
A - Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than debt in higher rated categories.
BBB - Debt rated "BBB" is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
BB, B and CCC - Bonds rated BB and B are regarded, on balance,
as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
BB represents a lower degree if speculation than B and CCC the highest
degree of speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C - The rating C is reserved for income bonds on which no
interest is being paid.
D - Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus
or a minus sign, which is used to show relative standing within the
major rating categories, except in the AAA category.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Issuers rated "Prime-1" (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well-
established industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of
fixed financial charges and high internal cash generation; well-
established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated "Prime-2" (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Standard & Poor's Ratings Group
A-1 - This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics will
be denoted with a plus (+) sign designation.
A-2 - Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as high as
for issues designated A-1.
1 Effective June 20, 1997, Mr. Chapman resigned from the Fund's Board of
Directors.
2 Effective March 30, 1998, Mr. Cohen became a member of the Fund's Board
of Directors.
3 Effective August 1, 1998, Mr. Sargent resigned from the Fund's Board
of Directors.
4 Effective July 28, 1998, Mr. Shuart resigned from the Fund's Board of
Directors.
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