- --------------------------------------------------------------------------------
PROSPECTUS
SMITH BARNEY
WORLD FUNDS, INC.
International
Equity
Portfolio
FEBRUARY 27, 1998
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Prospectus February 27, 1998
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc.
International Equity Portfolio
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The International Equity Portfolio (the "Portfolio") is one of the
investment portfolios that currently comprise Smith Barney World Funds, Inc.
(the "Fund"). The Portfolio seeks a total return on its assets from growth of
capital and income. The Portfolio seeks to achieve its objective by investing at
least 65% of its assets in a diversified portfolio of equity securities of
established non-United States issuers. The Portfolio may borrow for investment
purposes, which involves certain risk considerations; see "Leverage."
This Prospectus sets forth concisely certain information about the Fund and
the Portfolio, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference.
Additional information about the Portfolio is contained in a Statement of
Additional Information dated February 27, 1998, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Fund at the telephone number or address set forth above or by
contacting a Smith Barney Financial Consultant. The Statement of Additional
Information has been filed with the Securities and Exchange Commission (the
"SEC") and is incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Prospectus Summary 3
- --------------------------------------------------------------------------------
Financial Highlights 9
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 13
- --------------------------------------------------------------------------------
Valuation of Shares 21
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 22
- --------------------------------------------------------------------------------
Purchase of Shares 24
- --------------------------------------------------------------------------------
Exchange Privilege 34
- --------------------------------------------------------------------------------
Redemption of Shares 37
- --------------------------------------------------------------------------------
Minimum Account Size 39
- --------------------------------------------------------------------------------
Performance 40
- --------------------------------------------------------------------------------
Management of the Fund 40
- --------------------------------------------------------------------------------
Distributor 42
- --------------------------------------------------------------------------------
Additional Information 42
================================================================================
No person has been authorized to give any information or to make any
representation in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
================================================================================
2
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospectus.
See "Table of Contents."
INVESTMENT OBJECTIVE The Portfolio is an open-end, management investment
company whose investment objective is to seek a total return on its assets from
growth of capital and income. The Portfolio seeks to achieve its objective by
investing at least 65% of its assets in a diversified portfolio of equity
securities of established non-United States issuers. See "Investment Objective
and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers several classes of
shares ("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. In
addition, a fifth Class, Class Z shares, which is offered pursuant to a separate
prospectus, is offered exclusively to tax-exempt employee benefit and retirement
plans of Smith Barney Inc. ("Smith Barney") and its affiliates. See "Purchase of
Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% and are subject to an annual service fee of 0.25% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of $500,000
or more will be made at net asset value with no initial sales charge, but will
be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary --
Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year after
the date of purchase to zero. This CDSC may be waived for certain redemptions.
Class B shares are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.75% of the average daily net assets of the Class. The
Class B shares' distribution fee may cause that Class to have higher expenses
and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been
3
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
acquired through the reinvestment of dividends and distributions ("Class B
Dividend Shares") will be converted at that time. See "Purchase of Shares --
Deferred Sales Change Alternatives."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.75% of the average daily net assets of the Class C
shares, and investors pay a CDSC of 1.00% if they redeem Class C shares within
12 months of purchase. The CDSC may be waived for certain redemptions. The Class
C shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A shares. Purchases of Portfolio shares, which when
combined with current holdings of Class C shares of the Portfolio equal or
exceed $500,000 in the aggregate, should be made in Class A shares at net asset
value with no sales charge, and will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
In deciding which Class of Portfolio shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
share holders may qualify for reduced sales charges and the shares are subject
to lower ongoing expenses over the term of the investment. As an alternative,
Class B and Class C shares are sold without any initial sales charge so the
entire purchase price is immediately invested in the Portfolio. Any investment
return on these additional invested amounts may partially or wholly offset the
higher annual expenses of these Classes. Because the Portfolio's future return
cannot be predicted, however, there can be no assurance that this would be the
case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Portfolio. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but
4
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
will be subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase. The $500,000 investment may be met by adding the purchase to the net
asset value of all Class A shares offered with a sales charge held in funds
sponsored by Smith Barney listed under "Exchange Privilege." Class A share
purchases also may be eligible for a reduced initial sales charge. See "Purchase
of Shares." Because the ongoing expenses of Class A shares may be lower than
those for Class B and Class C shares, purchasers eligible to purchase Class A
shares at net asset value or at a reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B and Class C shares is the same as that of the
initial sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Fund" for a complete
description of the sales charges and service and distribution fees for each
Class of shares and "Valuation of Shares," "Dividends, Distributions and Taxes"
and "Exchange Privilege" for other differences between the Classes of shares.
SMITH BARNEY 401(k) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible
to participate in the Smith Barney 401(k) Program, which is generally designed
to assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as other types of participant directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available without sales
charge as investment alternatives under both of these programs. See "Purchase of
Shares -- Smith Barney 401(k) and ExecChoice(TM) Programs."
PURCHASE OF SHARES Shares may be purchased through a brokerage account
maintained by Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
other institutional investors, may purchase shares directly from the Fund
through the Fund's transfer agent, First Data Investor Services Group, Inc.
("First Data"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may
open an account by making an initial investment of at least $1,000 for each
account, or $250 for an individual retirement account ("IRA") or a Self-Employed
Retirement Plan. Investors in Class Y shares may open an account for an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made for
all Classes. For participants in retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial investment
requirement for Class A,
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
Class B and Class C shares and the subsequent investment requirement for all
Classes of shares is $25. The minimum investment requirements for purchases of
Portfolio shares through the Systematic Investment Plan are described below. See
"Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Portfolio shares. The minimum initial
investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes for shareholders purchasing
shares through the Systematic Investment Plan on a monthly basis is $25 and on a
quarterly basis is $50. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE PORTFOLIO Mutual Management Corp. (formerly, Smith Barney
Mutual Funds Management Inc.) (the "Manager") serves as the Portfolio's
investment manager. The Manager is a wholly owned subsidiary of Salomon Smith
Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of
Travelers Group Inc. ("Travelers"), a diversified financial services holding
company engaged, through its subsidiaries, principally in four business
segments: Investment Services, including Asset Management, Consumer Finance
Services, Life Insurance Services and Property & Casualty Insurance Services.
See "Management of the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the
same Class of certain other funds of the Smith Barney Mutual Funds at the
respective net asset values next determined. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Portfolio for the prior day
generally is quoted daily in the financial section of most newspapers and is
also available from a Smith Barney Financial Consultant. See "Valuation of
Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income and
distributions of net realized capital gains, if any, are declared and paid
annually. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and
distribution reinvestments will become eligible for conversion to Class A
shares on a pro rata basis. See "Dividends, Distributions and Taxes."
6
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The value of the Portfolio's
investments, and thus the net asset value of the Portfolio's shares, will
fluctuate in response to changes in market and economic conditions, as well as
the financial condition and prospects of issuers in which the Portfolio invests.
The Portfolio will invest in foreign securities. Investments in foreign
securities incur higher costs than investments in U.S. securities, including
higher costs in making securities transactions as well as foreign government
taxes, which may reduce the investment return of the Portfolio. In addition,
foreign investments may include additional risks associated with currency
exchange rates, less complete financial information about individual companies,
less market liquidity and political instability. See "Investment Objective and
Management Policies."
THE PORTFOLIO'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Portfolio, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and the Portfolio's operating
expenses for its most recent fiscal year:
International Equity Portfolio Class A Class B Class C Class Y
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) .... 5.00% None None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever
is lower) .............................. None* 5.00% 1.00% None
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management fees .......................... 0.85% 0.85% 0.85% 0.85%
12b-1 fees** ............................. 0.25 1.00 1.00 -
Other expenses ........................... 0.21 0.26 0.27 0.09
----- ----- ----- -----
Total Portfolio Operating Expenses .......... 1.31% 2.11% 2.12% 0.94%
- --------------------------------------------------------------------------------
* Purchases of Class A shares of $500,000 or more will be made at net asset
value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a conversion
feature and, therefore, are subject to an ongoing distribution fee. As a result,
long-term shareholders of Class C shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.
Class A shares of the Portfolio purchased through the Smith Barney
AssetOne(SM) Program will be subject to an annual asset-based fee, payable
quarterly, in lieu of the initial sales charge. The fee will vary to a maximum
of 1.50%, depending on the amount of assets held through the Program. For more
information, please call your Smith Barney Financial Consultant.
7
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Portfolio shares and investors
may actually pay lower or no charges, depending on the amount purchased and, in
the case of Class B, Class C and certain Class A shares, the length of time the
shares are held and whether the shares are held through the Smith Barney 401(k)
or ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of Shares."
Smith Barney receives an annual 12b-1 service fee of 0.25% of the value of
average daily net assets of Class A shares. Smith Barney also receives with
respect to Class B and Class C shares an annual 12b-1 fee of 1.00% of the value
of average daily net assets of the respective Classes, consisting of a 0.75%
distribution fee and a 0.25% service fee. "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
Example
The following example is intended to assist an investor in understanding
the various costs that an investor in the Portfolio will bear directly or
indirectly. The example assumes payment by the Portfolio of operating expenses
at the levels set forth in the table above. See "Purchase of Shares,"
"Redemption of Shares" and "Management of the Fund."
International Equity Portfolio 1 Year 3 Years 5 Years 10 Years*
- --------------------------------------------------------------------------------
An investor would pay the following expenses on
a $1,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the
end of each time period:
Class A.................................. $63 $89 $118 $200
Class B.................................. 71 96 123 224
Class C.................................. 32 66 114 245
Class Y.................................. 10 30 52 115
An investor would pay the following expenses on
the same investment, assuming the same
annual return and no redemption:
Class A.................................. $63 $89 $118 $200
Class B.................................. 21 66 113 224
Class C.................................. 22 66 114 245
Class Y.................................. 10 30 52 115
- --------------------------------------------------------------------------------
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
8
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon appears in the Fund's annual report
dated October 31, 1997. The information set out below should be read in
conjunction with the financial statements and related notes that also appear in
the Fund's Annual Report to Shareholders, which is incorporated by reference
into the Statement of Additional Information.
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares
--------------------------------------------------------------------
International Equity Portfolio 1997(1) 1996(1) 1995 1994(2)(3) 1993 1992 1991(4)
===================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year $18.64 $17.15 $18.79 $18.71 $12.35 $12.31 $11.94
- ---------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(loss) (0.04) 0.01 0.08* (0.01) (0.01) 0.02 (0.01)
Net realized and unrealized
gain (loss) 1.77 1.65 (1.50) 0.09 6.53 0.04 0.38
- ---------------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations 1.73 1.66 (1.42) 0.08 6.52 0.06 0.37
- ---------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income(5) (0.01) (0.17) (0.12) -- -- (0.02) --
Net realized gains -- -- (0.10) -- (0.16) -- --
- ---------------------------------------------------------------------------------------------------
Total Distributions (0.01) (0.17) (0.22) -- (0.16) (0.02) --
- ---------------------------------------------------------------------------------------------------
Net Asset Value, End
of Year $20.36 $18.64 $17.15 $18.79 $18.71 $12.35 $12.31
- ---------------------------------------------------------------------------------------------------
Total Return** 9.30% 9.78% (7.44)% 0.43%++ 52.78% 0.49% 3.10%++
- ---------------------------------------------------------------------------------------------------
Net Assets, End of
Year (000)'s $464,796 $513,870 $489,533 $591,598 $355,926 $122,605 $54,958
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(6) 1.31% 1.35% 1.36% 1.35%+ 1.35% 1.56% 1.73%+
Net investment income (loss) (0.18) 0.17 0.50 (0.05)+ (0.10) 0.24 0.75+
- ---------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 35% 46% 42% 35% 27% 20% 2%
===================================================================================================
Average commissions paid
on equity transactions(7)(8) $0.03 $0.02 $0.01 -- -- -- --
===================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from January 1, 1994 to October 31, 1994.
(3) On October 10, 1994, the former Class C shares were exchanged into Class A
shares; therefore Class C share activity for the period from January 1, 1994
to October 9, 1994 is included in Class A share activity.
(4) For the period from November 22, 1991 (date of transfer of net assets of
Fenimore International Fund, Inc.) to December 31, 1991.
(5) Distributions from net investment income include short-term capital gains,
if any, for Federal income tax purposes.
(6) During the years ended October 31, 1996 and October 31, 1995 the Portfolio
earned credits from the custodian which reduced service fees incurred. If
the credits are taken into consideration, the expense ratios for Class A
would have been 1.29% and 1.28%, respectively; numbers prior to October 31,
1995 have not been restated to reflect these credits.
(7) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(8) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commissions on trades executed outside these
countries are generally executed as a percentage of cost or proceeds ranging
from 0.5% to 1.0%.
+ Annualized.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
** Total returns do not reflect any applicable sales loads or contingent
deferred sales charges.
* Includes realized gains and losses from foreign currency transactions.
9
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
Class B Shares
-----------------------------
International Equity Portfolio 1997(1) 1996(1) 1995(2)
================================================================================
Net Asset Value, Beginning
of Year $18.65 $17.17 $18.38
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss) (0.20) (0.08) 0.06*
Net realized and unrealized
gain (loss) 1.77 1.60 (1.17)
- --------------------------------------------------------------------------------
Total Income (Loss) From
Operations 1.57 1.52 (1.11)
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income(3) -- (0.04) --
Net realized gains -- -- (0.10)
- --------------------------------------------------------------------------------
Total Distributions -- (0.04) (0.10)
- --------------------------------------------------------------------------------
Net Asset Value, End
of Year $20.22 $18.65 $17.17
- --------------------------------------------------------------------------------
Total Return** 8.42% 8.89% (6.00)%++
- --------------------------------------------------------------------------------
Net Assets, End of
Year (000)'s $231,148 $212,294 $126,171
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 2.11% 2.11% 2.13%+
Net investment income (loss) (0.95) (0.58) 0.34+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 35% 46% 42%
================================================================================
Average commissions per share
paid on equity transactions(5)(6) $0.03 $0.02 $0.01
================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from November 7, 1994 (inception date) to October 31, 1995.
(3) Distributions from net investment income include short-term capital gains,
if any, for Federal income tax purposes.
(4) During the year ended October 31, 1996 and the period ended October 31,
1995, the Portfolio earned credits from the custodian which reduced service
fees incurred. If the credits are taken into consideration, the expense
ratios for Class B would have been 2.04% and 2.04%+, respectively.
(5) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(6) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commissions on trades executed outside these
countries are generally executed as a percentage of cost or proceeds ranging
from 0.5% to 1.0%.
* Includes realized gains and losses from foreign currency transactions.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
** Total returns do not reflect any applicable sales loads or contingent
deferred sales charges.
10
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares
----------------------------------------------------
International Equity Portfolio 1997(1) 1996(1) 1995(2) 1994(3) 1993(4)
==========================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year $18.38 $16.93 $18.54 $18.58 $12.35
- ------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss) (0.22) (0.13) (0.06)* (0.11) 0.14
Net realized and unrealized
gain (loss) 1.77 1.62 (1.45) 0.07 6.25
- ------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations 1.55 1.49 (1.51) (0.04) 6.39
- ------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income(5) -- (0.04) -- -- --
Net realized gains -- -- (0.10) -- (0.16)
- ------------------------------------------------------------------------------------------
Total Distributions -- (0.04) (0.10) -- (0.16)
- ------------------------------------------------------------------------------------------
Net Asset Value, End
of Year $19.93 $18.38 $16.93 $18.54 $18.58
- ------------------------------------------------------------------------------------------
Total Return** 8.43% 8.85% (8.11)% (0.22)%++ 51.73%++
- ------------------------------------------------------------------------------------------
Net Assets, End of
Year (000)'s $200,849 $229,514 $240,090 $287,458 $114,951
- ------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(6) 2.12% 2.15% 2.16% 2.10%+ 2.14%+
Net investment loss (0.97) (0.63) (0.34) (0.77)+ (1.08)+
- ------------------------------------------------------------------------------------------
Portfolio Turnover Rate 35% 46% 42% 35% 27%
==========================================================================================
Average commissions per share
paid on equity transactions(7)(8) $0.03 $0.02 $0.01 -- --
==========================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) On November 7, 1994, the former Class B shares were renamed Class C shares.
(3) For the period from January 1, 1994 to October 31, 1994.
(4) For the period from January 4, 1993 (inception date) to December 31, 1993.
(5) Distributions from net investment income include short-term capital gains,
if any, for Federal income tax purposes.
(6) During the years ended October 31, 1996 and October 31, 1995, the Portfolio
earned credits from the custodian which reduced service fees incurred. If
the credits are taken into consideration, the expense ratios for Class C
would have been 2.09% and 2.08%, respectively; numbers prior to October 31,
1995 have not been restated to reflect these credits.
(7) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(8) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commissions on trades executed outside these
countries are generally executed as a percentage of cost or proceeds ranging
from 0.5% to 1.0%.
* Includes realized gains and losses from foreign currency transactions.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
** Total returns do not reflect any applicable sales loads or contingent
deferred sales charges.
11
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
Class Y Shares
--------------------------------------
International Equity Portfolio 1997(1) 1996(1) 1995(2) 1994(3)
================================================================================
Net Asset Value, Beginning
of Year $18.64 $17.13 $18.80 $17.64
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.04 0.18 0.10* 0.01
Net realized and unrealized
gain (loss) 1.76 1.54 (1.50) 1.15
- --------------------------------------------------------------------------------
Total Income (Loss) From
Operations 1.80 1.72 (1.40) 1.16
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income(4) (0.06) (0.21) (0.17) --
Net realized gains -- -- (0.10) --
- --------------------------------------------------------------------------------
Total Distributions (0.06) (0.21) (0.27) --
- --------------------------------------------------------------------------------
Net Asset Value, End
of Year $20.38 $18.64 $17.13 $18.80
- --------------------------------------------------------------------------------
Total Return 9.68% 10.19% (7.11)% 6.58%++
- --------------------------------------------------------------------------------
Net Assets, End of
Year (000)'s $301,852 $200,427 $97,132 $48,765
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(5) 0.94% 0.96% 1.06% 1.09%+
Net investment income 0.23 0.56 0.91 0.29+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 35% 46% 42% 35%
================================================================================
Average commissions per share
paid on equity transactions(6)(7) $0.03 $0.02 $0.01 --
================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) On November 7, 1994, the former Class D shares were renamed Class Y shares.
(3) For the period from June 16, 1994 (inception date) to October 31, 1994.
(4) Distributions from net investment income include short-term capital gains,
if any, for Federal income tax purposes.
(5) During the years ended October 31, 1996 and October 31, 1995, the Portfolio
earned credits from the custodian which reduced service fees incurred. If
the credits are taken into consideration, the expense ratios for Class Y
would have been 0.90% and 0.98%, respectively; numbers prior to October 31,
1995 have not been restated to reflect these credits.
(6) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(7) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commissions on trades executed outside these
countries are generally executed as a percentage of cost or proceeds ranging
from 0.5% to 1.0%.
* Includes realized gains and losses from foreign currency transactions.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
12
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
The investment objective of the Portfolio is to provide a total return on
its assets from growth of capital and income. The Portfolio seeks to achieve its
objective by investing at least 65% of its assets in a diversified portfolio of
equity securities of established non-United States issuers. There can be no
assurance that the investment objective of the Portfolio will be achieved.
Under normal market conditions, the Portfolio invests at least 65% of its
assets in a diversified portfolio of equity securities consisting of dividend
and non-dividend paying common stock, preferred stock, convertible debt and
rights and warrants to such securities and up to 35% of the Portfolio's assets
in bonds, notes and debt securities (consisting of securities issued in the
Eurocurrency markets or obligations of the United States or foreign governments
and their political subdivisions) of established non-United States issuers.
Investments may be made for capital appreciation or for income or any
combination of both for the purpose of achieving a higher overall return than
might otherwise be obtained solely from investing for growth of capital or for
income. There is no limitation on the percent or amount of the Portfolio's
assets which may be invested for growth or income and, therefore, from time to
time the investment emphasis may be placed solely or primarily on growth of
capital or solely or primarily on income.
In seeking to achieve its objective, the Portfolio presently expects to
invest its assets primarily in common stocks of established non-United States
companies which in the opinion of the Manager have potential for growth of
capital. However, there is no requirement that the Portfolio invest exclusively
in common stocks or other equity securities and, if deemed advisable, the
Portfolio may invest up to 35% of its assets in bonds, notes and other debt
securities (including securities issued in the Eurocurrency markets or
obligations of the United States or foreign governments and their political
subdivisions). When the Manager believes that the return on debt securities
will equal or exceed the return on common stocks, the Portfolio may, in seeking
its objective of total return, substantially increase its holdings (up to a
maximum of 35% of its assets) in such debt securities. In determining whether
the Portfolio will be invested for capital appreciation or for income or any
combination of both, the Manager regularly analyzes a broad range of
international equity and fixed income markets in order to assess the degree of
risk and level of return that can be expected from each market.
The Portfolio will generally invest its assets broadly among countries and
will normally have represented in the portfolio business activities in not less
than three different countries. Except as stated below, the Portfolio will
invest at least 65% of its assets in companies organized or governments located
in any area of the world other than the United States, such as the Far East
(e.g., Japan, Hong Kong, Singapore, Malaysia), Western Europe (e.g., United
Kingdom, Germany, the Nether lands, France, Italy, Switzerland), Eastern Europe
(e.g., the Czech Republic, Hungary, Poland, and the countries of the former
Soviet Union), Central and South
13
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
America (e.g., Mexico, Chile and Venezuela), Australia, Canada and such other
areas and countries as the Manager may determine from time to time. Allocation
of the Portfolio's investments will depend upon the relative attractiveness of
the international markets and particular issuers. Concentration of the
Portfolio's assets in one or a few countries or currencies will subject the
Portfolio to greater risks than if the Portfolio's assets were not
geographically concentrated.
Under unusual economic or market conditions as determined by the Manager,
for defensive purposes the Portfolio may temporarily invest all or a major
portion of its assets in U.S. government securities or in debt or equity
securities of companies incorporated in and having their principal business
activities in the United States. To the extent the Portfolio's assets are
invested for temporary defensive purposes, such assets will not be invested in a
manner designed to achieve the Portfolio's investment objective.
In determining the appropriate distribution of investments among various
countries and geographic regions, the Manager ordinarily considers the following
factors: prospects for relative economic growth between countries; expected
levels of inflation; government policies influencing business conditions; the
outlook for currency relationships; and the range of individual investment
opportunities available to international investors. In the future, if any other
relevant factors arise they will also be considered. In analyzing companies for
investment, the Manager ordinarily looks for one or more of the following
characteristics: an above-average earnings growth per share; high return on
invested capital; a healthy balance sheet; sound financial and accounting
policies and overall financial strength; strong competitive advantages;
effective research and product development and marketing; efficient service;
pricing flexibility; strength of management; and general operating
characteristics which will enable the company to compete successfully in its
market place. Ordinarily, the Manager will not view a company as being
sufficiently well established to be considered for inclusion in the Portfolio
unless the company, together with any predecessors, has been operating for at
least three fiscal years. However, the Portfolio may invest up to 5% of its
assets in such "unseasoned" issuers.
It is expected that Portfolio securities will ordinarily be traded on a
stock exchange or other market in the country in which the issuer is principally
based, but may also be traded on markets in other countries including, in many
cases, the United States securities exchanges and over-the-counter markets.
To the extent that the Portfolio's assets are not otherwise invested as
described above, the assets may be held in cash, in any currency, or invested in
U.S. as well as foreign high quality money market instruments and equivalents.
The Portfolio's investment objective may be changed only by the "vote of a
majority of the outstanding securities" as defined in the Investment Company Act
14
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
of 1940 (the "1940 Act"). Certain of the Portfolio's investment policies are
non-fundamental and, as such, may be changed by the Board of Directors, provided
such change is not prohibited by the investment restrictions (which are set
forth in the Statement of Additional Information) or applicable law, and any
such change will first be disclosed in the then current prospectus.
INVESTMENT PRACTICES
The Portfolio may utilize from time to time one or more of the investment
practices described below to assist it in reaching its investment objective.
These practices involve potential risks which are summarized below. In addition,
the Statement of Additional Information contains more detailed or additional
information about certain of these practices, the potential risks and/or the
limitations adopted by the Portfolio to reduce such risks.
In order to protect the dollar equivalent value of its portfolio securities
against declines resulting from currency value fluctuations and changes in
interest rate or other market changes, the Portfolio may enter into the
following hedging transactions: forward foreign currency contracts, interest
rate and currency swaps and financial instrument and market index futures
contracts and related options contracts. The Portfolio may also use leverage,
enter into repurchase transactions and lend its portfolio securities.
Currency Transactions. The Portfolio will enter into various currency
transactions, i.e., forward foreign currency contracts, currency swaps, foreign
currency or currency index futures contracts and put and call options on such
contracts or on currencies. A forward foreign currency contract involves an
obligation to purchase or sell a specific currency for a set price at a future
date. A currency swap is an arrangement whereby each party exchanges one
currency for another on a particular date and agrees to reverse the exchange on
a later date at a specific exchange rate. Forward foreign currency contracts and
currency swaps are established in the interbank market conducted directly
between currency traders (usually large commercial banks or other financial
institutions) on behalf of their customers. Futures contracts are similar to
forward contracts except that they are traded on an organized exchange and the
obligations thereunder may be offset by taking an equal but opposite position
to the original contract, with profit or loss determined by the relative prices
between the opening and offsetting positions. The Portfolio may enter into these
currency contracts and swaps in primarily the following circumstances: to "lock
in" the U.S. dollar equivalent price of a security the Portfolio is
contemplating to buy or sell that is denominated in a non-U.S. currency; or to
protect against a decline against the U.S. dollar of the currency of a
particular country to which the Portfolio has exposure. The Portfolio may seek
to achieve the same economic result by utilizing from time to time for such
hedging a currency different from the one of the given portfolio security as
long as, in the view of the Manager, such currency is
15
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
essentially correlated to the currency of the relevant portfolio security based
on historic and expected exchange rate patterns.
Interest Rate Transactions. The Portfolio will enter into various interest
rate transactions, i.e., futures contracts in various financial instruments and
interest rate related indices, put and call options on such futures contracts
and on such financial instruments and interest rate swaps. The Portfolio will
enter into these transactions primarily to "lock in" a return or spread on a
particular investment or portion of its portfolio and to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. Interest rate swaps involve the exchange by the Portfolio with
another party of their respective commitment to pay or receive interest, e.g.,
an exchange of floating-rate payments for fixed-rate payments. The Portfolio
will not enter into an interest rate swap transaction in which its interest
commitment is greater or measured differently than the interest receivable on
specific portfolio securities. Interest rate swaps may be combined with currency
swaps to take advantage of rate differentials in different markets on the same
or similar securities.
The Portfolio may enter into futures contracts and options on futures
contracts for non-hedging purposes, subject to applicable law.
Market Index Transactions. The Portfolio may also enter into various market
index contracts, i.e., index futures contracts on particular non-U.S. securities
markets or industry segments and related put and call options. These contracts
are used primarily to protect the value of the Portfolio's securities against a
decline in a particular market or industry in which it is invested.
General. The Portfolio will engage in the foregoing transactions primarily
as a means to hedge risks associated with management of its portfolio.
Investment in these contracts requires the Portfolio to deposit with the
applicable exchange or other specified financial intermediary as a good faith
deposit for its obligations an amount of cash or specified debt securities which
initially is 1-5% of the face amount of the contract and which thereafter
fluctuates on a periodic basis as the value of the contract fluctuates.
Risks. All of the foregoing transactions present certain risks. In
particular, the variable degree of correlation between price movements of
futures contracts and dollar equivalent price movements in the currency or
security being hedged creates the possibility that losses on the hedge may be
greater than gains in the value of the Portfolio's securities. In addition,
these instruments may not be liquid in all circumstances and are generally
closed out by entering into offsetting transactions rather than by disposing of
the Portfolio's obligations. As a result, in volatile markets, the Portfolio may
not be able to close out a transaction without incurring losses. Although the
contemplated use of these contracts should tend to minimize the risk of loss due
to a decline in the value of the hedged currency or security, at the same time
they tend to limit any potential gain which might result
16
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
from an increase in the value of such currency or security. The successful use
of futures and options is dependent upon the ability of the Manager to predict
changes in interest rates. Finally, the daily deposit requirements in futures
contracts create an ongoing greater potential financial risk than do option
purchase transactions, where the exposure is limited to the cost of the premium
for the option. Transactions in futures and options on futures for non-hedging
purposes involve greater risks and could result in losses which are not offset
by gains on other portfolio assets.
With respect to interest rate swaps, the Portfolio recognizes that such
arrangements are relatively illiquid and will include the principal amount of
the obligations owed to it under a swap as an illiquid security for purposes of
the Portfolio's investment restrictions except to the extent a third party (such
as a large commercial bank) has guaranteed the Portfolio's ability to offset the
swap at any time.
Options. The Portfolio may purchase put and call options on securities
which are traded on an exchange in other markets, on currencies and, as
developed from time to time, various futures contracts on market indexes and
other instruments. Purchasing options may increase investment flexibility and
improve total return, but may also subject the Portfolio to the risk of loss of
the option premium if an asset the Portfolio has the option to buy declines in
value or if an asset the Portfolio has the option to sell increases in value. In
order to assure that the Portfolio will not be deemed to be a "commodity pool"
for purposes of the Commodity Exchange Act, regulations of the Commodity Futures
Trading Commission ("CFTC") require that the 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.
Leverage. The Portfolio may borrow from banks, on a secured or unsecured
basis, up to 25% of the value of its assets. If the Portfolio borrows and uses
the proceeds to make additional investments, income and appreciation from such
investments will improve its performance if they exceed the associated borrowing
costs but impair its performance if they are less than such borrowing costs.
This speculative factor is known as "leverage."
Leverage creates an opportunity for increased returns to shareholders of
the Portfolio but, at the same time, creates special risk considerations. For
example, leverage may exaggerate changes in the net asset value of the
Portfolio's shares and in the Portfolio's yield. Although the principal or
stated value of such borrowings will be fixed, the Portfolio assets may change
in value during the time the borrowing is outstanding. Leverage will create
interest or dividend expenses for the Portfolio which can exceed the income from
the assets retained. To the extent
17
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
the income or other gain derived from securities purchased with borrowed funds
exceeds the interest or dividends the Portfolio will have to pay in respect
thereof, the Portfolio's net income or other gain will be greater than if
leverage had not been used. Conversely, if the income or other gain from the
incremental assets is not sufficient to cover the cost of leverage, the net
income or other gain of the Portfolio will be less than if leverage had not been
used. If the amount of income from the incremental securities is insufficient to
cover the cost of borrowing, securities might have to be liquidated to obtain
required funds. Depending on market or other conditions, such liquidations could
be disadvantageous to the Portfolio.
Repurchase Agreements and Lending Securities. The Portfolio may enter into
repurchase agreements up to 25% of its assets and may lend for a fee portfolio
securities amounting to up to 15% of its assets. These transactions must be
fully collateralized at all times, and the Manager will monitor the value of the
collateral, which will be marked to the market daily, to determine that the
value is at least 100% of the agreed upon sum to be paid to the Portfolio.
Repurchase agreements and lending of portfolio securities involve some credit
risk to the Portfolio, if the other party defaults on its obligations, since the
Portfolio could be delayed or prevented from recovering the collateral. The
Portfolio currently does not expect that it will enter into repurchase
agreements on more than 5% of its assets.
When-Issued and Delayed Delivery Securities. The Portfolio may purchase or
sell securities on a when-issued or delayed delivery basis. When-issued or
delayed delivery transactions arise when securities are purchased or sold by the
Port folio with payment and delivery taking place in the future in order to
secure what is considered to be an advantageous price and yield to the Portfolio
at the time of entering into the transaction. The Fund's custodian, Chase
Manhattan Bank (the "Custodian") will maintain, in a segregated account of the
Portfolio, cash, debt securities of any grade or equity securities, having a
value equal to or greater than the Portfolio's purchase commitments, provided
such securities have been deter mined by the Manager to be liquid and
unencumbered, and are marked to market daily, pursuant to guidelines established
by the Directors. The Custodian will likewise segregate securities sold on a
delayed basis. The payment obligations and the interest rates that will be
received are each fixed at the time the Portfolio enters into the commitment and
no interest accrues to the Portfolio until settlement. Thus, it is possible that
the market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed.
PORTFOLIO TRANSACTIONS AND TURNOVER
Purchases and sales of securities, futures or options on futures on an
exchange (including a board of trade), and options on securities may be effected
through securities brokers or futures commission merchants that charge a
commission for their services. Orders may be directed to any broker including,
to the extent and in
18
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
the manner permitted by applicable law, Smith Barney. In order for Smith Barney
to effect any such transaction for the Fund, the commissions, fees or other
remuneration received by Smith Barney must be reasonable and fair compared to
the commissions, fees or other remuneration paid to other brokers in connection
with comparable transactions involving similar securities, futures or options on
futures being purchased or sold on an exchange during a comparable period of
time. This standard would allow Smith Barney to receive no more than the
remuneration that would be expected to be received by an unaffiliated broker in
a commensurate arms-length transaction. Furthermore, the Board of Directors of
the Fund, including a majority of the Directors who are not "interested"
Directors, has adopted procedures that are reasonably designed to provide that
any commissions, fees or other remuneration paid to Smith Barney are consistent
with the foregoing standard. Brokerage transactions with Smith Barney are also
subject to such fiduciary standards as may be imposed upon Smith Barney by
applicable law.
Although it is anticipated that most investments of the Portfolio will be
long-term in nature, the rate of portfolio turnover will depend upon market and
other conditions, and it will not be a limiting factor when the Manager believes
that portfolio changes are appropriate. It is expected that the Portfolio's
annual turnover rate will not exceed 100% in normal circumstances. Higher
portfolio turnover rates can result in corresponding increases in brokerage
commissions for the Portfolio. See "Financial Highlights" for the Portfolio's
annual turnover rate during each year since inception.
RISK FACTORS
Investors should realize that risk of loss is inherent in the ownership of
any securities and that shares of the Portfolio will fluctuate with the market
value of its securities. In addition, concentration of the Portfolio's assets in
one or a few countries or currencies will subject the Portfolio to greater risks
than if the Portfolio's assets were not geographically concentrated.
Non-U.S. Securities. Investments in securities of non-U.S. issuers involve
certain risks not ordinarily associated with investments in securities of
domestic issuers. Such risks include fluctuations in foreign exchange rates,
future political and economic developments, and the possible imposition of
exchange controls or other foreign governmental laws or restrictions. Since the
Portfolio will invest heavily in securities denominated or quoted in currencies
other than the U.S. dollar, changes in foreign currency ex change rates will, to
the extent the Portfolio does not adequately hedge against such fluctuations,
affect the value of securities in its portfolio and the unrealized appreciation
or depreciation of investments so far as U.S. investors are concerned. In
addition, with respect to certain countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could adversely affect investments in those
countries.
19
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing, and financial reporting standards and requirements
comparable to or as uniform as those of U.S. companies. Non-U.S. securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.
companies. Transaction costs on non-U.S. securities markets are generally higher
than in the U.S. There is generally less government supervision and regulation
of exchanges, brokers and issuers than there is in the U.S. The Fund might have
greater difficulty taking appropriate legal action in non-U.S. courts.
Dividend and interest income from non-U.S. securities will generally be
subject to withholding taxes by the country in which the issuer is located and
may not be recoverable by the Portfolio or the investors.
Securities of Developing Countries. A developing country generally is
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income markets of
developing countries involves exposure to economic structures that are generally
less diverse and mature, and to political systems that can be expected to have
less stability, than those of developed countries. Historical experience
indicates that the markets of developing countries have been more volatile than
the markets of the more mature economies of developed countries; however, such
markets often have provided higher rates of return to investors.
One or more of the risks discussed above could affect adversely the economy
of a developing market or the Portfolio's investments in such a market. In
Eastern Europe, for example, upon the accession to power of Communist regimes in
the past, the governments of a number of Eastern European countries expropriated
a large amount of property. The claims of many property owners against those of
governments may remain unsettled . There can be no assurance that any
investments that the Portfolio might make in such emerging markets would not be
expropriated, nationalized or otherwise confiscated at some time in the future.
In such an event, the Portfolio could lose its entire investment in the market
involved. Moreover, changes in the leadership of policies of such markets could
halt the expansion or reverse the liberalization of foreign investment policies
now occurring in certain of these markets and adversely affect existing
investment opportunities.
Year 2000. The investment management services provided to the Portfolio by
the Manager and the services provided to shareholders by Smith Barney, the
Fund's Distributor, depend on the smooth functioning of their computer systems.
Many computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were encoded
20
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
and calculated. That failure could have a negative impact on the Portfolio's
operations, including the handling of securities trades, pricing and account
services. The Manager and Smith Barney have advised the Portfolio that they have
been reviewing all of their computer systems and actively working on necessary
changes to their systems to prepare for the the year 2000 and expect that their
systems will be compliant before that date. In addition, the Manager has been
advised by the Portfolio's custodian, transfer agent and accounting service
agent that they are also in the process of modifying their systems with the same
goal. There can, however, be no assurance that the Manager, Smith Barney or any
other service provider will be successful, or that interaction with other
non-complying computer systems will not impair Portfolio services at that time.
- --------------------------------------------------------------------------------
Valuation of Shares
- --------------------------------------------------------------------------------
The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Portfolio's net assets attributable to each Class by the total
number of shares of the Class outstanding.
Securities owned by the Portfolio for which market quotations are readily
available are valued at current market value or, in their absence, at fair
value. Securities traded on an exchange are valued at last sales prices on the
principal exchange on which each such security is traded, or if there were no
sales on that exchange on the valuation date, the last quoted sale, up to the
time of valuation, on the other exchanges. If instead there were no sales on the
valuation date with respect to these securities, such securities are valued at
the mean of the latest published closing bid and asked prices. Over-the-counter
securities are valued at last sales price or, if there were no sales that day,
at the mean between the bid and asked prices. Options, futures contracts and
options thereon that are traded on exchanges are also valued at last sales
prices as of the close of the principal exchange on which each is listed or if
there were no such sale on the valuation date, the last quoted sale, up to the
time of valuation, on the other exchanges. In the absence of any sales on the
valuation date, valuation shall be the mean of the latest closing bid and asked
prices. Securities with a remaining maturity of 60 days or less are valued at
amortized cost where the Board has determined that amortized cost is fair
value. Premiums received on the sale of call options will be included in the
Portfolio's net assets, and current market value of such options sold by the
Portfolio will be subtracted from the Portfolio's net assets. Any other
investments of the Portfolio, including restricted securities and listed
securities for which there is a thin market or that trade infrequently (i.e.,
securities for which prices are not readily available), are valued at a fair
value determined by the Board of Directors in good faith. This value generally
is determined as the amount that the Portfolio could reasonably expect to
receive from an orderly disposition of these
21
<PAGE>
- --------------------------------------------------------------------------------
Valuation of Shares (continued)
- --------------------------------------------------------------------------------
assets over a reasonable period of time but in no event more than seven days.
The value of any security or commodity denominated in a currency other than U.S.
dollars will be converted into U.S. dollars at the prevailing market rate as
determined by the Manager.
Foreign securities trading may not take place on all days on which the NYSE
is open. Further, trading takes place in various foreign markets on days on
which the NYSE is not open. Accordingly, the determination of the net asset
value of the Port folio may not take place contemporaneously with the
determination of the prices of investments held by such Portfolio. Events
affecting the values of investments that occur between the time their prices
are determined and 4:00 P.M. on each day that the NYSE is open will not be
reflected in the Portfolio's net asset value unless the Manager, under the
supervision of the Fund's Board of Directors, determines that the particular
event would materially affect net asset value. As a result, the Portfolio's net
asset value may be significantly affected by such trading on days when a
shareholder has no access to the Portfolio.
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund declares and pays income dividends at least annually on shares of
the Portfolio and makes annual distributions of capital gains, if any, on such
shares.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales charge or CDSC.
Income dividends and capital gain distributions that are invested are
credited to shareholders' accounts in additional shares at the net asset value
as of the close of business on the payment date. A shareholder may change the
option at any time by notifying his or her Smith Barney Financial Consultant.
Accounts held directly by First Data should notify First Data in writing at
least five business days prior to the payment date to permit the change to be
entered in the shareholder's account.
The per share dividends on Class B and Class C shares of the Portfolio may
be lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable with respect to Class B and Class
C shares. The per share dividends on Class A shares of the Portfolio may be
lower than the per share dividends on Class Y shares principally as a result of
the service fee applicable to Class A shares. Distributions of capital gains, if
any, will be in the same amount for Class A, Class B, Class C and Class Y
shares.
22
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
TAXES
The Portfolio intends to continue to qualify as a regulated investment
company under Sub chapter M of the Code to be relieved of Federal income tax on
that part of its net investment income and realized capital gains which it pays
out to its shareholders. To qualify, the Portfolio must meet certain tests,
including distributing at least 90% of its investment company taxable income.
Dividends from net investment income and distributions of realized
short-term capital gains on the sale of securities, whether paid in cash or
automatically invested in additional shares of the Portfolio, are taxable to
shareholders as ordinary income. The Portfolio's dividends will not qualify for
the dividends received deduction for corporations. Dividends and distributions
declared by the Portfolio may also be subject to state and local taxes.
Distributions out of net long-term capital gains (i.e., net long-term capital
gains in excess of net short-term capital losses) are taxable to shareholders as
long-term capital gains. Information as to the tax status of dividends paid or
deemed paid in each calendar year will be mailed to shareholders as early in the
succeeding year as practical but not later than January 31.
Income received by the Portfolio from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the rate of foreign tax in
advance since the amount of the Portfolio's assets to be invested in various
countries is not known. Such foreign taxes would reduce the income of the
Portfolio distributed to shareholders.
If, at the end of the Portfolio's taxable year, more than 50% of the value
of the Portfolio's total assets consists of stock or securities of foreign
corporations, the Portfolio may make an election pursuant to which foreign
income taxes paid by it will be treated as paid directly by its shareholders.
The Portfolio will make this election only if it deems the election to be in the
best interests of shareholders, and will notify shareholders in writing each
year if it makes the election and the amount of foreign taxes to be treated as
paid by the shareholders. If the Portfolio makes such an election, the amount of
such foreign taxes would be included in the income of shareholders, and a
shareholder other than a foreign corporation or non-resident alien individual
could claim either a credit or, provided the shareholder itemizes deductions, a
deduction for U.S. federal income tax purposes for such foreign taxes.
Shareholders who choose to utilize a credit (rather than a deduction) for
foreign taxes will be subject to the limitation that the credit may not exceed
the shareholders' U.S. tax (determined without regard to the availability of the
credit) attributable to their total foreign source taxable income. For this
purpose, the portion of dividends and distributions paid by the Portfolio from
its foreign source income will be treated as foreign source income.
23
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
The Portfolio's gains and losses from the sale of securities and from certain
foreign currency gains and losses will generally be treated as derived from U.S.
sources. The limitation on the foreign tax credit is applied separately to
foreign source "passive income," such as the portion of dividends received from
the Portfolio that qualifies as foreign source income. In addition, the foreign
tax credit is allowed to offset only 90% of the alternative minimum tax imposed
on corporations and individuals. Because of these limitations, shareholders may
be unable to claim a credit for the full amount of their proportionate share of
the foreign income taxes paid by the Portfolio.
In determining gain or loss, a shareholder who redeems or exchanges shares
in the Portfolio within 90 days of the acquisition of such shares will not be
entitled to include in tax basis the sales charges incurred in acquiring such
shares to the extent of any subsequent reduction in sales charges for investing
in the Portfolio or a different Portfolio of the Fund, such as pursuant to the
rights discussed in "Exchange Privilege."
The Fund is required to withhold and remit to the U.S. Treasury 31% of
dividends, distributions and redemption proceeds to shareholders who fail to
provide a correct taxpayer identification number (the Social Security number in
the case of an individual) or to make the required certifications, or who have
been notified by the Internal Revenue Service that they are subject to backup
withholding and who are not otherwise exempt. The 31% withholding tax is not an
additional tax, but is creditable against a shareholder's federal income tax
liability.
Prior to investing in shares of the Portfolio, investors should consult
with their tax advisors concerning the federal, state and local tax consequences
of such an investment.
- --------------------------------------------------------------------------------
Purchase of Shares
- --------------------------------------------------------------------------------
GENERAL
The Portfolio offers five Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC and
are available only to investors investing a minimum of $5,000,000 (except for
purchases of Class Y shares by Smith Barney Concert Allocation Series Inc., for
which there is no minimum purchase amount). Class Z shares are offered without a
sales charge, CDSC, service fee or distribution fee, exclusively to tax-exempt
employee benefit and retirement plans of Smith Barney and its affiliates.
Investors meeting these criteria who are interested in acquiring Class Z shares
should contact a Smith Barney Financial Consultant for a Class Z Prospectus. See
"Prospectus Summary -- Alternative Purchase Arrangements" for a discussion of
factors to consider in
24
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
selecting which Class of shares to purchase.
Purchases of Portfolio shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. In addition, certain investors, including qualified
retirement plans and certain other institutional investors, may purchase shares
directly from the Fund through First Data. When purchasing shares of the
Portfolio, investors must specify whether the purchase is for Class A, Class B,
Class C or Class Y shares. Smith Barney and other brokers/dealers may charge
their customers an annual account maintenance fee in connection with a brokerage
account through which an investor purchases or holds shares. Accounts held
directly at First Data are not subject to a maintenance fee.
Investors in Class A, Class B and Class C shares may open an account by
making an initial investment of at least $1,000 for each account, or $250 for an
IRA or a Self-Employed Retirement Plan, in the Portfolio. Investors in Class Y
shares may open an account by making an initial investment of $5,000,000.
Subsequent investments of at least $50 may be made for all Classes. For
participants in retirement plans qualified under Section 403(b)(7) or Section
401(a) of the Code, the minimum initial investment requirement for Class A,
Class B and Class C shares and the subsequent investment requirement for all
Classes in the Portfolio is $25. For shareholders purchasing shares of the
Portfolio through the Systematic Investment Plan on a monthly basis, the minimum
initial investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes is $25. For shareholders
purchasing shares of the Portfolio through the Systematic Investment Plan on a
quarterly basis, the minimum initial investment requirement for Class A, Class B
and Class C shares and the subsequent investment requirement for all Classes is
$50. There are no minimum investment requirements in Class A shares for
employees of Travelers and its subsidiaries, including Smith Barney, Directors
or Trustees, of any of the Smith Barney Mutual Funds, and their spouses and
children. The Fund reserves the right to waive or change minimums, to decline
any order to purchase its shares and to suspend the offering of shares from time
to time. Shares purchased will be held in the shareholder's account by First
Data. Share certificates are issued only upon a shareholder's written request to
First Data.
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Portfolio calculates its net asset
value, are priced according to the net asset value determined on that day (the
"trade date"). Orders received by dealers or introducing brokers prior to the
close of regular trading on the NYSE on any day the Portfolio calculates its net
asset value, are priced according to the net asset value determined on that day,
provided the order is received by the Fund or Smith Barney prior to Smith
Barney's close of business. For shares purchased through Smith Barney or
Introducing Brokers purchasing through Smith Barney, payment for Portfolio
shares is due on the third business day after the trade
25
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
date. In all other cases, payment must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through
pre-authorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder to provide systematic additions to the
shareholder's Portfolio account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by Smith Barney or
First Data. The Systematic Investment Plan also authorizes Smith Barney to
apply cash held in the shareholder's Smith Barney brokerage account or redeem
the shareholder's shares of a Smith Barney money market fund to make additions
to the account. Additional information is available from the Fund or a Smith
Barney Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the
Portfolio are as follows:
Dealers'
Sales Charge Sales Charge Reallowance
% of as % of as % of
Amount of Investment Offering Price Amount Invested Offering Price
- --------------------------------------------------------------------------------
Less than $ 25,000 5.00% 5.26% 4.50%
$ 25,000 - 49,999 4.00 4.17 3.60
50,000 - 99,999 3.50 3.63 3.15
100,000 - 249,999 3.00 3.09 2.70
250,000 - 499,999 2.00 2.04 1.80
500,000 and over * * *
================================================================================
* Purchases of Class A shares of $500,000 or more will be made at net asset
value without any initial sales charge, but will be subject to a CDSC of 1.00%
on redemptions made within 12 months of purchase. The CDSC on Class A shares is
payable to Smith Barney, which compensates Smith Barney Financial Consultants
and other dealers whose clients make purchases of $500,000 or more. The CDSC is
waived in the same circumstances in which the CDSC applicable to Class B and
Class C shares is waived. See "Deferred Sales Charge Alternatives" and "Waivers
of CDSC."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.
The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the Portfolio made at one time by "any person," which
includes an individual and his or her immediate family, or a trustee or other
fiduciary of a
26
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
single trust estate or single fiduciary account.
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board Members and employees); the immediate families of
such persons (including the surviving spouse of a deceased Board Member or
employee); and to a pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the National Association of Securities
Dealers, Inc., provided such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other investment company to effect the combination of such company
with the Portfolio by merger, acquisition of assets or otherwise; (c) purchases
of Class A shares by any client of a newly employed Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the Financial
Consultant's employment with Smith Barney), on the condition the purchase of
Class A shares is made with the proceeds of the redemption of shares of a mutual
fund which (i) was sponsored by the Financial Consultant's prior employer, (ii)
was sold to the client by the Financial Consultant and (iii) was subject to a
sales charge; (d) purchases by shareholders who have redeemed Class A shares in
the Portfolio (or Class A shares of another fund of the Smith Barney Mutual
Funds that are offered with a sales charge) and who wish to reinvest their
redemption proceeds in the Portfolio, provided the reinvestment is made within
60 calendar days of the redemption; (e) purchases by accounts managed by
registered investment advisory subsidiaries of Travelers; (f) purchases by
Section 403(b) or Section 401(a) or (k) accounts associated with Copeland
Retirement Programs; (g) direct rollovers by plan participants of distributions
from a 401(k) plan offered to employees of Travelers or its subsidiaries or a
401(k) plan enrolled in the Smith Barney 401(k) Program (Note: subsequent
investments will be subject to the applicable sales charge); (h) purchases by
separate accounts used to fund certain unregistered variable annuity contracts;
and (i) purchases by investors participating in a Smith Barney fee-based
arrangement. In order to obtain such discounts, the purchaser must provide
sufficient information at the time of purchase to permit verification that the
purchase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Portfolio may be purchased by "any person" (as
defined above) at a reduced sales charge or at net asset value determined by
aggregating the dollar amount of the new purchase and the total net asset value
of all Class A shares of the Portfolio and of funds sponsored by Smith Barney
which are offered with a sales charge listed under "Exchange Privilege" then
held by such person and
27
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
applying the sales charge applicable to such aggregate. In order to obtain such
discount, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be
open to specified partners or employees of the employer and its subsidiaries, if
any. Such plan may, but is not required to, provide for payroll deductions, IRAs
or investments pursuant to retirement plans under Sections 401 or 408 of the
Code. Smith Barney may also offer a reduced sales charge or net asset value
purchase for aggregating related fiduciary accounts under such conditions that
Smith Barney will realize economies of sales efforts and sales related expenses.
An individual who is a member of a qualified group may also purchase Class A
shares at the reduced sales charge applicable to the group as a whole. The sales
charge is based upon the aggregate dollar value of Class A shares offered with a
sales charge that have been previously purchased and are still owned by the
group, plus the amount of the current purchase. A "qualified group" is one
which (a) has been in existence for more than six months, (b) has a purpose
other than acquiring Portfolio shares at a discount and (c) satisfies uniform
criteria which enable Smith Barney to realize economies of scale in its costs of
distributing shares. A qualified group must have more than 10 members, must be
available to arrange for group meetings between representatives of the Portfolio
and the members, and must agree to include sales and other materials related to
the Portfolio in its publications and mailings to members at no cost to Smith
Barney. In order to obtain such reduced sales charge or to purchase at net asset
value, the purchaser must provide sufficient information at the time of purchase
to permit verification that the purchase qualifies for the reduced sales charge.
Approval of group purchase reduced sales charge plans is subject to the
discretion of Smith Barney.
LETTER OF INTENT
28
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes
purchases of all Class A shares of the Port folio and other funds of the Smith
Barney Mutual Funds offered with a sales charge over the 13 month period based
on the total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the 13 month
period starting up to 90 days before the date of execution of a Letter of
Intent. Each investment made during the period receives the reduced sales charge
applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charges applicable to the purchases made and the charges previously paid,
or an appropriate number of escrowed shares will be redeemed. Please contact a
Smith Barney Financial Consultant or First Data to obtain a Letter of Intent
application.
Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $5,000,000 of Class Y shares of the
same Portfolio within six months from the date of the Letter. If a total
investment of $5,000,000 is not made within the six-month period, all Class Y
shares purchased to date will be transferred to Class A shares, where they will
be subject to all fees (including a service fee of 0.25%) and expenses
applicable to the Portfolio's Class A shares, which may include a CDSC of 1.00%.
Please contact a Smith Barney Financial Consultant or First Data for further
information.
DEFERRED SALES CHARGE ALTERNATIVES
CDSC Shares are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Portfolio. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares that were purchased without an initial
sales charge but subject to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their net asset value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) capital appreciation
of Portfolio assets; (b) reinvestment of dividends or capital gain
distributions; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or (d) with respect to Class C shares and
Class A shares that are CDSC Shares,
29
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
shares redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
the amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case of
Class B shares held under the Smith Barney 401(k) Program, as described below.
See "Purchase of Shares -- Smith Barney 401(k) and ExecChoice(TM) Programs."
Year Since Purchase
Payment Was Made CDSC
- --------------------------------------------------------------------------------
First 5.00%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
================================================================================
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder. See "Prospectus Summary -- Alternative Purchase Arrangements
- -- Class B Shares Conversion Feature."
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Portfolio shares
being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution reinvestments in such
other funds. For Federal income tax purposes, the amount of the CDSC will
reduce the gain or increase the loss, as the case may be, on the amount realized
on redemption. The amount of any CDSC will be paid to Smith Barney.
30
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within twelve
months following the death or disability of the shareholder; (d) redemption of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares to effect a combination of the Portfolio with any
investment company by merger, acquisition of assets or otherwise. In addition, a
shareholder who has redeemed shares from other funds of the Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part of the redemption
proceeds within 60 days and receive pro rata credit for any CDSC imposed on the
prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below, are offered to all plans
participating ("Participating Plans") in these programs.
The Portfolio offers to Participating Plans Class A and Class C shares as
investment alternatives under the Smith Barney 401(k) and ExecChoice(TM)
Programs. Class A and Class C shares acquired through the Participating Plans
are subject to the same service and/or distribution fees as the Class A and
Class C shares acquired by other investors; however, they are not subject to any
initial sales
31
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
charge or CDSC. Once a Participating Plan has made an initial investment in the
Portfolio, all of its subsequent investments in the Portfolio must be in the
same Class of shares, except as otherwise described below.
Class A Shares. Class A shares of the Portfolio are offered without any
sales charge or CDSC to any Participating Plan that purchases $1,000,000 or more
of Class A shares of one or more funds of the Smith Barney Mutual Funds.
Class C Shares. Class C shares of the Portfolio are offered without any
sales charge or CDSC to any Participating Plan that purchases less than
$1,000,000 of Class C shares of one or more funds of the Smith Barney Mutual
Funds.
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If, at
the end of the fifth year after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, a
Participating Plan's total Class C holdings in all non-money market Smith
Barney Mutual Funds equal at least $1,000,000, the Participating Plan will be
offered the opportunity to exchange all of its Class C shares for Class A
shares of the Portfolio. (For Participating Plans that were originally
established through a Smith Barney retail brokerage account, the five-year
period will be calculated from the date the retail brokerage account was
opened.) Such Participating Plans will be notified of the pending exchange in
writing within 30 days after the fifth anniversary of the enrollment date and,
unless the exchange offer has been rejected in writing, the exchange will occur
on or about the 90th day after the fifth anniversary date. If the Participating
Plan does not qualify for the five-year exchange to Class A shares, a review of
the Participating Plan's holdings will be performed each quarter until either
the Participating Plan qualifies or the end of the eighth year.
401(k) Plans Opened Prior to June 21, 1996. In any year after the date a
Participating Plan enrolled in the Smith Barney 401(k) Program, if its total
Class C holdings in all non-money market Smith Barney Mutual Funds equal at
least $500,000 as of the calendar year-end, the Participating Plan will be
offered the opportunity to exchange all of its Class C shares for Class A shares
of the Portfolio. Such Plans will be notified in writing within 30 days after
the last business day of the calendar year and, unless the exchange offer has
been rejected in writing, the exchange will occur on or about the last business
day of the following March.
Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM)
Program, whether opened before or after June 21, 1996, that has not previously
qualified for an exchange into Class A shares will be offered the opportunity to
exchange all of its Class C shares for Class A shares of the Portfolio
regardless of asset size, at the end of the eighth year after the date the
Participating Plan enrolled in the Smith Barney 401(k) or ExecChoice(TM)
Program. Such Plans will be notified of the pending exchange in writing
approximately 60 days before the eighth anniversary of the enrollment date and,
unless the exchange has been rejected in writing, the
32
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
exchange will occur on or about the eighth anniversary date. Once an exchange
has occurred, a Participating Plan will not be eligible to acquire additional
Class C shares of the Portfolio but instead may acquire Class A shares of the
Portfolio. Any Class C shares not converted will continue to be subject to the
distribution fee.
Participating Plans wishing to acquire shares of the Portfolio through the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must
purchase such shares directly from First Data. For further information regarding
these Programs, investors should contact a Smith Barney Financial Consultant.
Existing 401(k) Plans Investing in Class B Shares. Class B shares of the
Portfolio are not available for purchase by Participating Plans opened on or
after June 21, 1996, but may continue to be purchased by any Participating Plan
in the Smith Barney 401(k) Program opened prior to such date and originally
investing in such Class. Class B shares acquired are subject to a CDSC of 3.00%
of redemption proceeds if the Participating Plan terminates within eight years
of the date the Participating Plan first enrolled in the Smith Barney 401(k)
Program.
At the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) Program, the Participating Plan will be
offered the opportunity to exchange all of its Class B shares for Class A shares
of the Portfolio. Such Participating Plan will be notified of the pending
exchange in writing approximately 60 days before the eighth anniversary of the
enrollment date and, unless the exchange has been rejected in writing, the
exchange will occur on or about the eighth anniversary date. Once the exchange
has occurred, a Participating Plan will not be eligible to acquire additional
Class B shares of the Portfolio but instead may acquire Class A shares of the
Portfolio. If the Participating Plan elects not to exchange all of its Class B
shares at that time, each Class B share held by the Participating Plan will have
the same conversion feature as Class B shares held by other investors. See
"Purchase of Shares -- Deferred Sales Charge Alternatives."
No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased more
than eight years prior to the redemption, plus increases in the net asset value
of the shareholder's Class B shares above the purchase payments made during the
preceding eight years. Whether or not the CDSC applies to the redemption by a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to redemptions by other shareholders, which depends on
the number of years since those shareholders made the purchase payment from
which the amount is being redeemed.
The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
33
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
(a) the retirement of an employee in the Participating Plan; (b) the termination
of employment of an employee in the Participating Plan; (c) the death or
disability of an employee in the Participating Plan; (d) the attainment of age
5911/42 by an employee in the Participating Plan; (e) hardship of an employee in
the Participating Plan to the extent permitted under Section 401(k) of the Code;
or (f) redemptions of shares in connection with a loan made by the Participating
Plan to an employee.
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A, Class B and Class C shares are subject to
minimum investment requirements and all shares are subject to the other
requirements of the fund into which exchanges are made.
FUND NAME
Growth Funds
Concert Peachtree Growth Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Large Capitalization Growth Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++ Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
34
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Municipal High Income Fund
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- Income Portfolio
Money Market Funds
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
+++ Smith Barney Municipal Money Market Fund, Inc.
+++ Smith Barney Muni Funds -- California Money Market Portfolio
+++ Smith Barney Muni Funds -- New York Money Market Portfolio
================================================================================
* Available for exchange with Class A, Class C and Class Y shares of the
Portfolio.
** Available for exchange with Class A and Class B shares of the Portfolio. In
addition, shareholders who own Class C shares of the Portfolio through the
Smith Barney 401(k) Program may exchange those shares for Class C shares of
this fund.
35
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
*** Available for exchange with Class A shares of the Portfolio.
+ Available for exchange with Class B and Class C shares of the Portfolio.
++ Available for exchange with Class A and Class Y shares of the Portfolio. In
addition, Participating Plans opened prior to June 21, 1996 and investing
in Class C shares may exchange those shares for Class C shares of this
fund.
+++ Available for exchange with Class A and Class Y shares of the Portfolio.
Class B Exchanges. In the event a Class B shareholder wishes to exchange
all or a portion of his or her shares in any of the funds imposing a CDSC higher
than that imposed by the Portfolio, the exchanged Class B shares will be subject
to the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Portfolio that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed
to have been purchased on the same date as the Class C shares of the Port folio
that have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Portfolio who wish to ex change all or a portion of their shares for shares of
the respective Class in any of the funds identified above may do so without
imposition of any charge.
Additional Information Regarding the Exchange Privilege. Although the ex
change privilege is an important benefit, excessive exchange transactions can be
detrimental to the Portfolio's performance and its shareholders. The Manager
may determine that a pattern of frequent exchanges is excessive and contrary to
the best interests of the Portfolio's other shareholders. In this event, the
Fund may, at its discretion, decide to limit additional purchases and/or
exchanges by the shareholder. Upon such a determination, the Fund will provide
notice in writing or by telephone to the share holder at least 15 days prior to
suspending the exchange privilege and during the 15 day period the shareholder
will be required to (a) re deem his or her shares in the Portfolio or (b) remain
invested in the Portfolio or exchange into any of the funds of the Smith Barney
Mutual Funds ordinarily available, which position the shareholder would be
expected to maintain for a significant period of time. All relevant factors will
be considered in determining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or
36
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
other basis of shares redeemed. Before exchanging shares, investors should read
the current prospectus describing the shares to be acquired. The Portfolio
reserves the right to modify or discontinue exchange privileges upon 60 days'
prior notice to shareholders.
- --------------------------------------------------------------------------------
Redemption of Shares
- --------------------------------------------------------------------------------
The Fund is required to redeem the shares of the Portfolio tendered to it,
as described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at no
charge other than any applicable CDSC. Redemption requests received after the
close of regular trading on the NYSE are priced at the net asset value next
determined.
If a share holder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until First Data receives
further instructions from Smith Barney, or if the shareholder's account is not
with Smith Barney, from the shareholder directly. The redemption proceeds will
be remitted on or before the third business day following receipt of proper
tender, except on any days on which the NYSE is closed or as permitted under the
1940 Act in extraordinary circumstances. Generally, if the redemption proceeds
are remitted to a Smith Barney brokerage account, these funds will not be
invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which may take up to ten
days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney World Funds, Inc./International Equity Portfolio
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $2,000 must be guaranteed by an eligible guarantor
institution, such as a domestic bank, savings and loan institution, domestic
credit union, member bank
37
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
of the Federal Reserve System or member firm of a national securities exchange.
Written redemption requests of $2,000 or less do not require a signature
guarantee unless more than one such redemption request is made in any 10-day
period or the redemption proceeds are to be sent to an address other than the
address of record. Unless otherwise directed, redemption proceeds will be mailed
to an investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Portfolio offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the share
holder is eligible to receive qualified distributions and has an account value
of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Portfolio. Any applicable CDSC will not be
waived on amounts withdrawn by a shareholder that exceed 1.00% per month of the
value of the share holder's shares subject to the CDSC at the time the
withdrawal plan commences. (With respect to withdrawal plans in effect prior to
November 7, 1994, any applicable CDSC will be waived on amounts withdrawn that
do not exceed 2.00% per month of the value of the shareholder's shares subject
to the CDSC.) For further information regarding the automatic cash withdrawal
plan, shareholders should contact a Smith Barney Financial Consultant.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Fund shares by telephone. To determine if a shareholder
is entitled to participate in this program, he or she should contact First Data
at 1-800-451-2010. Once eligibility is confirmed, the shareholder must complete
and return a Telephone/Wire Authorization Form, along with a signature
guarantee, that will be provided by First Data upon request. (Alternatively, an
investor may authorize telephone redemptions on the new account application with
the applicant's signature guarantee when making his/her initial investment in
the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares, may be made by eligible shareholders by calling First Data at
1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m. (New
York City time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
determined. Redemptions of shares (i) by retirement plans or (ii) for which
38
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
certificates have been issued are not permitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In order
to use the wire procedures, the bank receiving the proceeds must be a member of
the Federal Reserve System or have a correspondent relationship with a member
bank. The Fund reserves the right to charge shareholders a nominal fee for each
wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions
communicated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller and legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded). The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and exchange program or to impose a charge for this service at any time
following at least seven (7) days prior notice to shareholders.
- --------------------------------------------------------------------------------
Minimum Account Size
- --------------------------------------------------------------------------------
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Portfolio if the aggregate net asset value of the shares held in
the Portfolio account is less than $500. (If a shareholder has more than one
account in this Port folio, each account must satisfy the minimum account size.)
The Fund, however, will not redeem shares based solely on market reductions in
net asset value. Before the Fund exercises such right, shareholders will receive
written notice and will be permitted 60 days to bring accounts up to the
minimum to avoid involuntary liquidation.
39
<PAGE>
- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------
From time to time the Fund may advertise the Portfolio's total return and
average annual total return in advertisements. In addition, in other types of
sales literature the Fund may include the Portfolio's current dividend return.
These figures are computed separately for Class A, Class B, Class C and Class Y
shares of the Portfolio. These figures are based on historical earnings and are
not intended to indicate future performance. Total return is computed for a
specified period of time assuming deduction of the maximum sales charge from the
initial amount invested and reinvestment of all income dividends and capital
gain distributions on the reinvestment dates at prices calculated as stated in
this Prospectus, then dividing the value of the investment at the end of the
period so calculated by the initial amount invested and subtracting 100%. The
standard average annual total return, as prescribed by the SEC is derived from
this total return, which provides the ending redeemable value. Such standard
total return information may also be accompanied with nonstandard total return
information for differing periods computed in the same manner but without
annualizing the total return or taking sales charges into account. The Portfolio
calculates current dividend return for each Class by dividing the current
dividend by the net asset value or the maximum public offering price (including
sales charge) on the last day of the period for which current dividend return is
presented. The current dividend return for each Class may vary from time to time
depending on market conditions, the composition of the investment portfolio and
operating expenses. These factors and possible differences in the methods used
in calculating current dividend return should be considered when comparing a
Class' current return to yields published for other investment companies and
other investment vehicles. The Portfolio may also include comparative
performance information in advertising or marketing its shares. Such performance
information may include data from Lipper Analytical Services, Inc. and other
financial publications.
- --------------------------------------------------------------------------------
Management of the Fund
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Portfolio
rests with the Fund's Board of Directors. The Directors approve all significant
agreements between the Fund and the companies that furnish services to the Fund
and the Portfolio, including agreements with the Fund's distributor, investment
manager, custodian and transfer agent. The day-to-day operations of the
Portfolio are delegated to the Portfolio's Manager. The Statement of Additional
Information contains background information regarding each Director and
executive officer of the Fund.
40
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
MANAGER
The Manager manages the day-to-day operations of the Portfolio pursuant to
a management agreement entered into by the Fund on behalf of the Portfolio under
which the Manager offers the Port folio advice and assistance with respect to
the acquisition, holding or disposal of securities and recommendations with
respect to other aspects and affairs of the Port folio and furnishes the
Portfolio with bookkeeping, accounting and administrative services, office space
and equipment, and the services of the officers and employees of the Fund. By
written agreement Research and other departments and staff of Smith Barney
furnish the Manager with information, advice and assistance and are available
for consultation on the Fund's Portfolios, thus Smith Barney may also be
considered an investment adviser to the Fund. Smith Barney's services are paid
for by the Manager on the basis of direct and indirect costs to Smith Barney of
performing such services; there is no charge to the Fund for such services. For
the Portfolio's last fiscal year the management fee was 0.85% of the Portfolio's
average net assets and the total operating expenses were 1.31% for Class A
shares; 2.11% for Class B shares; 2.12% for Class C shares; and 0.94% for Class
Y shares.
The Manager was incorporated on March 12, 1968 under the laws of Delaware.
As of January 31, 1998 the Manager had aggregate assets under management of
approximately $94 billion. The Manager, Smith Barney and Holdings are each
located at 388 Greenwich Street, New York, New York 10013. The term "Smith
Barney" in the title of the Fund has been adopted by permission of Smith Barney
and is subject to the right of Smith Barney to elect that the Fund stop using
the term in any form or combination of its name.
PORTFOLIO MANAGEMENT
The Portfolio is managed by Maurits E. Edersheim and a team of seasoned
international equity portfolio managers, who collectively have over 125 years of
experience and manage in excess of $2 billion in global equity assets for other
investment companies and managed accounts. Mr. Edersheim is Chairman and
Advisory Director of the Fund and is Deputy Chairman of Smith Barney
International Incorporated. Mr. James Conheady, Mr. Rein van der Does and Mr.
Jeffrey Russell, all Vice Presidents of the Portfolio and Managing Directors of
Smith Barney, are members of the international equity team, and have been
responsible for the day to day operations of the Portfolio, including making all
investment decisions, since November 1991.
Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended October 31,
1997 is included in the Annual Report dated October 31, 1997. A copy of the
Annual Report may be obtained upon request and without charge from a Smith
Barney Financial Consultant or by writing or calling the Fund at the address or
phone number listed on page one of this Prospectus.
41
<PAGE>
- --------------------------------------------------------------------------------
Distributor
- --------------------------------------------------------------------------------
Smith Barney distributes shares of the Portfolio as principal underwriter
and as such conducts a continuous offering pursuant to a "best efforts"
arrangement requiring Smith Barney to take and pay for only such securities as
may be sold to the public. Pursuant to a plan of distribution adopted by the
Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid
a service fee with respect to Class A, Class B and Class C shares of the
Portfolio at the annual rate of 0.25% of the average daily net assets
attributable to these Classes. Smith Barney is also paid a distribution fee with
respect to Class B and Class C shares at the annual rate of 0.75% of the average
daily net assets attributable to these Classes. Class B shares that
automatically convert to Class A shares eight years after the date of original
purchase will no longer be subject to a distribution fee. The fees are used by
Smith Barney to pay its Financial Consultants for servicing shareholder accounts
and, in the case of Class B and Class C shares, to cover expenses primarily
intended to result in the sale of those shares. These expenses include:
advertising expenses; the cost of printing and mailing prospectuses to potential
investors; payments to and expenses of Smith Barney Financial Consultants and
other persons who provide support services in connection with the distribution
of shares; interest and/or carrying charges; and indirect and overhead costs of
Smith Barney associated with the sale of Portfolio shares, including lease,
utility, communications and sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan with respect to Class B and Class C shares are not
tied exclusively to the distribution and shareholder services expenses actually
incurred by Smith Barney and the payments may exceed distribution expenses
actually incurred. The Fund's Board of Directors will evaluate the
appropriateness of the Plan and its payment terms on a continuing basis and in
so doing will consider all relevant factors, including expenses borne by Smith
Barney, amounts received under the Plan and proceeds of the CDSC.
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Fund, an open-end investment company, was incorporated in Maryland on
March 22, 1991. The Fund has an authorized capital of 1,000,000,000 shares with
a par value of $.001 per share. The Board of Directors has authorized the
issuance of six series of shares, each representing shares in one of six
separate Portfolios and may authorize the issuance of additional series of
shares in the future. The assets of each
42
<PAGE>
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
Portfolio are segregated and separately managed and a shareholder's interest is
in the assets of the Portfolio in which he or she holds shares. Class A, Class
B, Class C, Class Y and Class Z shares of the Portfolio represent interests in
the assets of the Port folio and have identical voting, dividend, liquidation
and other rights on the same terms and conditions except that expenses related
to the distribution of each Class of shares are borne solely by each Class and
each Class of shares has exclusive voting rights with respect to provisions of
the Fund's Rule 12b-1 distribution plan which pertains to a particular Class.
As described under "Voting" in the Statement of Additional Information, the
Fund ordinarily will not hold meetings of shareholders annually; however,
shareholders have the right to call a meeting upon a vote of 10% of the Fund's
outstanding shares for the purpose of voting to remove directors, and the Fund
will assist shareholders in calling such a meeting as required by the 1940 Act.
Shares do not have cumulative voting rights or preemptive rights and are fully
paid, transferable and nonassessable when issued for payment as described in
this Prospectus.
The Chase Manhattan Bank, located at Chase MetroTech Center, Brooklyn, New
York 11245, serves as custodian of the Portfolio's investments.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the period covered. In an effort to reduce the Fund's printing and
mailing costs, the Fund plans to consolidate the mailing of its semi-annual and
annual reports by household. This consolidation means that a household having
multiple accounts with the identical address of record will receive a single
copy of each report. Shareholders who do not want this consolidation to apply to
their account should contact their Smith Barney Financial Consultant or First
Data.
43
<PAGE>
- --------------------------------------------------------------------------------
SMITH BARNEY
------------
A Member of TravelersGroup[LOGO]
Smith Barney
World Funds, Inc.
International
Equity Portfolio
388 Greenwich Street
New York, New York 10013
FD 0667 2/98
- --------------------------------------------------------------------------------
