File No. 33-39564
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Pre-Effective Amendment No._____
Post-Effective Amendment No. 20
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
SMITH BARNEY WORLD FUNDS, INC.
(Formerly, Smith Barney Worldwide Funds, Inc.)
(Exact name of Registrant as Specified
in the Articles of Incorporation)
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices)(Zip Code)
(212) 816-6474
(Registrant's Telephone Number, Including Area Code)
Christina T. Sydor
388 Greenwich Street, New York, New York 10013 (22nd floor)
(Name and Address of Agent For Service)
Continuous
(Approximate Date of Public Offering)
It is proposed that this filing will become effective
(check appropriate box)
X Immediately upon filing pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a) (1)
_____ 75 days after filing pursuant to paragraph (a) (2)
On February 27, 1998 pursuant to paragraph (b)
_____ On (date) pursuant to paragraph (a) (1)
_____ On (date) pursuant to paragraph (a) (2) of Rule 485
If appropriate, check the following box:
_____ This post-effective amendment designates a new effective
date for a previously filed post-effective amendment
Title of Securities Being Registered: Shares of Common Stock
CROSS REFERENCE SHEET
(as required by Rule 495(a))
Part A of
Form N-1A Location in Part A
1. Cover Page cover page
2. Synopsis "Prospectus Summary"
3. Condensed Financial
Information "Financial Highlights"
4. General Description
of Registrant "Additional Information"
cover page
"Investment Objective
and Management Policies"
5. Management of the Fund "Management of the Fund
"Purchase of Shares"
"Prospectus Summary"
6. Capital Stock and
Other Securities "Additional Information"
cover page
"Dividends, Distributions
and Taxes"
7. Purchase of Securities
Being Offered "Purchase of Shares"
"Prospectus Summary"
"Management of the Fund"
"Valuation of Shares"
"Exchange Privilege"
8. Redemption or
Repurchase "Redemption of Shares"
"Minimum Account Size"
9. Pending Legal
Proceedings not applicable
Part B of Statement of Additional
Form N-1A Information Caption
10. Cover Page cover page
11. Table of Contents "Table of Contents"
12. General Information
and History not applicable
13. Investment Objectives
and Policies cover page
"Investment Policies"
"Investment Restrictions"
14. Management of the Fund "Directors and Officers"
15. Control Persons and Principal
Holders of Securities See Prospectus - "Additional
Information"
16. Investment Advisory and
Other Services See Prospectus - "Management
of the Fund"
"Directors and Officers"
"Independent Auditors"
"Custodian"
17. Brokerage Allocation and Other
Practices See Prospectus - "Management
of the Fund"
"Investment Management
Agreement and other Services"
18. Capital Stock and
Other Securities See Prospectus - "Additional
Information"
"Voting Rights"
19. Purchase, Redemption
and Pricing of Securities Being
Offered See Prospectus - "Exchange
Privilege"
See Prospectus - "Purchase of
Shares"
"Determination of Net Asset
Value"
See Prospectus - "Valuation
of Shares"
See Prospectus - "Redemption
of Shares"
"Financial Statements"
20. Tax Status See Prospectus - "Dividends,
Distributions and Taxes"
"Additional Tax Information"
21. Underwriters See Prospectus - "Management
of the Fund"
See Prospectus - "Purchase of
Shares"
"Investment Management
Agreement and Other Services"
22. Calculation of Performance
Data See Prospectus - "Performance"
"Performance Information"
23. Financial Statements "Financial Statements"
PART A
<PAGE>
P R O S P E C T U S
SMITH BARNEY WORLD FUNDS, INC.
Emerging Markets 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.
Emerging Markets Portfolio
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The Emerging Markets Portfolio (the "Portfolio") is one of the investment
portfolios that currently comprise Smith Barney World Funds, Inc. (the "Fund").
The Portfolio seeks long term capital appreciation on its assets through a
portfolio invested primarily in securities of emerging country issuers.
An investment in the Portfolio involves certain risks, particularly in rela-
tion to the Portfolio's investing in emerging countries, such as restrictions
on foreign investment and repatriation of capital, share price volatility, lim-
ited trading liquidity and small market capitalization of the securities mar-
kets, currency devaluations and fluctuations in currency exchange rates, high
inflation, government regulation, government involvement in the economy and
political uncertainty, which are not typically associated with investments in
the United States. IN ADDITION, THE PORTFOLIO MAY INVEST UP TO 10% OF ITS
ASSETS IN HIGH YIELD, HIGH RISK CORPORATE DEBT SECURITIES AND SOVEREIGN DEBT
OBLIGATIONS, WHICH ARE CONSIDERED SPECULATIVE AND SUBJECT TO CERTAIN RISKS. See
"Investment Objective and Management Policies." See the Appendix for a further
discussion of the risks associated with an investment in the Portfolio.
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 con-
tacting a Smith Barney Financial Consultant. The Statement of Additional Infor-
mation 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
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 10
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 13
- -------------------------------------------------
RISK FACTORS 14
- -------------------------------------------------
VALUATION OF SHARES 19
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 20
- -------------------------------------------------
PURCHASE OF SHARES 22
- -------------------------------------------------
EXCHANGE PRIVILEGE 31
- -------------------------------------------------
REDEMPTION OF SHARES 34
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 37
- -------------------------------------------------
PERFORMANCE 37
- -------------------------------------------------
MANAGEMENT OF THE FUND 37
- -------------------------------------------------
DISTRIBUTOR 39
- -------------------------------------------------
ADDITIONAL INFORMATION 40
- -------------------------------------------------
APPENDIX A-1
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations 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 Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Portfolio is an open-end, management investment com-
pany whose investment objective is to seek long-term capital appreciation on
its assets through a portfolio invested primarily in securities of emerging
country 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
$15,000,000. 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 acquired through the reinvestment of dividends and
distributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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 $15,000,000. 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 cir-
cumstances:
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 regu-
lar investment may wish to consider Class A shares; as the investment accumu-
lates shareholders may qualify for reduced sales charges and the shares are
subject to lower ongoing expenses over the term of the investment. As an
alternative, Class B and Class C shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Portfolio.
Any investment return on these additional invested amounts may partially or
wholly offset the higher annual expenses of these Classes. Because the Portfo-
lio'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 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 add-
ing the purchase to the net asset value of all Class A shares offered with a
sales charge held in funds spon -
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
sored by Smith Barney Inc. ("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 eli-
gible 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 pur-
pose 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 Tax-
es" 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 main-
tained with 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 $15,000,000. 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 subse-
quent investment requirement for all Classes of shares is $25. The minimum
investment requirements for
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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 subse-
quent 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 seg-
ments: Investment Services, including Asset Management, Consumer Finance Serv-
ices, 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 respec-
tive net asset values next determined. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Portfolio for the prior day may be
quoted daily in the financial section of many newspapers and is also available
from a Smith Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income and distribu-
tions 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 dis-
tribution 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 Portfo-
lio'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 Portfo-
lio 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." See the Appendix for a further discussion
of the risks associated with an investment in the Portfolio.
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 operat-
ing expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
EMERGING MARKETS PORTFOLIO CLASS A CLASS B CLASS C CLASS Y
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None None None
Maximum 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 1.00% 1.00% 1.00% 1.00%
12b-1 fees*** 0.25 1.00 1.00 --
Other expenses 0.86 0.88 0.86 0.86
- ------------------------------------------------------------------------------
TOTAL PORTFOLIO OPERATING EXPENSES 2.11% 2.88% 2.86% 1.86%
- ------------------------------------------------------------------------------
</TABLE>
* 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.
** For Class Y shares, "Other expenses" have been estimated because no Class
Y shares were outstanding for the period ended October 31, 1997.
*** 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.
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class A shares of the Portfolio purchased through the Smith Barney
AssetOne SM Program will be subject to an annual asset-based fee, payable quar-
terly, 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.
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 account-
ing 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 indirect-
ly. 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."
<TABLE>
<CAPTION>
EMERGING MARKETS PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the end
of each time period:
Class A.................................... $70 $113 $158 $282
Class B.................................... 79 119 162 303
Class C.................................... 39 89 151 319
Class Y.................................... 19 58 101 218
An investor would pay the following expenses
on the same investment, assuming the same
annual return and no redemption:
Class A.................................... $70 $113 $158 $282
Class B.................................... 29 89 152 303
Class C.................................... 29 89 151 319
Class Y.................................... 19 58 101 218
- --------------------------------------------------------------------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate
8
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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.
9
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP, indepen-
dent 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. No information is presented for Class Y
shares because there were no Class Y shares outstanding during the years pre-
sented.
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
EMERGING MARKETS PORTFOLIO
CLASS A SHARES 1997(1) 1996 1995(2)
- ---------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.08 $11.06 $12.00
- ---------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss(3) (0.05) (0.02) (0.05)#
Net realized and unrealized gain (loss) 0.42 1.04 (0.89)
- ---------------------------------------------------------------------
Total Income (Loss) From Operations 0.37 1.02 (0.94)
- ---------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- -- --
- ---------------------------------------------------------------------
Total Distributions -- -- --
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.45 $12.08 $11.06
- ---------------------------------------------------------------------
TOTAL RETURN(P) 3.06% 9.22% (7.83)%++
- ---------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $14,046 $10,691 $7,069
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) 2.11% 2.25% 1.45%+
Net investment loss (0.34) (0.19) (0.63)+
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 99% 78% 17%
- ---------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY TRANSACTIONS(4)(5) $0.00* $0.00* $0.00*
- ---------------------------------------------------------------------
</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 May 12, 1995 (inception date) to October 31, 1995.
(3) The Manager waived all or part of its fees for the period ended October 31,
1995. If such fees were not waived, the per share effect on net investment
loss and the expense ratio would have been as follows:
<TABLE>
<CAPTION>
PER SHARE INCREASE TO EXPENSE RATIO
NET INVESTMENT LOSS WITHOUT FEE WAIVERS
-----------------
1995 1995
------ ------
<S> <C> <C>
Class A $0.05 2.12%+
</TABLE>
In addition, 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 A would have been 2.16% and 1.20%+,
respectively.
(4) As of September 1995, the SEC instituted new guidelines, requiring the
disclosure of average commissions per share.
(5) 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 on foreign currency transactions.
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
(P) 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>
EMERGING MARKETS PORTFOLIO
CLASS B SHARES 1997(1) 1996 1995(2)
- ---------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $11.95 $11.02 $12.00
- ---------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss(3) (0.14) (0.10) (0.09)#
Net realized and unrealized gain (loss) 0.40 1.03 (0.89)
- ---------------------------------------------------------------------
Total Income (Loss) From Operations 0.26 0.93 (0.98)
- ---------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- -- --
- ---------------------------------------------------------------------
Total Distributions -- -- --
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.21 $11.95 $11.02
- ---------------------------------------------------------------------
TOTAL RETURN(P) 2.18% 8.44% (8.17)%++
- ---------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $18,107 $13,062 $7,630
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) 2.88% 3.06% 2.00%+
Net investment loss (1.00) (0.94) (1.17)+
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 99% 78% 17%
- ---------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY TRANSACTIONS(4)(5) $0.00* $0.00* $0.00*
- ---------------------------------------------------------------------
</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 May 12, 1995 (inception date) to October 31, 1995.
(3) The Manager waived all or part of its fees for the period ended October 31,
1995. If such fees were not waived, the per share effect on net investment
loss and the expense ratio would have been as follows:
<TABLE>
<CAPTION>
PER SHARE INCREASE TO EXPENSE RATIO
NET INVESTMENT LOSS WITHOUT FEE WAIVERS
-----------------
1995 1995
------ ------
<S> <C> <C>
Class B $0.05 2.68%+
</TABLE>
In addition, 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 2.97% and 1.74%+,
respectively.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(5) 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 on foreign currency transactions.
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
(P) 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:
<TABLE>
<CAPTION>
EMERGING MARKETS PORTFOLIO
CLASS C SHARES 1997(1) 1996 1995(2)
- --------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $11.95 $11.02 $12.00
- --------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss(3) (0.15) (0.10) (0.08)#
Net realized and unrealized gain (loss) 0.42 1.03 (0.90)
- --------------------------------------------------------------------
Total Income (Loss) From Operations 0.27 0.93 (0.98)
- --------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- -- --
- --------------------------------------------------------------------
Total Distributions -- -- --
- --------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.22 $11.95 $11.02
- --------------------------------------------------------------------
TOTAL RETURN(P) 2.26% 8.44% (8.17)%++
- --------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $4,332 $2,448 $1,604
- --------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) 2.86% 3.02% 1.95 %+
Net investment loss (1.03) (0.92) (1.08)+
- --------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 99% 78% 17 %
- --------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY TRANSACTIONS(4)(5) $0.00* $0.00* $0.00*
- --------------------------------------------------------------------
</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 May 12, 1995 (inception date) to October 31, 1995.
(3) The Manager waived all or part of its fees for the period ended October 31,
1995. If such fees were not waived, the per share effect on net investment
loss and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE INCREASE TO EXPENSE RATIO
NET INVESTMENT LOSS WITHOUT FEE WAIVERS
-----------------
1995 1995
------ ------
<S> <C> <C>
Class C $0.05 2.61%+
</TABLE>
In addition, 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 C would have been 2.92% and 1.70%+,
respectively.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(5) 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 on foreign currency transactions.
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
(P) Total returns do not reflect any applicable sales loads or contingent
deferred sales charges.
12
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The investment objective of the Portfolio is to provide long term capital
appreciation on its assets through a portfolio invested primarily in securi-
ties of emerging country issuers. The Portfolio's investment objective may be
changed only with the approval of a majority of the Portfolio's outstanding
shares. There can be no assurance that the investment objective of the Portfo-
lio will be achieved.
The Portfolio will seek to achieve its objective by investing substantially
all its assets in equity securities of issuers in emerging market countries
(consisting of dividend and non-dividend paying common stocks, preferred
stocks, convertible securities and rights and warrants to such securities).
The Portfolio may also invest in debt securities having a high potential for
capital appreciation, especially in countries where direct equity investment
is not permitted. Under normal conditions, at least 70% of the Portfolio's
assets will be invested in equity securities.
For purposes of its investment objective, the Portfolio considers as "emerg-
ing" all countries other than Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Holland, Ireland, Italy, Japan, Luxembourg, Norway,
Sweden, Switzerland, Spain, the United Kingdom and the United States. The
Portfolio is organized as a non-diversified series, but will generally invest
its assets broadly among countries and will normally have at least 65% of its
assets invested in issuers in not less than three different countries. Alloca-
tion of the Portfolio's investments will depend upon the relative attractive-
ness of the emerging 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 geographi-
cally concentrated.
In selecting securities for investment by the Portfolio, the Manager
assesses the general attractiveness of specific countries based on an analysis
of internal conditions, including political stability, market practices, eco-
nomic growth prospects, general market valuations and potential changes in
currency relationships. The Manager then performs an analysis, using many of
these same factors, of each issuer being considered for investment.
The Portfolio also may invest in debt securities of issuers in countries
having smaller capital markets. Capital appreciation in debt securities may
arise as a result of a favorable change in relative foreign exchange rates, in
relative interest rate levels, or in the creditworthiness of issuers. In
accordance with its investment objective, the Portfolio will not seek to bene-
fit from anticipated short-term fluctuations in currency exchange rates. The
Portfolio may, from time to time, invest in debt securities with relatively
high yields (as compared to other debt securities meeting the Portfolio's
investment criteria), notwithstanding that the Portfolio may not anticipate
that such securities will experience substantial capital appreciation. Such
income can be used, however, to offset the operating expenses of the Portfo-
lio.
The Portfolio may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ("governmental entities"), issued or guaranteed
by interna-
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
tional organizations designated or supported by multiple foreign governmental
entities (which are not obligations of foreign governments) to promote eco-
nomic reconstruction or development ("supranational entities"), or issued by
foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Steel and Coal Community, the
Asian Development Bank and the Inter-American Development Bank. The governmen-
tal members, or "stockholders," usually make initial capital contributions to
the supranational entity and in many cases are committed to make additional
capital contributions if the supranational entity is unable to repay its
borrowings.
The Portfolio reserves the right, as a temporary defensive measure or to
provide for redemptions or in anticipation of investment in countries having
smaller capital markets, to hold cash or cash equivalents (in U.S. dollars or
foreign currencies) and short-term securities, including money market securi-
ties ("Temporary Investments"). The Portfolio may invest in the securities of
foreign issuers in the form of American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other securi-
ties convertible into securities of foreign issuers. The Portfolio may invest
in unsponsored ADRs. The issuers of unsponsored ADRs are not obligated to dis-
close material information in the United States, and therefore, there may not
be a correlation between such information and the market value of such ADRs.
The Portfolio may invest in U.S. over-the-counter securities of issuers whose
business interests are in emerging countries.
Refer to the Appendix or the Statement of Additional Information for further
information on the Portfolio's investments, including options and futures con-
tracts, swap agreements, structured notes and indexed securities (sometimes
referred to as "derivatives"); loans and other direct debt instruments, float-
ing and variable rate income securities, zero coupon, discount and payment-in-
kind securities, premium securities, Yankee bonds, borrowings, repurchase
agreements, reverse repurchase agreements and securities loans, foreign repur-
chase agreements, illiquid investments, restricted securities, and delayed-
delivery transactions.
RISK FACTORS
General. Investors should realize that risk of loss is inherent in the own-
ership of any securities and that the Portfolio's net asset value will fluctu-
ate, reflecting fluctuations in the market value of its portfolio positions.
The Portfolio normally will invest in a substantial number of issuers; howev-
er, the Portfolio has registered under the Investment Company Act of 1940, as
amended (the "1940 Act") as a "non-diversified" fund so that it will be able
to invest more than 5% of its assets in the securities of an issuer. Since, as
a "non-diversified" fund, the Portfolio is
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
permitted to invest a greater proportion of its assets in the securities of a
smaller number of issuers, the Portfolio may be subject to greater credit and
liquidity risks with respect to its individual portfolio than a fund that is
more broadly diversified. 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.
Securities of Non-U.S. Issuers. 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 restric-
tions. Since the Portfolio will invest heavily in securities denominated or
quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange 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, repatriation, confiscatory tax-
ation, political or social instability or diplomatic developments which could
adversely affect investments in those countries.
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 com-
parable to or as uniform as those of U.S. companies. Non-U.S. securities mar-
kets, 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. com-
panies. 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 Portfolio
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 sub-
ject 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 Emerging Market Countries. An emerging market country gener-
ally is considered to be a country that is in the initial stages of its indus-
trialization cycle. Investing in the equity and fixed-income markets of emerg-
ing market countries involves exposure to economic structures that are gener-
ally 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.
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Up to 10% of the Portfolio's assets may be invested in debt securities of
emerging markets, which may be unrated or rated below investment grade. Secu-
rities rated below investment grade (and comparable unrated securities) are
the equivalent of high yield, high risk bonds, commonly known as "junk bonds".
Such securities are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations and involve major risk exposure to adverse business,
financial, economic, or political conditions.
One or more of the risks discussed above could affect adversely the economy
of a developing market or the Portfolio's investments in such market. In East-
ern Europe, for example, upon the accession to power of Communist regimes in
the past, the governments of a number of Eastern European countries expropri-
ated a large amount of property. The claims of many property owners against
those 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 or 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.
Restrictions On Foreign Investment. Some countries prohibit or impose sub-
stantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Portfolio. As illustra-
tions, certain countries require governmental approval prior to investments by
foreign persons, or limit the amount of investment by foreign persons in a
particular company, or limit the investment by foreign persons to only a spe-
cific class of securities of a company which may have less advantageous terms
than securities of the company available for purchase by nationals or limit
the repatriation of funds for a period of time.
A number of countries, such as South Korea, Taiwan and Thailand, have autho-
rized the formation of closed-end investment companies to facilitate indirect
foreign investment in their capital markets. In accordance with the 1940 Act,
the Portfolio may invest up to 10% of its total assets in securities of
closed-end investment companies. This restriction on investments in securities
of closed-end investment companies may limit opportunities for the Portfolio
to invest indirectly in certain smaller capital markets. Shares of certain
closed-end investment companies may at times be acquired only at market prices
representing premiums to their net asset values. If the Portfolio acquires
shares in closed-end investment companies, shareholders would bear both their
proportionate share of expenses in the Portfolio (including management and
advisory fees) and, indirectly, the expenses of such closed-end investment
companies.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or the companies with the most
actively
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
traded securities. Also, the 1940 Act restricts the Portfolio's investments in
any equity security of an issuer which, in its most recent fiscal year, derived
more than 15% of its revenues from "securities related activities," as defined
by the rules thereunder. These provisions may also restrict the Portfolio's
investments in certain foreign banks and other financial institutions.
Smaller capital markets, while often growing in trading volume, have substan-
tially less volume than U.S. markets, and securities in many smaller capital
markets are less liquid and their prices may be more volatile than securities
of comparable U.S. companies. Brokerage commissions, custodial services, and
other costs relating to investment in smaller capital markets are generally
more expensive than in the United States. Such markets have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities trans-
actions, making it difficult to conduct such transactions. Further, satisfac-
tory custodial services for investment securities may not be available in some
countries having smaller capital markets, which may result in the Portfolio
incurring additional costs and delays in transporting and custodying such secu-
rities outside such countries. Delays in settlement could result in temporary
periods when assets of the Portfolio are uninvested and no return is earned
thereon. The inability of the Portfolio to make intended security purchases due
to settlement problems could cause the Portfolio to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to the Portfolio due to subsequent
declines in value of the portfolio security or, if the Portfolio has entered
into a contract to sell the security, could result in possible liability to the
purchaser. There is generally less government supervision and regulation of
exchanges, brokers and issuers in countries having smaller capital markets than
there is in the United States.
Hedging Strategies. The Portfolio may engage in various portfolio strategies
to seek to hedge its portfolio against movements in the equity markets, inter-
est rates and exchange rates between currencies by the use of options, futures
and options on futures. Utilization of options and futures transactions
involves the risk of imperfect correlation in movements in the price of options
and futures and movements in the price of the securities, interest rates or
currencies which are the subject of the hedge. Options and futures transactions
in foreign markets are also subject to the risk factors associated with foreign
investments generally, as discussed above. There can be no assurance that a
liquid secondary market for options and futures contracts will exist at any
specific time.
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 and calculated. That failure could have a negative impact on the Port-
folio's operations,
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 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.
See the Appendix for a further discussion of the risks associated with an
investment in the Portfolio.
PORTFOLIO TRANSACTIONS AND TURNOVER
All orders for transaction in securities and options on behalf of the Port-
folio are placed by the Manager with broker/dealers that the Manager selects,
including Smith Barney and other affiliated brokers. Brokerage will be allo-
cated to Smith Barney, to the extent and in the manner permitted by applicable
law, provided that, in the judgment of the Board of Directors of the Fund, the
commission, fee or other remuneration received or to be received by Smith Bar-
ney (or any broker/dealer affiliate of Smith Barney that is also a member of a
securities exchange) is reasonable and fair compared to the commission, fee or
other remuneration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a securi-
ties exchange during the same or comparable period of time. In all trades
directed to Smith Barney, the Fund has been assured that its orders will be
accorded priority over those received from Smith Barney for its own account or
for any of its directors, officers or employees. The Fund will not deal with
Smith Barney in any transaction in which Smith Barney acts as principal.
Under certain market conditions, the Portfolio may experience high portfolio
turnover as a result of its investment strategies. For example, the exercise
of a substantial number of options written by the Portfolio and the purchase
or sale of securities by the Portfolio in anticipation of a rise or decline in
interest rates could result in high portfolio turnover. Short-term gains real-
ized from portfolio transactions are taxable to shareholders as ordinary
income. In addition, higher portfolio turnover rates can result in correspond-
ing increases in brokerage commissions for the Portfolio. The annual portfolio
turnover rate for the Portfolio may vary significantly from year to year, but
it is generally not expected to exceed 85%. The Portfolio will not consider
portfolio turnover rate a limiting factor in making investment decisions con-
sistent with its respective objectives and policies. 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.
18
<PAGE>
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 val-
ue. 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 con-
tracts 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 sales 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 of Directors has determined that amor-
tized 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 infre-
quently (i.e., securities for which prices are not readily available), are val-
ued 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 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 con-
verted into U.S. dollars at the prevailing market rate as determined by the
investment adviser.
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 Portfolio may not take place contemporaneously with the determina-
tion 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 materi-
ally affect net asset value. As a
19
<PAGE>
VALUATION OF SHARES (CONTINUED)
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 dis-
tributions 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 cred-
ited 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.
TAXES
The Portfolio intends to continue to qualify as a regulated investment com-
pany under Subchapter 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
20
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
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 conven-
tions 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 dis-
tributed to shareholders.
If, at the end of the Portfolio's taxable year, more than 50% of the value of
the Portfolio's total assets consist of stock or securities of foreign corpora-
tions, 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. Share-
holders 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. The Portfo-
lio'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. sourc-
es. 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."
21
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
The Fund is required to withhold and remit to the U.S. Treasury 31% of divi-
dends, distributions and redemption proceeds to shareholders who fail to pro-
vide 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 four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC
and are available only to investors investing a minimum of $15,000,000 (except
for purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount). See "Prospectus Summa-
ry--Alternative Purchase Arrangements" for a discussion of factors to consider
in selecting which Class of shares to purchase.
Purchases of Portfolio shares must be made through a brokerage account main-
tained 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 broker-dealers may charge their cus-
tomers 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 mak-
ing 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 $15,000,000.
Subsequent investments of at least $50 may be made for all Classes. For par-
ticipants in retirement plans qualified under Section 403(b)(7) or Section
401(a) of the Code, the mini -
22
<PAGE>
PURCHASE OF SHARES (CONTINUED)
mum 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 require-
ment for all Classes is $25. For shareholders purchasing shares of the Portfo-
lio 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 the Fund's transfer agent, 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 Intro-
ducing Brokers purchasing through Smith Barney, payment for Portfolio shares is
due on the third business day after the trade date. In all other cases, payment
must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis to charge the regular bank account or other financial institu-
tion indicated by the shareholder to provide systematic additions to the share-
holder's Portfolio account. A shareholder who has insufficient funds to com-
plete 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 share-
holder'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.
23
<PAGE>
PURCHASE OF SHARES (CONTINUED)
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Portfolio
are as follows:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------
DEALERS'
% OF % OF REALLOWANCE AS % OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
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 * * *
- ---------------------------------------------------------------------------
</TABLE>
* 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 single trust estate or single fiduciary account.
INITIAL SALES CHARGE WAIVERS
Purchase 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 per-
sons 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 com-
pany with the Portfolio by merger, acquisition of assets or otherwise; (c) pur-
chases of Class A shares by any client of a newly employed Smith Barney Finan-
cial Consultant (for a period up to 90 days from the commencement of the Finan-
cial Consultant's employment with Smith Barney), on the condition the purchase
of Class A shares is made with the
24
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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) pur-
chases 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 sold
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) direct rollovers by plan participants of distri-
butions from a 401(k) plan offered to employees of Travelers or its subsidiar-
ies or a 401(k) plan enrolled in the Smith Barney 401(k) Program (Note: subse-
quent investments will be subject to the applicable sales charge); (g) pur-
chases by separate accounts used to fund certain unregistered variable annuity
contracts; and (h) purchases by investors participating in a Smith Barney fee-
based arrangement. In order to obtain such discounts, the purchaser must pro-
vide 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 aggregat-
ing 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 applying the sales charge applicable to such aggregate. In
order to obtain such discount, the purchaser must provide sufficient informa-
tion at the time of purchase to permit verification that the purchase qualifies
for the reduced sales charge. The right of accumulation is subject to modifica-
tion or discontinuance at any time with respect to all shares purchased there-
after.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or pur-
chase 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 meet-
ing 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
25
<PAGE>
PURCHASE OF SHARES (CONTINUED)
reduced sales charge or net asset value purchase for aggregating related fidu-
ciary 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 aggre-
gate 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 dis-
cretion of Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes pur-
chases of all Class A shares of the Portfolio 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 $5,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $15,000,000 of Class Y shares of
the same Portfolio within 13 months from the date of the Letter. If a total
investment of
26
<PAGE>
PURCHASE OF SHARES (CONTINUED)
$15,000,000 is not made within the 13-month period, all Class Y shares pur-
chased to date will be transferred to Class A shares, where they will be sub-
ject 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 con-
tact 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 cer-
tain 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 ini-
tial 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 distribu-
tions; (c) with respect to Class B shares, shares redeemed more than five years
after their purchase; or (d) with respect to Class C shares and Class A shares
that are CDSC Shares, shares redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC is imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case of
Class B shares held under the Smith Barney 401(k) Program, as described below.
See "Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ---------------------------------
<S> <C>
First 5.00%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
- ---------------------------------
</TABLE>
27
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 pro-
portion 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 distribu-
tions 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.
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 addi-
tional 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) au-
tomatic 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"); (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 invest-
ment 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
28
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 redemp-
tion.
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 par-
ticipating ("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) Pro-
grams. 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 ini-
tial sales 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 Par-
ticipating 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.
29
<PAGE>
PURCHASE OF SHARES (CONTINUED)
401(k) Plans Opened Prior to June 21, 1996. In any year after the date a Par-
ticipating 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 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 regard-
ing these Programs, investors should contact a Smith Barney Financial Consul-
tant.
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
30
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Participating Plan will have the same conversion feature as Class B shares held
by other investors. See "Purchase of Shares -- Deferred Sales Charge Alterna-
tives."
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 dur-
ing the preceding eight years. Whether or not the CDSC applies to the redemp-
tion by a Participating Plan depends on the number of years since the Partici-
pating 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 pay-
ment from which the amount is being redeemed.
The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the termina-
tion 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
59 1/2 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 Par-
ticipating 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 min-
imum investment requirements and all shares are subject to the other require-
ments 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
31
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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
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 Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Municipal High Income Fund
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Smith Barney World Funds, Inc.--International Balanced Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
32
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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.
*** 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 higher CDSC
than that imposed by the Portfolio, the exchanged Class B shares will be sub-
ject 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 Portfolio
that have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the Port-
folio who wish to exchange all or a portion of their shares for shares of the
respective class in any of the funds identified above may do so without impo-
sition of any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can be detrimental to the Portfolio's performance and its shareholders. The
Manager may
33
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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 shareholder at least 15 days prior to suspending
the exchange privilege and during the 15 day period the shareholder will be
required to (a) redeem his or her shares in the 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 reg-
istration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Portfolio reserves the right to modify or discon-
tinue 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 shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, 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 ten-
der, 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. Redemp -
34
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
tion 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 Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
Smith Barney World Funds, Inc./Emerging Markets 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 regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates 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 guar-
antor institution, such as a domestic bank, savings and loan institution,
domestic credit union, member bank of the Federal Reserve System or member firm
of a national securities exchange. Written redemption requests of $2,000 or
less do not require a signature guarantee unless more than one such redemption
request is made in any 10-day period. 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 shareholder's shares subject to the CDSC at the time the with-
drawal plan commences. For further information regarding the automatic cash
withdrawal plan, shareholders should contact a Smith Barney Financial Consul-
tant.
35
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be eligi-
ble to redeem and exchange Fund shares by telephone. To determine if a share-
holder 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. (Alter-
natively, an investor may authorize telephone redemptions on the new account
application with the applicant's signature guarantee when making his/her ini-
tial 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. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not per-
mitted 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 instruc-
tions 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.
36
<PAGE>
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 Portfolio, each account must satisfy the minimum account size.)
The Fund, however, will not redeem shares based solely on market reductions in
net asset value. Before the Fund exercises such right, shareholders will
receive written notice and will be permitted 60 days to bring accounts up to
the minimum to avoid involuntary liquidation.
PERFORMANCE
From time to time the Portfolio may include its total return, average annual
total return and current dividend return in advertisements and/or other types
of sales literature. These figures are computed separately for Class A, Class
B, Class C and Class Y shares of the Portfolio. These figures are based on his-
torical 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, if any, 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 condi-
tions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating cur-
rent 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 agree-
37
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
ments 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 Port-
folio are delegated to the Portfolio's Manager. The Statement of Additional
Information contains background information regarding each Director and execu-
tive officer of the Fund.
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 is responsible for furnishing or causing to be furnished to
the Portfolio advice and assistance with respect to the acquisition, holding
or disposal of securities and recommendations with respect to other aspects
and affairs of the Portfolio 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 the
Research and other departments and staff of Smith Barney furnish the Manager
with information, advice and assistance and are available for consultation on
the Portfolio, thus Smith Barney may also be considered an investment adviser
to the Fund. Smith Barney 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 investment advisory serv-
ices provided by the Manager, the Portfolio pays the Manager an investment
advisory fee calculated at the rate of 1.00% of the Portfolio's average daily
net assets, paid monthly. Although this fee is higher than that paid by most
investment companies, the Portfolio's management has determined that it is
comparable to the fee charged by other investment advisers of investment com-
panies that have similar investment objectives and policies.
For the Portfolio's fiscal year ended October 31, 1997, the management fee
was 1.00% of the Portfolio's average net assets. Total operating expenses
incurred by the Portfolio for this period were 2.11% for Class A shares; 2.88%
for Class B shares and 2.86% for Class C shares.
The management agreement further provides that all other expenses not spe-
cifically assumed by the Manager under the management agreement on behalf of
the Portfolio are borne by the Fund. Expenses payable by the Fund include, but
are not limited to, all charges of custodians (including sums as custodian and
sums for keeping books and for rendering other services to the Fund) and
shareholder servicing agents, expenses of preparing, printing and distributing
all prospectuses, proxy material, reports and notices to shareholders, all
expenses of shareholders' and directors' meetings, filing fees and expenses
relating to the registration and qualification of the Fund's shares and the
Fund under federal or state securities laws and maintaining such registrations
and qualifications (including the printing of the Fund's
38
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
registration statements), fees of auditors and legal counsel, costs of per-
forming portfolio valuations, out-of-pocket expenses of directors and fees of
directors who are not "interested persons" as defined in the 1940 Act, inter-
est, taxes and governmental fees, fees and commissions of every kind, expenses
of issue, repurchase or redemption of shares, insurance expense, association
membership dues, all other costs incident to the Fund's existence and extraor-
dinary expenses such as litigation and indemnification expenses. Direct
expenses are charged to each of the Fund's Portfolios; general corporate
expenses are allocated on the basis of relative net assets.
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 Donald Elefson. Mr. Elefson joined the Smith
Barney international equity team in the spring of 1994 and is a Vice President
of the Fund and of Smith Barney. Previously, he assisted in the management of
the emerging markets mutual funds at Merrill Lynch Asset Management. Prior to
Merrill Lynch, Mr. Elefson held a position in equity analysis and equity sales
with Cazenove Inc. and BHF Securities in New York, and with Georg Hauck and
Sohn in Frankfurt, Germany.
Management's discussion and analysis, and additional performance information
regarding the Portfolio during the fiscal period 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.
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 attrib-
utable to these Classes. Smith Barney is also
39
<PAGE>
DISTRIBUTOR (CONTINUED)
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 dis-
tribution fee. The fees are used by Smith Barney to pay its Financial Consul-
tants 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 con-
tinuing 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 appropriate-
ness 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 issu-
ance 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 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 and Class Y shares of the Portfolio
represent interests in the assets of the Portfolio 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 pertain
to a particular Class. As described under "Voting" in the State-
40
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
ment 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.
41
<PAGE>
APPENDIX
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Portfolio may employ,
among others, one or more of the strategies set forth below. More detailed
information concerning these strategies and their related risks is contained
in the Statement of Additional Information.
Foreign Currencies. The value of the Portfolio's investments, and the value
of dividends and interest earned by the Portfolio, may be significantly
affected by changes in currency exchange rates. Some foreign currency values
may be volatile, and there is the possibility of governmental controls on cur-
rency exchange or governmental intervention in currency markets, which could
adversely affect the Portfolio. Although the Manager may attempt to manage
currency exchange rate risks, there is no assurance that the Manager will do
so at an appropriate time or that the Manager will be able to predict exchange
rates accurately. For example, if the Manager increases the Portfolio's expo-
sure to a foreign currency, and that currency's value subsequently falls, the
Manager's currency management may result in increased losses to the Portfolio.
Similarly, if the Manager hedges the Portfolio's exposure to a foreign curren-
cy, and that currency's value rises, the Portfolio will lose the opportunity
to participate in the currency's appreciation.
Options and Futures Contracts. The Portfolio may buy and sell options and
futures contracts to manage its exposure to changing interest rates, security
prices, and currency exchange rates. Some options and futures strategies,
including selling futures, buying puts, and writing calls, tend to hedge the
Portfolio's investments against price fluctuations. Other strategies, includ-
ing buying futures, writing puts, and buying calls, tend to increase market
exposure. Options and futures may be combined with each other or with forward
contracts in order to adjust the risk and return characteristics of the over-
all strategy. The Portfolio may invest in options and futures based on any
type of security, index, or currency, including options and futures traded on
foreign exchanges and options not traded on exchanges.
Options and futures can be volatile investments, and involve certain risks.
If the Manager applies a hedge at an inappropriate time or judges market con-
ditions incorrectly, options and futures strategies may lower the Portfolio's
return. The Portfolio could also experience losses if the prices of its
options and futures positions were poorly correlated with its other invest-
ments, or if it could not close out its positions because of an illiquid sec-
ondary market.
The Portfolio will not hedge more than 25% of its total assets by selling
futures, buying puts, and writing calls under normal conditions. In addition,
the Portfolio will not buy futures or write puts whose underlying value
exceeds 25% of its total assets, and will not buy calls with a value exceeding
5% of its total assets.
A-1
<PAGE>
APPENDIX (CONTINUED)
Swap Agreements. As one way of managing its exposure to different types of
investments, the Portfolio may enter into interest rate swaps, currency swaps,
and other types of swap agreements such as caps, collars, and floors. In a typ-
ical interest rate swap, one party agrees to make regular payments equal to a
floating interest rate times a "notional principal amount," in return for pay-
ments equal to a fixed rate times the same amount for a specified period of
time. If a swap agreement provides for payments in different currencies, the
parties might agree to exchange the notional principal amount as well. Swaps
may also depend on other prices or rates, such as the value of a index or mort-
gage prepayment rates.
Swap agreements are sophisticated hedging instruments that typically involve
a small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Portfolio's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Portfolio may also suffer
losses if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions.
Indexed Securities. The Portfolio may invest in indexed securities, including
inverse floaters, whose value is linked to currencies, interest rates, commodi-
ties, indices, or other financial indicators. Most indexed securities are short
to intermediate term fixed-income securities whose values at maturity or inter-
est rates rise or fall according to the change in one or more specified under-
lying instruments. Indexed securities may be positively or negatively indexed
(i.e., their value may increase or decrease if the underlying instrument appre-
ciates), and may have return characteristics similar to direct investments in
the underlying instrument or to one or more options on the underlying instru-
ment. Indexed securities may be more volatile than the underlying instrument
itself. No more than 5% of the Portfolio's assets will be invested in inverse
floaters.
Sovereign Debt Obligations. The Portfolio may purchase sovereign debt instru-
ments issued or guaranteed by foreign governments or their agencies, including
debt of emerging market countries. Sovereign debt may be in the form of conven-
tional securities or other types of debt instruments such as loans or loan par-
ticipations. Sovereign debt of emerging market countries may involve a high
degree of risk, and may be in default or present the risk of default. Govern-
mental entities responsible for repayment of the debt may be unable or unwill-
ing to repay principal and interest when due, and may require renegotiation or
rescheduling of debt payments. In addition, prospects for repayment of princi-
pal and interest may depend on political as well as economic factors. Although
some sovereign debt, such as Brady Bonds, is collateralized by U.S. government
securities, repayment of principal and interest is not guaranteed by the U.S.
government.
A-2
<PAGE>
APPENDIX (CONTINUED)
Loans and other direct debt instruments are interests in amounts owed by a
corporate, governmental, or other borrower to another party. They may represent
amounts owed to lenders or lending syndicates (loans and loan participations),
to suppliers of goods or services (trade claims or other receivables), or to
other parties. Direct debt instruments involve the risk of loss in cases of
default or insolvency of the borrower and may offer less legal protection to
the Portfolio in the event of fraud or misrepresentation. In addition, loan
participations involve a risk of insolvency of the lending bank or other finan-
cial intermediary. Direct debt instruments may also include standby financing
commitments that obligate the Portfolio to supply additional cash to the bor-
rower on demand.
Floating and Variable Rate Income Securities. Income securities may provide
for floating or variable rate interest or dividend payments. The floating or
variable rate may be determined by reference to a known lending rate, such as a
bank's prime rate, a certificate of deposit rate or the London Inter Bank
Offered Rate (LIBOR). Alternatively, the rate may be determined through an auc-
tion or remarketing process. The rate also may be indexed to changes in the
values of interest rate or securities indexes, currency exchange rates or other
commodities. The amount by which the rate paid on an income security may
increase or decrease may be subject to periodic or lifetime caps. Floating and
variable rate income securities include securities whose rates vary inversely
with changes in market rates of interest. Such securities may also pay a rate
of interest determined by applying a multiple to the variable rate. The extent
of increases and decreases in the value of securities whose rates vary
inversely with changes in market rates of interest generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate security having similar credit quality, redemption provisions and maturi-
ty.
Zero Coupon, Discount and Payment-in-Kind Securities. The Portfolio may
invest in "zero coupon" and other deep discount securities of governmental or
private issuers. Zero coupon securities generally pay no cash interest (or div-
idends in the case of preferred stock) to their holders prior to maturity. Pay-
ment-in-kind securities allow the lender, at its option, to make current inter-
est payments on such securities either in cash or in additional securities.
Accordingly, such securities usually are issued and traded at a deep discount
from their face or par value and generally are subject to greater fluctuations
of market value in response to changing interest rates than securities of com-
parable maturities and credit quality that pay cash interest (or dividends in
the case of preferred stock) on a current basis.
Premium Securities. The Portfolio may invest in income securities bearing
coupon rates higher than prevailing market rates. Such "premium" securities are
typically purchased at prices greater than the principal amounts payable on
maturity. The Portfolio will not amortize the premium paid for such securities
in calculating
A-3
<PAGE>
APPENDIX (CONTINUED)
its net investment income. As a result, in such cases the purchase of such
securities provides the Portfolio a higher level of investment income distrib-
utable to shareholders on a current basis than if the Portfolio purchased
securities bearing current market rates of interest. If securities purchased
by the Portfolio at a premium are called or sold prior to maturity, the Port-
folio will recognize a capital loss to the extent the call or sale price is
less than the purchase price. Additionally, the Portfolio will recognize a
capital loss if it holds such securities to maturity.
Yankee Bonds. The Portfolio may invest in U.S. dollar-denominated bonds sold
in the United States by non-U.S. issuers ("Yankee bonds"). As compared with
bonds issued in the United States, such bond issues normally carry a higher
interest rate but are less actively traded.
Borrowings. The Portfolio may borrow from banks up to 25% of the value of
its assets for temporary or emergency purposes, such as to accommodate
requests for the redemption of shares while effecting an orderly liquidation
of portfolio securities or to clear securities transactions and not for
leveraging purposes.
Repurchase Agreements and Securities Loans. The Portfolio may enter into
repurchase agreements on up to 25% of its assets and may lend for a fee port-
folio securities amounting up to one-third of its total assets. These transac-
tions 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.
Foreign Repurchase Agreements. In addition to repurchase agreements solely
in U.S. markets, the Portfolio may enter into repurchase agreements with
respect to foreign securities and repurchase agreements denominated in foreign
currencies. Foreign repurchase agreements may be less well secured than repur-
chase agreements in U.S. markets, and may involve greater risks of loss if the
counterparty should default on its obligations. As a result, the creditworthi-
ness of the other party is an especially important concern.
Illiquid Investments. The Portfolio may invest up to 15% of its assets in
illiquid investments. Under the supervision of the Board of Directors, the
Manager determines the liquidity of the Portfolio's investments. The absence
of a trading market can make it difficult to ascertain a market value for
illiquid investments. Disposing of illiquid investments may involve time-con-
suming negotiation and legal expenses, and it may be difficult or impossible
for a Portfolio to sell them promptly at an acceptable price.
A-4
<PAGE>
APPENDIX (CONCLUDED)
Restricted Securities. The Portfolio may invest no more than 10% of its
total assets in securities which cannot be sold to the public without regis-
tration under the Securities Act of 1933 (restricted securities). Unless reg-
istered for sale, these securities can only be sold in privately negotiated
transactions or pursuant to an exemption from registration. Restricted securi-
ties (excluding securities issued pursuant to Rule 144A of the Securities Act
of 1933) are considered to be illiquid and are subject to the 15% limitation
on investments in illiquid securities.
Delayed-Delivery Transactions. The Portfolio may buy and sell securities on
a when-issued or delayed-delivery basis, with payment and delivery taking
place at a future date. The market value of securities purchased in this way
may change before the delivery date, which could increase fluctuation in the
Portfolio's yield. Although the Portfolio has not established any limit on the
percentage of its assets that may be committed in connection with such trans-
actions, the Portfolio will maintain a segregated account with its custodian
of cash, debt securities of any grade or equity securities, denominated in
U.S. dollars or non-U.S. currencies having a value equal to or greater than
the Portfolio's purchase commitments; provided such securities have been
determined by the Manager to be liquid and unencumbered, and are marked to
market daily, pursuant to guidelines established by the Directors.
Structured Notes. The Portfolio may purchase structured notes, which are
over-the-counter debt instruments where the interest rate and/or principal are
indexed to an unrelated indicator (e.g., short-term rates in Japan, the price
of oil). Sometimes the two are inversely related (i.e., as the index goes up,
the coupon rate goes down; inverse floaters are an example of this) and some-
times they may fluctuate to a greater degree than the underlying index (e.g.,
the coupon may change twice as much as the change in the index rate).
Structured notes are often issued by high-grade corporate issuers. There is
often an underlying swap involved; the issuer will receive payments that match
its obligations under the structured note (usually from an investment bank)
and, in turn, makes more "traditional" payments to the investment bank (e.g.,
fixed rate or ordinary floating rate payments). It is important to note, how-
ever, that in such cases the Portfolio would not be involved in the swap; the
issuer of the note would remain obligated even if its counterparty defaulted.
A-5
<PAGE>
[This page intentionally left blank]
<PAGE>
SMITH BARNEY
--------------------------------
A Member of TravelersGroup LOGO
SMITH BARNEY
WORLD FUNDS, INC.
EMERGING MARKETS PORTFOLIO
388 Greenwich Street
New York, New York 10013
FD0875 2/98
<PAGE>
P R O S P E C T U S
SMITH BARNEY
WORLD FUNDS, INC.
European
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.
European Portfolio
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The European Portfolio (the "Portfolio") is one of the investment portfolios
that currently comprise Smith Barney World Funds, Inc. (the "Fund"). The Port-
folio seeks long term capital appreciation by investing primarily in equity
securities of issuers based in countries of Europe.
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 con-
tacting a Smith Barney Financial Consultant. The Statement of Additional Infor-
mation 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
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 10
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 12
- -------------------------------------------------
VALUATION OF SHARES 17
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 18
- -------------------------------------------------
PURCHASE OF SHARES 21
- -------------------------------------------------
EXCHANGE PRIVILEGE 30
- -------------------------------------------------
REDEMPTION OF SHARES 33
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 35
- -------------------------------------------------
PERFORMANCE 35
- -------------------------------------------------
MANAGEMENT OF THE FUND 36
- -------------------------------------------------
DISTRIBUTOR 38
- -------------------------------------------------
ADDITIONAL INFORMATION 39
- -------------------------------------------------
APPENDIX A-1
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations 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 Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Portfolio is an open-end, management investment com-
pany whose investment objective is to seek long-term capital appreciation by
investing primarily in equity securities of issuers based in countries of
Europe. 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 $15,000,000. 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 redemp-
tions. 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 acquired through the reinvestment of dividends and dis-
tributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares -- Deferred Sales Charge Alternatives."
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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 $15,000,000. 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 cir-
cumstances:
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 regu-
lar investment may wish to consider Class A shares; as the investment accumu-
lates shareholders may qualify for reduced sales charges and the shares are
subject to lower ongoing expenses over the term of the investment. As an
alternative, Class B and Class C shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Portfolio.
Any investment return on these additional invested amounts may partially or
wholly offset the higher annual expenses of these Classes. Because the Portfo-
lio'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 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 add-
ing the purchase to the net
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
asset value of all Class A shares offered with a sales charge held in funds
sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange Privi-
lege." 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 eli-
gible 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 pur-
pose 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 descrip-
tion of the sales charges and service and distribution fees for each Class of
shares and "Valuation of Shares," "Dividends, Distributions and Taxes" and "Ex-
change 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 main-
tained with 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 Retire-
ment Plan. Investors in Class Y shares may open an account for an initial
investment of $15,000,000. 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 require
-
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
ment for Class A, Class B and Class C shares and the subsequent investment
requirement for all Classes of shares is $25. The minimum investment require-
ments 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 subse-
quent investment requirement for all Classes for shareholders purchasing shares
through the Systematic Investment Plan on a monthly basis is $25 and on a quar-
terly 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 "Re-
demption of Shares."
MANAGEMENT OF THE PORTFOLIO Mutual Management Corp. (formerly, Smith Barney
Mutual Funds Management Inc.) (the "Manager") serves as the Portfolio's invest-
ment 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 "Man-
agement 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 gener-
ally 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 distribu-
tions 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 rein-
vestments 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 Portfo-
lio'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 Portfo-
lio 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 operat-
ing expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
EUROPEAN PORTFOLIO CLASS A CLASS B CLASS C CLASS Y
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None None None
Maximum 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 0.70 0.67 0.69 0.70
- -------------------------------------------------------------------------------
TOTAL PORTFOLIO OPERATING EXPENSES 1.80% 2.52% 2.54% 1.55%
- -------------------------------------------------------------------------------
</TABLE>
* 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.
** For Class Y shares, "Other expenses" have been estimated because no Class
Y shares were outstanding for the period ended October 31, 1997.
*** 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 con-
version 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 permit-
ted by the National Association of Securities Dealers, Inc.
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class A shares of the Portfolio purchased through the Smith Barney AssetOneSM
Program will be subject to an annual asset-based fee, payable quarterly, in
lieu of the initial sales charge. The fee will vary to a maximum of 1.50%,
depending on the amount of assets held through the Program. For more informa-
tion, please call your Smith Barney Financial Consultant.
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 account-
ing 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 indirect-
ly. 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."
<TABLE>
<CAPTION>
EUROPEAN PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return and
(2) redemption at the end of each
time period:
Class A $ 67 $104 $143 $251
Class B 76 108 144 268
Class C 36 79 135 288
Class Y 16 49 84 185
An investor would pay the following
expenses on the same investment,
assuming the same annual return and
no redemption:
Class A $ 67 $104 $143 $251
Class B 26 78 134 268
Class C 26 79 135 288
Class Y 16 49 84 185
- ------------------------------------------------------------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
8
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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 REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
9
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP, indepen-
dent 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. No information is presented for Class Y
shares because there were no Class Y shares outstanding during the years pre-
sented.
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------- -------------------------
EUROPEAN PORTFOLIO 1997(1) 1996 1995 1994(2) 1997(1) 1996 1995(3)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR $17.25 $14.67 $12.88 $12.50 $17.09 $14.56 $12.62
- ----------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income
(loss)(4) (0.08) (0.08) 0.07 (0.11) (0.20) (0.20) 0.02
Net realized and
unrealized gain 2.22 2.79 1.72 0.49 2.19 2.77 1.92
- ----------------------------------------------------------------------------------------------
Total Income From Opera-
tions 2.14 2.71 1.79 0.38 1.99 2.57 1.94
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- (0.09) -- -- -- -- --
Net realized gains (1.16) (0.04) -- -- (1.16) (0.04) --
- ----------------------------------------------------------------------------------------------
Total Distributions (1.16) (0.13) -- -- (1.16) (0.04) --
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $18.23 $17.25 $14.67 $12.88 $17.92 $17.09 $14.56
- ----------------------------------------------------------------------------------------------
TOTAL RETURN(P) 12.88% 18.65% 13.90% 3.04%++ 12.08% 17.72% 15.37%++
- ----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S) $14,118 $10,528 $11,870 $5,189 $29,221 $26,384 $24,825
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses(4) 1.80% 1.85% 2.06% 1.34%+ 2.52% 2.59% 3.31%+
Net investment income
(loss) (0.42) (0.49) 0.51 (1.12)+ (1.13) (1.22) 0.26+
- ----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 28% 39% 34% 21% 28% 39% 34%
- ----------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS
PAID PER SHARE ON
EQUITY TRANSACTIONS(5)(6) $0.07 $0.05 $0.06 -- $0.07 $0.05 $0.06
- ----------------------------------------------------------------------------------------------
</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 February 7, 1994 (inception date) to October 31, 1994.
(3)For the period from November 7, 1994 (inception date) to October 31, 1995.
(4)The Manager waived all or part of its fees for the year ended October 31,
1995 and the period ended October 31, 1994. In addition, the Manager agreed
to reimburse the Portfolio for $10,344 of the Portfolio's expenses for the
period ended October 31, 1994. If such fees and expenses were not waived or
reimbursed, the per share effect on net investment income and the expense
ratios would have been as follows:
<TABLE>
<CAPTION>
EXPENSE RATIOS
PER SHARE DECREASES WITHOUT FEE WAIVERS
TO NET INVESTMENT INCOME AND CUSTODY CREDITS
----------------------------------------
1995 1994 1995 1994
------------ ------------ --------- --------- ---
<S> <C> <C> <C> <C> <C>
Class A $0.01 $0.10 2.09% 2.37%+
Class B 0.00* -- 3.35+ --
</TABLE>
In addition, 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 1.82% and 2.02%, respectively; and for Class B
would have been 2.56% and 3.26%+, respectively; numbers prior to October 31,
1995 have not been restated to reflect these credits.
(5)As of September 1995, the SEC instituted new guidelines requiring the dis-
closure of average commissions per share.
(6)Trades executed in the United States and Canada are executed at an average
commission rate of $0.06 per share. Commissions on trades executed outside
these countries generally are executed as a percentage of cost or proceeds
ranging from 0.50% to 1.00%. The Portfolio paid commissions which equaled an
average rate of 0.30% on the total of either cost or proceeds on executed
trades, which is below the average range. While the amount of commissions
paid is reasonable on a percentage basis, the commission per share amount
appears high because these securities were trading at a very large dollar
amount per share, which is atypical of the way U.S. or Canadian companies'
shares trade. As a result, since less shares trade for a comparable dollar
amount than would ordinarily be the case in the U.S. or Canada, the commis-
sion per share amount skewed upward.
*Amount represents less than $0.01.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+Annualized.
(P)Total returns do not reflect 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
---------------------------------
EUROPEAN PORTFOLIO 1997(1) 1996 1995(2) 1994(3)
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $17.04 $14.51 $12.83 $12.48
- -----------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment loss(4) (0.21) (0.14) (0.08) (0.16)
Net realized and unrealized gain 2.19 2.71 1.76 0.51
- -----------------------------------------------------------------------
Total Income From Operations 1.98 2.57 1.68 0.35
- -----------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gains (1.16) (0.04) -- --
- -----------------------------------------------------------------------
Total Distributions (1.16) (0.04) -- --
- -----------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $17.86 $17.04 $14.51 $12.83
- -----------------------------------------------------------------------
TOTAL RETURN(P) 12.06% 17.78% 13.09% 2.80%++
- -----------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $3,110 $2,011 $1,311 $1,607
- -----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(4) 2.54% 2.52% 2.51% 2.02%+
Net investment loss (1.18) (1.17) (0.64) (1.60)+
- -----------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 28% 39% 34% 21%
- -----------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY TRANSACTIONS(5)(6) $0.07 $0.05 $0.06 --
- -----------------------------------------------------------------------
</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 February 14, 1994 (inception date) to October 31, 1994.
(4)The Manager waived all or part of its fees for the year ended October 31,
1995 and the period ended October 31, 1994. In addition, the Manager agreed
to reimburse the Portfolio for $10,344 of the Portfolio's expenses for the
period ended October 31, 1994. If such fees and expenses were not waived or
reimbursed, the per share effect on net investment income and the expense
ratios would have been as follows:
<TABLE>
<CAPTION>
EXPENSE RATIOS
PER SHARE DECREASES WITHOUT FEE WAIVERS
TO NET INVESTMENT INCOME AND CUSTODY CREDITS
---------------------------------------
1995 1994 1995 1994
------------ ------------ --------- --------- ---
<S> <C> <C> <C> <C> <C>
Class C $0.01 $0.10 2.54% 3.07%+
</TABLE>
In addition, 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 2.50% and 2.48%, respectively; numbers prior to
October 31, 1995 have not been restated to reflect these credits.
(5)As of September 1995, the SEC instituted new guidelines requiring the dis-
closure of average commissions per share.
(6)Trades executed in the United States and Canada are executed at an average
commission rate of $0.06 per share. Commissions on trades executed outside
these countries generally are executed as a percentage of cost or proceeds
ranging from 0.50% to 1.00%. The Portfolio paid commissions which equaled an
average rate of 0.30% on the total of either cost or proceeds on executed
trades, which is below the average range. While the amount of commissions
paid is reasonable on a percentage basis, the commission per share amount
appears high because these securities were trading at a very large dollar
amount per share, which is atypical of the way U.S. or Canadian companies'
shares trade. As a result, since less shares trade for a comparable dollar
amount than would ordinarily be the case in the U.S. or Canada, the commis-
sion per share amount skewed upward.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+Annualized.
(P)Total returns do not reflect applicable sales loads or contingent deferred
sales charges.
11
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The investment objective of the Portfolio is to achieve long-term capital
appreciation by investing primarily in equity securities of issuers based in
countries of Europe. There can be no assurance that the investment objective of
the Portfolio will be achieved.
The Portfolio's investment objective may be changed only by the "vote of a
majority of the outstanding voting securities" as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"). The Portfolio's investment
policies are nonfundamental and, as such, may be changed by the Board of Direc-
tors, 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 prospec-
tus.
The Portfolio seeks to achieve its objective by investing primarily in equity
securities (common and preferred stock) of issuers in the countries of Europe
(the "Primary Investment Area"), which includes Western Europe (e.g., France,
Germany, Italy, the Netherlands, Switzerland, United Kingdom) and Eastern
Europe (e.g., the Czech Republic, Hungary, Poland and the countries of the for-
mer Soviet Union). The Manager believes that the Portfolio's objective can best
be achieved by an investment policy based on the identification of countries
and industries with above-average growth rates, the assessment of currency fac-
tors, and the identification of companies in those countries and industries
with potential for above-average growth in earnings. It is a fundamental policy
of the Portfolio to invest, under normal circumstances, at least 65% of its
total assets in a diversified portfolio of equity securities of issuers domi-
ciled in the Primary Investment Area of the Portfolio. The Portfolio will gen-
erally invest its assets broadly among countries and will normally have repre-
sented in the portfolio business activities in not less than three countries in
the Primary Investment Area. Allocation of the Portfolio's investments will
depend upon the relative attractiveness of the markets and particular issuers.
Concentration of the Portfolio's assets in one or a few countries will subject
the Portfolio to greater risks than if the Portfolio's assets were not geo-
graphically concentrated.
In addition, the Portfolio may invest up to 35% of its total assets in other
kinds of securities, e.g., convertible bonds, warrants, Samurai and Yankee
Bonds, Eurobonds, sponsored and unsponsored American Depository Receipts
("ADRs") and European Depository Receipts ("EDRs"), securities issued by compa-
nies domiciled outside the Primary Investment Area of the Portfolio, including,
but not limited to, Eastern Europe, U.S. and foreign government securities, and
U.S. and non-U.S. money market securities. Money market securities will gener-
ally be held by the Portfolio for temporary defensive purposes. With respect to
certain countries, investments by the Portfolio presently may only be made by
acquiring shares of other investment companies with local governmental author-
ity to invest in those
12
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
countries. It is not expected that the income yield of the Portfolio will be
significant.
The Portfolio may also hold cash in U.S. dollars to meet redemption requests
and other expenses and cash in other currencies to meet settlement require-
ments for foreign securities. The Portfolio may engage in currency exchange
transactions with up to 100% of its assets in order to protect against uncer-
tainty in the level of future exchange rates between a particular foreign cur-
rency and the U.S. dollar or between foreign currencies in which the Portfo-
lio's securities are or may be denominated. The Portfolio may conduct its cur-
rency exchange transactions either on a "spot" (i.e., cash) basis at the rate
prevailing in the currency exchange market or through entering into forward
contracts to purchase or sell currencies. The Portfolio's dealings in forward
foreign currency exchange contracts will be limited to hedging involving
either specific transactions or aggregate portfolio positions.
The Portfolio may invest up to 5% of its assets in yen-denominated bonds
sold in Japan by non-Japanese issuers. Such bonds are commonly called "Samurai
Bonds" and correspond to "Yankee Bonds" or dollar-denominated bonds sold in
the United States by non-U.S. issuers. As compared with domestic issues, e.g.,
those of the government of Japan and its agencies, Samurai bond issues nor-
mally carry a higher interest rate but are less actively traded and therefore
may be volatile. Moreover, as with other securities denominated in foreign
currencies, their value is affected by fluctuations in currency exchange
rates. It is the policy of the Portfolio to invest in Samurai bond issues only
after taking into account considerations of quality and liquidity, as well as
yield. These bonds would be issued by governments of the Organization of Eco-
nomic Cooperation and Development or would have AAA ratings.
As a fundamental policy, the Portfolio may borrow money from a bank only as
a temporary measure for emergency or extraordinary purposes in an amount not
exceeding 10% of the value of its total assets, and may invest no more than
15% of its total assets in securities that are illiquid (i.e., trading in the
security is suspended or, in the case of unlisted securities, market makers do
not exist or will not entertain bids or offers). When the Portfolio has bor-
rowed in excess of 5% of the value of its total assets, the Portfolio will not
make further investments. The Portfolio will not invest more than 25% of the
value of its total assets in the securities of issuers engaged in any one
industry (other than the U.S. Government, its agencies and instrumentalities).
The Portfolio will invest no more than 10% of the value of its net assets in
warrants valued at the lower of cost or market. The Portfolio does not cur-
rently intend to engage in trading options or futures contracts but may do so
in the future if determined to be in the Portfolio's best interests by the
Portfolio's Board of Directors. Special considerations associated with the
Portfolio's investments are described below under "Risk Factors and Special
Considerations" and in the Appendix to this Prospectus.
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ADDITIONAL INVESTMENTS
Short-Term Investments. As noted above, in certain circumstances the Portfo-
lio may invest without limitation in short-term money market instruments, such
as U.S. Government securities; certificates of deposit, time deposits and
bankers' acceptances issued by domestic banks (including their branches
located outside the United States and subsidiaries located in Canada), domes-
tic branches of foreign banks, savings and loan associations and similar
institutions; high grade commercial paper; and repurchase agreements. To the
extent the Portfolio is investing in short-term investments as a temporary
defensive posture, the Portfolio's investment objective may not be achieved.
U.S. Government Securities. The U.S. Government securities in which the
Portfolio may invest include: bills, certificates of indebtedness, and notes
and bonds issued by the U.S. Treasury or by agencies or instrumentalities of
the U.S. Government. Some U.S. Government securities, such as U.S. Treasury
bills and bonds, are supported by the full faith and credit of the U.S. Trea-
sury; others are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to pur-
chase the agency's obligations; still others, such as those of the Student
Loan Marketing Association and the Federal Home Loan Mortgage Corporation
("FHLMC"), are supported only by the credit of the instrumentality. Mortgage
participation certificates issued by the FHLMC generally represent ownership
interests in a pool of fixed-rate conventional mortgages. Timely payment of
principal and interest on these certificates is guaranteed solely by the
issuer of the certificates. Other investments will include Government National
Mortgage Association Certificates ("GNMA Certificates"), which are mortgage-
backed securities representing part ownership of a pool of mortgage loans on
which timely payment of interest and principal is guaranteed by the full faith
and credit of the U.S. Government. While the U.S. Government guarantees the
payment of principal and interest on GNMA Certificates, the market value of
the securities is not guaranteed and will fluctuate.
Reverse Repurchase Agreements. The Portfolio may invest up to 5% of its net
assets in reverse repurchase agreements. Reverse repurchase agreements are
considered to be borrowings by the Portfolio and involve the sale of portfolio
securities with an agreement to repurchase the securities at an agreed-upon
price, date and interest payment.
Hedging Transactions. The Portfolio may also enter into various types of
securities, index and currency futures, options and related contracts and
interest rate swaps, caps and floors in order to hedge the existing or antici-
pated value of its portfolio securities. See the Statement of Additional
Information for further information about these techniques.
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Lending of Portfolio Securities. From time to time, the Portfolio may lend
its portfolio securities to brokers, dealers and other financial organizations.
These loans may not exceed 33 1/3% of the Portfolio's total assets taken at
value. Loans of portfolio securities by the Portfolio will be collateralized by
cash, letters of credit or U.S. Government securities, which are maintained at
all times in an amount equal to at least 100% of the current market value of
the loaned securities. By lending its portfolio securities, the Portfolio will
seek to generate income by continuing to receive interest on the loaned securi-
ties, by investing the cash collateral in short-term instruments or by
obtaining yield in the form of interest paid by the borrower when U.S. Govern-
ment securities are used as collateral. The risks in lending portfolio securi-
ties, as with other extensions of secured credit, consist of possible delays in
receiving additional collateral or in the recovery of the securities or possi-
ble loss of rights in the collateral should the borrower fail financially.
Loans will be made to firms deemed by the Manager to be of good standing and
will not be made unless, in the judgment of the Manager, the consideration to
be earned from such loans would justify the risk.
PORTFOLIO TRANSACTIONS AND TURNOVER
All orders for transactions in securities and options on behalf of the Port-
folio are placed by the Manager with broker/dealers that the Manager selects,
including Smith Barney and other affiliated brokers. Brokerage will be allo-
cated to Smith Barney, to the extent and in the manner permitted by applicable
law, provided that, in the judgment of the Board of Directors of the Fund, the
commission, fee or other remuneration received or to be received by Smith Bar-
ney (or any broker/dealer affiliate of Smith Barney that is also a member of a
securities exchange) is reasonable and fair compared to the commission, fee or
other remuneration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a securi-
ties exchange during the same or comparable period of time. In all trades
directed to Smith Barney, the Fund has been assured that its orders will be
accorded priority over those received from Smith Barney for its own account or
for any of its directors, officers or employees. The Fund will not deal with
Smith Barney in any transaction in which Smith Barney acts as principal.
Under certain market conditions, the Portfolio may experience high portfolio
turnover as a result of its investment strategies. For example, the exercise of
a substantial number of options written by the Portfolio and the purchase or
sale of securities by the Portfolio in anticipation of a rise or decline in
interest rates could result in high portfolio turnover. Short-term gains real-
ized from portfolio transactions are taxable to shareholders as ordinary
income. In addition, higher portfolio turnover rates can result in correspond-
ing increases in brokerage commissions for the Portfolio. The annual portfolio
turnover rate for the Portfolio may vary significantly from year to year, but
it is generally not expected to exceed 75%. The
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Portfolio will not consider portfolio turnover rate a limiting factor in making
investment decisions consistent with its respective objectives and policies.
See "Financial Highlights" for the Portfolio's annual turnover rate during each
year since inception.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should realize that risk of loss is inherent in the ownership of
any securities and that the Portfolio's net asset value will fluctuate reflect-
ing fluctuations in the market value of its portfolio positions. In addition,
concentration of the Portfolio's assets in one or a few countries will subject
the Portfolio to greater risks than if the Portfolio's assets were not geo-
graphically concentrated.
Foreign Securities. There are certain risks involved in investing in securi-
ties of companies and governments of foreign nations which are in addition to
the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and economic
developments and the possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting, auditing and
financial reporting standards or of other regulatory practices and requirements
comparable to those applicable to domestic companies. The yield of the Portfo-
lio may be adversely affected by fluctuations in value of one or more foreign
currencies relative to the U.S. dollar. Moreover, securities of many foreign
companies and their markets may be less liquid and their prices more volatile
than those of securities of comparable domestic companies. In addition, with
respect to certain foreign countries, there is the possibility of expropria-
tion, nationalization, confiscatory taxation and limitations on the use or
removal of funds or other assets of the Portfolio, including the withholding of
dividends. Foreign securities may be subject to foreign government taxes that
could reduce the yield on such securities. Because the Portfolio will invest in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may adversely affect the value of
portfolio securities and the appreciation or depreciation of investments.
Investments in foreign securities also may result in higher expenses due to the
cost of converting foreign currency to U.S. dollars, the payment of fixed bro-
kerage commissions on foreign exchanges, which generally are higher than com-
missions on domestic exchanges, and the expense of maintaining securities with
foreign custodians, and the imposition of transfer taxes or transaction charges
associated with foreign exchanges. Finally, investments in unsponsored ADR's
may entail certain risks and costs not encountered by investments in sponsored
ADR's.
Securities of Developing Countries. A developing country generally is consid-
ered 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
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 devel-
oping 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 expro-
priated 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 invest-
ment 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 and calculated. That failure could have a negative impact on the Port-
folio'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 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 serv-
ice 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 val-
ue. Securities
17
<PAGE>
VALUATION OF SHARES (CONTINUED)
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 valua-
tion, 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 securi-
ties 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 sales on the valuation date, the last quoted sale, up to the time of valu-
ation, 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 of Directors 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 invest-
ments 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 deter-
mined by the Board of Directors in good faith. This value generally is deter-
mined as the amount that the Portfolio could reasonably expect to receive from
an orderly disposition of these assets over a reasonable period of time but in
no event more than seven days. The value of any security or commodity denomi-
nated in a currency other than U.S. dollars will be converted into U.S. dollars
at the prevailing market rate as determined by the investment adviser.
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 Portfolio may not take place contemporaneously with the determina-
tion 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 investment adviser, under the supervi-
sion 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.
18
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
If a shareholder does not otherwise instruct, dividends and capital gain dis-
tributions 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 cred-
ited 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.
TAXES
The Portfolio intends to continue to qualify as a regulated investment com-
pany under Subchapter 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 conven-
tions 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 dis-
tributed to shareholders.
19
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
If, at the end of the Portfolio's taxable year, more than 50% of the value
of the Portfolio's total assets consist of stock or securities of foreign cor-
porations, 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 for-
eign 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. The
Portfolio's gains and losses from the sale of securities and from certain for-
eign 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 pro-
portionate 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 invest-
ing 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 divi-
dends, distributions and redemption proceeds to shareholders who fail to pro-
vide 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.
20
<PAGE>
PURCHASE OF SHARES
GENERAL
The Portfolio offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC
and are available only to investors investing a minimum of $15,000,000 (except
for purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount). See "Prospectus Summa-
ry--Alternative Purchase Arrangements" for a discussion of factors to consider
in selecting which Class of shares to purchase.
Purchases of Portfolio shares must be made through a brokerage account main-
tained 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 broker-dealers may charge their cus-
tomers 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 mak-
ing 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 $15,000,000.
Subsequent investments of at least $50 may be made for all Classes. For par-
ticipants 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 mini-
mum 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
the Fund's transfer agent, First Data. Share certificates are issued only upon
a shareholder's written request to First Data.
21
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 date. In all other
cases, payment must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on
a quarterly basis to charge the regular bank account or other financial insti-
tution 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:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------
DEALERS'
% OF % OF REALLOWANCE AS % OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
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 * * *
- ---------------------------------------------------------------------------
</TABLE>
* 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."
22
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 ("1933 Act").
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 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 Securi-
ties Dealers, Inc., provided such sales are made upon the assurance of the
purchaser that the purchase is made for investment purposes and that the secu-
rities 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 sold with a sales charge) and who wish
to reinvest their redemption proceeds in the Portfolio, provided the reinvest-
ment is made within 60 calendar days of the redemption; (e) purchases by
accounts managed by registered investment advisory subsidiaries of Travelers;
(f) 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); (g) purchases by separate accounts
used to fund certain unregistered variable annuity contracts; and (h) pur-
chases by investors participating in a Smith Barney fee-based arrangement. In
order to obtain such discounts, the purchaser must provide sufficient informa-
tion 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 aggregat-
ing the
23
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 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 pur-
chase 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 meet-
ing 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 Port-
folio 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.
24
<PAGE>
PURCHASE OF SHARES (CONTINUED)
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes pur-
chases of all Class A shares of the Portfolio 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 $5,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $15,000,000 of Class Y shares of
the same Portfolio within 13 months from the date of the Letter. If a total
investment of $15,000,000 is not made within the 13-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 cer-
tain 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 ini-
tial 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
25
<PAGE>
PURCHASE OF SHARES (CONTINUED)
(d) with respect to Class C shares and Class A shares that are CDSC Shares,
shares redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC is imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case of
Class B shares held under the Smith Barney 401(k) Program, as described below.
See "Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ---------------------------------
<S> <C>
First 5.00%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
- ---------------------------------
</TABLE>
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 pro-
portion 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 distribu-
tions 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.
26
<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 invest-
ment. Assuming at the time of the redemption the net asset value had appreci-
ated 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 com-
mences (see "Automatic Cash Withdrawal Plan") (provided, however, that auto-
matic 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) redemp-
tion 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 addi-
tion, a shareholder who has redeemed shares from other funds of the Smith Bar-
ney 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 par-
ticipating ("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) Pro-
grams. Class A and Class C shares acquired through the Participating Plans are
subject to the same service and/or distribution fees as the Class A and Class
C shares acquired by other investors; however, they are not subject to any
initial sales charge or CDSC. Once a Participating Plan has made an initial
investment in the Portfolio,
27
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 Par-
ticipating 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 Par-
ticipating 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 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
28
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 regard-
ing these Programs, investors should contact a Smith Barney Financial Consul-
tant.
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 con-
version 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 dur-
ing the preceding eight years. Whether or not the CDSC applies to the redemp-
tion by a Participating Plan depends on the number of years since the Partici-
pating 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 pay-
ment from which the amount is being redeemed.
The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the termina-
tion of employment of an employee in the Participating Plan; (c) the death or
disability of an
29
<PAGE>
PURCHASE OF SHARES (CONTINUED)
employee in the Participating Plan; (d) the attainment of age 59 1/2 by an
employee in the Participating Plan; (e) hardship of an employee in the Partici-
pating 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 min-
imum investment requirements and all shares are subject to the other require-
ments 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
30
<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.--Global Government Bond Portfolio
Smith Barney World Funds, Inc.--International Balanced Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
Smith Barney Concert Allocation Series Inc.--Growth Portfolio
Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
Smith Barney Concert Allocation Series Inc.--Income Portfolio
Money Market Funds
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc.--Cash Portfolio
++Smith Barney Money Funds, Inc.--Government Portfolio
***Smith Barney Money Funds, Inc.--Retirement Portfolio
+++Smith Barney Municipal Money Market Fund, Inc.
+++Smith Barney Muni Funds--California Money Market Portfolio
+++Smith Barney Muni Funds--New York Money Market Portfolio
- -------------------------------------------------------------------------------
*Available for exchange with Class A, Class C and Class Y shares of the
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.
31
<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 higher CDSC
than that imposed by the Portfolio, the exchanged Class B shares will be sub-
ject 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 Portfolio
that have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the Port-
folio who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without imposi-
tion of any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Portfolio's performance and its shareholders. The invest-
ment 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 pur-
chases and/or exchanges by the shareholder. Upon such a determination, the Fund
will provide notice in writing or by telephone to the shareholder at least 15
days prior to suspending the exchange privilege and during the 15 day period
the shareholder will be required to (a) redeem his or her shares in the Portfo-
lio 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 "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined. Redemption procedures dis-
cussed 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 reg-
istration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read
32
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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 shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, 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 ten-
der, 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 Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
Smith Barney World Funds, Inc./European 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 regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates 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 appear-
33
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
ing on a share certificate, stock power or written redemption request in excess
of $2,000 must be guaranteed by an eligible guarantor institution, such as a
domestic bank, savings and loan institution, domestic credit union, member bank
of the Federal Reserve System or member firm of a national securities exchange.
Written redemption requests of $2,000 or less do not require a signature guar-
antee unless more than one such redemption request is made in any 10-day peri-
od. 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 shareholder's shares subject to the CDSC at the time the with-
drawal 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 guaran-
tee, 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. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not per-
mitted under this program.
34
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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 instruc-
tions 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 Portfolio, each account must satisfy the minimum account
size.) The Fund, however, will not redeem shares based solely on market reduc-
tions in net asset value. Before the Fund exercises such right, shareholders
will receive written notice and will be permitted 60 days to bring accounts up
to the minimum to avoid involuntary liquidation.
PERFORMANCE
From time to time the Portfolio may include its total return, average annual
total return and current dividend return in advertisements and/or other types
of sales literature. These figures are computed separately for Class A, Class
B, Class C and
35
<PAGE>
PERFORMANCE (CONTINUED)
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,
if any, from the initial amount invested and reinvestment of all income divi-
dends and capital gain distributions on the reinvestment dates at prices calcu-
lated 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 sub-
tracting 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 non-
standard 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 composi-
tion of its investment portfolio and operating expenses. These factors and pos-
sible 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 Analyti-
cal 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 Portfo-
lio are delegated to the Portfolio's Manager. The Statement of Additional
Information contains background information regarding each Director and execu-
tive officer of the Fund.
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 is responsible for furnishing or causing to be furnished to
the Portfolio advice and assistance with respect to the acquisition, holding or
disposal of securities and recommendations with respect to other aspects and
affairs of the
36
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
Portfolio and furnishes the Portfolio with bookkeeping, accounting and admin-
istrative services, office space and equipment, and the services of the offi-
cers and employees of the Fund. By written agreement the Research and other
departments and staff of Smith Barney furnish the Manager with information,
advice and assistance and are available for consultation on the Portfolio,
thus Smith Barney may also be considered an investment adviser to the Fund.
Smith Barney 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 investment advisory services provided
by the Manager, the Portfolio pays the Manager an investment advisory fee cal-
culated at the rate of 0.85% of the Portfolio's average daily net assets, paid
monthly. Although this fee is higher than that paid by most investment compa-
nies, the Portfolio's management has determined that it is comparable to the
fee charged by other investment advisers of investment companies that have
similar investment objectives and policies. Total operating expenses incurred
by the Portfolio for the fiscal year ended October 31, 1997 were 1.80% for
Class A shares, 2.52% for Class B shares and 2.54% for Class C shares.
The management agreement further provides that all other expenses not spe-
cifically assumed by the Manager under the management agreement on behalf of
the Portfolio are borne by the Fund. Expenses payable by the Fund include, but
are not limited to, all charges of custodians (including sums as custodian and
sums for keeping books and for rendering other services to the Fund) and
shareholder servicing agents, expenses of preparing, printing and distributing
all prospectuses, proxy material, reports and notices to shareholders, all
expenses of shareholders' and directors' meetings, filing fees and expenses
relating to the registration and qualification of the Fund's shares and the
Fund under federal or state securities laws and maintaining such registrations
and qualifications (including the printing of the Fund's registration state-
ments), fees of auditors and legal counsel, costs of performing portfolio val-
uations, out-of-pocket expenses of directors and fees of directors who are not
"interested persons" as defined in the 1940 Act, interest, taxes and govern-
mental fees, fees and commissions of every kind, expenses of issue, repurchase
or redemption of shares, insurance expense, association membership dues, all
other costs incident to the Fund's existence and extraordinary expenses such
as litigation and indemnification expenses. Direct expenses are charged to
each of the Fund's Portfolios; general corporate expenses are allocated on the
basis of relative net assets.
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 Bar-
ney 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.
37
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
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 of 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 Interna-
tional Incorporated. Mr. Rein van der Does, who is responsible for the day to
day operations of the Portfolio, making all of the investment decisions since
the Portfolio's inception in February, 1994, is a Vice President of the Fund, a
Managing Director of Smith Barney and a member of the international equity
team. He is also an International Economist and is a member of the New York
Association for International Investment and the New York Society of Security
Analysts.
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.
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 serv-
ice 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 pro-
vide support services in connection with the distribution of shares; interest
and/or carrying charges; and indirect and overhead costs of Smith Barney asso-
ciated with the sale of Portfolio shares, including lease, utility, communica-
tions and sales promotion expenses.
38
<PAGE>
DISTRIBUTOR (CONTINUED)
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 con-
tinuing 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 appropriate-
ness 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 issu-
ance 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 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 and Class Y shares of the Portfolio
represent interests in the assets of the Portfolio 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 pertain
to a particular Class. As described under "Voting" in the Statement of Addi-
tional 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 direc-
tors, 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 pre-
emptive 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.
39
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
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.
40
<PAGE>
APPENDIX
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Portfolio may employ,
among others, one or more of the strategies set forth below. More detailed
information concerning these strategies and their related risks is contained in
the Statement of Additional Information.
Repurchase Agreements. The Portfolio may enter into repurchase agreement
transactions on U.S. Government securities with certain banks and
broker/dealers. Under the terms of a typical repurchase agreement, the Portfo-
lio would acquire an underlying debt obligation for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the obligation at an agreed-upon price
and time, thereby determining the yield during the Portfolio's holding period.
This arrangement results in a fixed rate of return that is not subject to mar-
ket fluctuations during the Portfolio's holding period. Repurchase agreements
are considered to be loans by the Portfolio. The value of the underlying secu-
rities will be at least equal at all times to the total amount of the repur-
chase obligation, including interest. The Portfolio bears a risk of loss in the
event that the other party to a repurchase agreement defaults on its obliga-
tions and the Portfolio is delayed or prevented from exercising its rights to
dispose of the collateral securities, including the risk of a possible decline
in the value of the underlying securities during the period while the Portfolio
seeks to assert these rights to them, the risk of incurring expenses associated
with asserting those rights and the risk of losing all or part of the income
from the agreement. The Portfolio's Manager, acting under the supervision of
the Board of Directors, reviews on an ongoing basis the creditworthiness and
the value of the collateral of those banks and dealers with which the Portfolio
enters into repurchase agreements to evaluate potential risks.
Short Sales. The Portfolio may sell securities "short against the box." While
a short sale is the sale of a security the Portfolio does not own, it is
"against the box" if at all times when the short position is open, the Portfo-
lio owns an equal amount of the securities or securities convertible into, or
exchangeable without further consideration for, securities of the same issue as
the securities sold short. Short sales "against the box" are used to defer rec-
ognition of capital gains or losses.
Illiquid Securities. The Portfolio may invest up to 15% of its assets in
securities (excluding those subject to Rule 144A under the Securities Act of
1933 (the "1933 Act"), as amended) with contractual or other restrictions on
resale and other instruments that are not readily marketable, including (a)
repurchase agreements with maturities greater than seven days, (b) time depos-
its maturing from two business days through seven calendar days, (c) to the
extent that a liquid secondary market does not exist for the instruments,
futures contracts and options on those contracts and (d) other securities that
are subject to restrictions on resale that the Manager has determined are not
liquid under guidelines established by the Fund's
A-1
<PAGE>
APPENDIX (CONTINUED)
Board of Directors; provided however that the Portfolio will not invest more
than 5% of its assets in securities that are restricted from sale to the public
until they have been registered under the 1933 Act.
Currency Exchange Transactions and Options on Foreign Currencies. In order to
protect against uncertainty in the level of future exchange rates, the Portfo-
lio may engage in currency exchange transactions and purchase exchange-traded
put and call options on foreign currencies. The Portfolio will conduct its cur-
rency exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market or through entering into forward
contracts to purchase or sell currencies. The Portfolio's dealings in forward
currency exchange and options on foreign currencies are limited to hedging
involving either specific transactions or portfolio positions.
A forward currency contract involves an obligation to purchase or sell a spe-
cific currency for an agreed-upon price at an agreed-upon date which may be any
fixed number of days from the date of the contract agreed upon by the parties.
These contracts are entered into in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
Although these contracts are intended to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they tend to
limit any potential gain that might result should the value of the currency
increase.
The Portfolio may purchase put options on a foreign currency in which securi-
ties held by the Portfolio are denominated to protect against a decline in the
value of the currency in relation to the currency in which the exercise price
is denominated. The Portfolio may purchase a call option on a foreign currency
to hedge against an adverse exchange rate of the currency in which a security
that it anticipates purchasing is denominated in relation to the currency in
which the exercise price is denominated. An option on a foreign currency gives
the purchaser, in return for a premium, the right to sell, in the case of a
put, and buy, in the case of a call, the underlying currency at a specified
price during the term of the option. Although the purchase of an option on a
foreign currency may constitute an effective hedge by a Portfolio against fluc-
tuations in the exchange rates, in the event of rate movements adverse to the
Portfolio's position, the Portfolio may forfeit the entire amount of the pre-
mium plus related transaction costs. Options on foreign currencies purchased by
the Portfolio may be traded on domestic and foreign exchanges or traded over-
the-counter.
Although the foreign currency market may not necessarily be more volatile
than the market in other commodities, the foreign currency market offers less
protection against defaults in the forward trading of currencies than is avail-
able when trading in currencies occurs on an exchange. Because a forward clear-
ing contract is not guaranteed by an exchange or clearinghouse, a default on
the contract would
A-2
<PAGE>
APPENDIX (CONTINUED)
deprive the Portfolio of unrealized profits or force the Portfolio to cover its
commitments for the purchase or resale, if any, at the current market price.
A-3
<PAGE>
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<PAGE>
SMITH BARNEY
--------------------------------
A Member of TravelersGroup[LOGO]
SMITH BARNEY
WORLD FUNDS, INC.
EUROPEAN PORTFOLIO
388 Greenwich Street
New York, New York 10013
FD 0478 2/98
PROSPECTUS
SMITH BARNEY
WORLD FUND, INC
Global
Government
Bond
Portfolio
February 27, 1998
Prospectus begins on page one
[LOGO]
Smith Barney Mutual Funds
Investing for your future.
Everyday.
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS February 27, 1998
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc.
Global Government Bond Portfolio
388 Greenwich Street
New York, New York 10016
(800) 451-2010
The Global Government Bond Portfolio (the "Portfolio") is one of the
investment portfolios that currently comprise Smith Barney World Funds, Inc.
(the "Fund"). The Portfolio seeks as high a level of current income and capital
appreciation as is consistent with its policy of investing principally in high
quality bonds of the United States and foreign governments.
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>
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Table of Contents
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Prospectus Summary 3
- --------------------------------------------------------------------------------
Financial Highlights 9
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 13
- --------------------------------------------------------------------------------
Valuation of Shares 22
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 23
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Purchase of Shares 25
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Exchange Privilege 34
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Redemption of Shares 37
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Minimum Account Size 40
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Performance 40
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Management of the Fund 41
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Distributor 43
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Additional Information 44
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No person has been authorized to give any information or to make any
representations 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 as high a level of current income
and capital appreciation as is consistent with its policy of investing
principally in high quality bonds of the United States and foreign governments.
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 $15,000,000. 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 4.50% 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 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and by 1.00% each year thereafter 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 0.50% 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 acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."
3
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 0.45% 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 $15,000,000. 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
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B and Class C shares are sold without any initial sales charge so the entire
purchase price is immediately invested in the 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 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 aggregating the
purchase to the
4
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
net asset value of all Class A shares offered with a sales charge held in funds
sponsored by Smith Barney Inc. ("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
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 $15,000,000. 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 of
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 are paid monthly from net investment
income. Distributions of net realized capital gains, if any, are 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 rein vestments will become eligible for conversion to Class A
shares on a pro rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that
the Portfolio's investment objective will be achieved. The value of the
6
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 Fund 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:
<TABLE>
<CAPTION>
Global Government Bond Portfolio Class A Class B Class C Class Y
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) ............ 4.50% None None None
Maximum CDSC (as a percentage of original cost or
redemption proceeds, whichever is lower).. None* 4.50 1.00% None
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management fees .................................. 0.75 0.75 0.75 0.75%
12b-1 fees** ..................................... 0.25 0.75 0.70 --
Other expenses ................................... 0.26 0.30 0.24 0.14
----
Total Portfolio Operating Expenses .................. 1.26 1.80 1.69 0.89%
==== ==== ==== ====
</TABLE>
*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
AssetOneSM Program will be subject to an annual asset-based fee, payable
quarterly, in lieu of the initial sales charge. The fee will vary to a maximum
of 1.50%, depending on the amount of assets held through the Program. For more
information, please call your Smith Barney Financial Consultant.
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
7
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
Class B shares, Class C shares 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 aver age daily net assets of Class A shares. Smith Barney also receives
with respect to Class B shares an annual 12b-1 fee of 0.75% of the value of
average daily net assets of that Class, consisting of a 0.50% distribution fee
and a 0.25% service fee. For Class C shares, Smith Barney receives an annual
12b-1 fee of 0.70% of the value of average daily net assets of this Class,
consisting of a 0.45% 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."
Global Government Bond 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.................................... $57 $83 $111 $190
Class B.................................... 63 87 108 198
Class C.................................... 27 53 92 200
Class Y.................................... 9 28 49 110
An investor would pay the following expenses
on the same investment, assuming
the same annual return and no redemption:
Class A.................................... $57 $83 $111 $190
Class B.................................... 18 57 98 198
Class C.................................... 17 53 92 200
Class Y.................................... 9 28 49 110
- --------------------------------------------------------------------------------
*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>
Global Government Bond Portfolio Year Ended October 31, Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
Class A Shares 1997(1) 1996(1) 1995 1994(2) 1993 1992 1991(3)
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Year $12.55 $12.30 $11.68 $12.92 $11.84 $12.90 $12.00
- --------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Operations:
Net investment income 0.59 0.70 0.92* 0.69 0.83 1.00 0.35
Net realized and
unrealized gain (loss) 0.38 0.42 0.48 (1.28) 1.36 (0.90) 1.12
- --------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from Operations 0.97 1.12 1.40 (0.59) 2.19 0.10 1.47
================================================================================================================================
Less Distributions From:
Net investment income(4) (1.22) (0.87) (0.78) (0.23) (0.52) (0.97 0.44)
Net realized gains (0.08) -- -- -- (0.59) (0.19) (0.13)
Capital -- -- -- (0.42) -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.30) (0.87) (0.78) (0.65) (1.11) (1.16) (0.57)
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Year $12.22 $12.55 $12.30 $11.68 $12.92 $11.84 $12.90
- --------------------------------------------------------------------------------------------------------------------------------
Total Return(P) 8.21% 9.41% 12.40% (4.64)%+ +19.13% 0.93% 12.42%++
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Year (000)'s $94,957 $106,536 $123,917 $77,961 $107,415 $107,609 $99,855
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(5) 1.26% 1.26% 1.38% 1.32%+ 1.30% 1.36% 1.15%+
Net investment income 4.82 5.69 7.44 6.57+ 6.67 7.72 8.26+
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 367% 133% 195% 179% 119% 177% 64%
================================================================================================================================
</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) For the period from July 22, 1991 (inception date) to December 31, 1991.
(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 A would have been 1.24% and 1.32%, respectively; numbers prior
to October 31, 1995 have not been restated to reflect these credits.
* Includes realised 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
(P) Total returns do not reflect any applicable sales loads or contingent
deferred sales charges.
9
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global Government Bond Portfolio
<S> <C> <C> <C>
Class B Shares 1997(1) 1996(1) 1995(2)
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $12.50 $12.26 $11.57
- --------------------------------------------------------------------------------
Income from Operations:
Net investment income 0.52 0.63 0.78*
Net realized and unrealized gain 0.38 0.42 0.57
- --------------------------------------------------------------------------------
Total Income from Operations 0.90 1.05 1.35
================================================================================
Less Distributions From:
Net investment income(3) (1.10) (0.81) (0.66)
Net realized gains (0.08) -- --
- --------------------------------------------------------------------------------
Total Distributions (1.18) (0.81) (0.66)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $12.22 $12.50 $12.26
- --------------------------------------------------------------------------------
Total Return (P) 7.62% 8.83% 11.97%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000)'s $19,690 $25,970 $35,159
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 1.80% 1.81% 1.92%+
Net investment income 4.24 5.15 6.65+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 367% 133% 195%
================================================================================
</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 November 18, 1994 (inception date) to October 31,
1995.
(3) Distributions from net investment income include short-term; 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 1.78% and 1.86%+, respectively.
* 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.
(P) Total returns do not reflect any applicable sales loads or contingent
deferred sales charges.
10
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global Government Bond Portfolio
<S> <C> <C> <C> <C> <C>
Class C Shares 1997(1) 1996(1) 1995(2) 1994(3) 1993(4)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $12.47 $12.23 $11.68 $12.93 $11.83
- --------------------------------------------------------------------------------------------------------
Income (Loss) from Operations:
Net investment income 0.53 0.64 0.85* 0.90 0.79
Net realized and
unrealized gain (loss) 0.38 0.41 0.42 (1.55) 1.37
- --------------------------------------------------------------------------------------------------------
Total Income (Loss) from Operations 0.91 1.05 1.27 (0.65) 2.16
=========================================================================================================
Less Distributions From:
Net investment income(5) (1.11) (0.81) (0.72) (0.21) (0.47)
Net realized gains (0.08) -- -- -- (0.59)
Capital -- -- -- (0.39) --
- --------------------------------------------------------------------------------------------------------
Total Distributions (1.19) (0.81) (0.72) (0.60) (1.06)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.19 $12.47 $12.23 $11.68 $12.93
- --------------------------------------------------------------------------------------------------------
Total Return (P) 7.73% 8.90% 11.25% (5.09)%+ 18.89%++
- --------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000)'s $3,257 $3,986 $4,141 $5,835 $4,972
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(6) 1.69% 1.74% 1.84% 1.80%+ 1.74%+
Net investment income 4.33 5.22 7.15 6.05+ 6.28+
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 367% 133% 195% 179% 119%
========================================================================================================
</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 1.71% and 1.78%, respectively; numbers prior
to October 31, 1995 have not been restated to reflect these credits.
+ Annualized.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
(P) Total returns do not reflect any applicable sales loads or contingent
deferred sales charges.
* Includes realized gains and losses from foreign currency transactions.
11
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global Government Bond Portfolio
<S> <C> <C> <C> <C> <C>
Class Y Shares 1997(1) 1996(1) 1995(2) 1994(3) 1993(4)
- ----------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $12.39 $12.14 $11.68 $12.93 $11.97
- ----------------------------------------------------------------------------------------
Income (Loss) from Operations:
Net investment income 0.63 0.73 0.78* 0.76 0.69
Net realized and
unrealized gain (loss) 0.37 0.42 0.49 (1.35) 1.23
- ----------------------------------------------------------------------------------------
Total Income (Loss) from Operations 1.00 1.15 1.27 (0.59) 1.92
========================================================================================
Less Distributions From:
Net investment income(5) (1.28) (0.90) (0.81) (0.23) (0.37)
Net realized gains (0.08) -- -- -- (0.59)
Capital -- -- -- (0.43) --
- -----------------------------------------------------------------------------------------
Total Distributions (1.36) (0.90) (0.81) (0.66) (0.96)
- -----------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.03 $12.39 $12.14 $11.68 $12.93
- -----------------------------------------------------------------------------------------
Total Return 8.61% 9.82% 11.27% (4.62)%+ +16.49%++
- -----------------------------------------------------------------------------------------
Net Assets, End of Year (000)'s $28,097 $15,105 $62 $3,202 $371
- -----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(6) 0.89% 0.84% 0.98% 1.23%+ 1.20%+
Net investment income 5.19 6.12 6.38 6.76+ 6.73+
- -----------------------------------------------------------------------------------------
Portfolio Turnover Rate 367% 133% 195% 179% 119%
=========================================================================================
</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 C shares were renamed Class Y
shares.
(3) For the period from January 1, 1994 to October 31, 1994.
(4) For the period from February 19, 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 reduce service fees
incurred. If the credits are taken into consideration, the expense ratios
for Class Y would have been 0.81% and 0.93%, respectively; numbers prior
to October 31, 1995 have not been restated to reflect these credits.
+ Annualized.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* Includes realized gains and losses from foreign currency transactions.
12
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
The investment objective of the Portfolio is to provide as high a level of
current income and capital appreciation as is consistent with its policy of
investing principally in high quality bonds of the United States and foreign
governments. 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
total assets in bonds issued or guaranteed by the United States or foreign
governments (including foreign states, provinces, cantons and municipalities) or
their agencies, authorities, or instrumentalities denominated in various
currencies, including U.S. dollars, or in multinational currency units, such as
the European Currency Unit ("ECU"). Except with respect to government securities
of less developed countries (see below), the Portfolio invests in foreign
government securities only if the issue or the issuer thereof is rated in the
two highest rating categories by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("S&P") (see "Appendix -- Ratings of Debt
Obligations" in the Statement of Additional Information), or if unrated, are of
comparable quality in the determination of the investment manager.
Consistent with its investment objective, under normal circumstances the
Portfolio may invest up to 35% of its total assets in debt obligations
(including debt obligations convertible into common stock) of United States or
foreign corporations and financial institutions and supranational entities.
Supranational entities are international organizations, organized or supported
by government entities to promote economic reconstruction or development and by
international banking institutions and related government agencies. The
supranational entities in which the Portfolio may invest are the World Bank, The
Asian Development Bank, the European Economic Community, the European Investment
Bank, the European Coal and Steel Community, Eurofima, Euratom, Council of
Europe, the European Bank for Construction and Development, the International
Finance Corporation and the Nordic Investment Bank. Any non-government
investment would be limited to issues that are rated A or better by Moody's or
S&P, or if not rated, are determined by the investment manager to be of
comparable quality. For certain risks associated with investments in foreign
issues, see "Risk Factors."
The Portfolio is organized as a non-diversified series and currently
contemplates investing primarily in obligations of the U.S. and of developed
nations (i.e., industrialized countries) which the investment manager believes
to pose limited credit risks. These countries currently are Australia, Austria,
Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan,
Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden,
Switzerland and The United Kingdom. The Portfolio also will invest in
securities denominated in the currencies of such countries or in multinational
currency units. Under normal market conditions the Portfolio invests at least
65% of its assets in issues of not less
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Investment Objective and Management Policies (continued)
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than three different countries; issues of any one country (other than the United
States) will represent no more than 45% of the Portfolio's total assets.
Allocation of the Portfolio's investments will depend upon the relative
attractiveness of the global 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.
In seeking to achieve its investment objective of high current income, the
investment adviser considers and compares the relative yields of obligations of
various developed nations; whereas, in seeking to achieve its objective of
capital appreciation, it considers all of the following factors, especially
changes in currency values against the U.S. dollar. The investment manager
allocates the Portfolio's assets among securities of countries and in currency
denominations where opportunities for meeting the Portfolio's investment
objective are expected to be the most attractive. The investment manager selects
securities of particular issuers on the basis of its views as to the best values
then currently available in the marketplace. Such values are a function of
yield, maturity, issue classification and quality characteristics, coupled with
expectations regarding the local and world economies, movements in the general
level and term of interest rates, currency values, political developments, and
variations of the supply of funds available for investment in the world bond
market relative to the demands placed upon it. The investment manager generally
evaluates currencies on the basis of fundamental economic criteria (e.g.,
relative inflation and interest rate levels and trends, growth rate forecasts,
balance of payments status and economic policies) as well as technical and
political data. If the currency in which a security is denominated appreciates
against the U.S. dollar, the dollar value of the security will increase, and
conversely, a decline in the exchange rate of the currency normally would
adversely affect the value of the security expressed in dollars. Similarly, a
decline in interest rates on debt obligations generally increases the value of
debt obligations, and conversely, an increase in interest rates generally
decreases the value of such obligations.
Investments may be made from time to time in government securities,
including loan assignments and loan participations, of less developed countries.
Such countries currently include Argentina, Brazil, Bulgaria, Czech Republic,
Ecuador, Hungary, Indonesia, Lithuania, Malaysia, Mexico, Peru, Philippines,
Poland, Russia, Slovakia, South Africa, Thailand, Turkey, Uruguay and Venezuela.
Countries may be added to or deleted from this list as economic and political
conditions warrant. Historical experience indicates that the markets of less
developed countries have been more volatile than the markets of the more mature
economies of developed countries; however, such markets often provide rates of
return to investors commensurate with the credit and market risks. The
investment manager does not intend to invest more than 10% of the Portfolio's
assets in the government securities of less developed countries and will not
invest more than 5% of the
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Investment Objective and Management Policies (continued)
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Portfolio's assets in the government securities of any one such country. Such
investments may be unrated or rated below investment grade or may be in default.
Securities rated below investment grade (and comparable unrated securities) are
the equivalent of high yield, high risk bonds. Such securities are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations and involve
major risk exposure to adverse business, financial, economic, and political
conditions, whether or not occurring within the issuers' borders.
During times when the investment manager believes a temporary defensive
posture in the market is warranted, including times involving international
political or economic uncertainty, the Portfolio may hold cash (U.S. dollars and
foreign currencies) and/or invest any portion or all of its assets in high
quality money market instruments. It is impossible to predict when or for how
long the Portfolio will employ defensive strategies. The Portfolio also may
temporarily hold cash (U.S. dollars and foreign currencies) and may, pending
investment of proceeds from new sales of Portfolio shares, invest all or a
portion of its assets in high quality money market instruments or, to meet
ordinary daily cash needs, also invest in the latter, but only up to 35% of its
assets. High quality money market instruments in which the Portfolio may invest
include, but are not limited to, the following instruments of U.S. or foreign
issuers that are rated in one of the two highest ratings categories of Moody's
or S&P (see "Appendix -- Ratings of Debt Obligations" in the Statement of
Additional Information), or if unrated, are of comparable quality in the
determination of the investment manager: short-term government securities;
commercial paper; bank certificates of deposit; time deposits; and bankers'
acceptances; and repurchase agreements related to any of the foregoing.
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 Chase Manhattan Bank, the
Fund's custodian (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 determined by the investment 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.
15
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Investment Objective and Management Policies (continued)
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Repurchase Agreements. The Portfolio may on occasion enter into repurchase
agreements, wherein the seller agrees to repurchase a security from the
Portfolio at an agreed-upon future date, normally the next business day. The
resale price is greater than the purchase price, which reflects the agreed-upon
rate of return for the period the Portfolio holds the security and which is not
related to the coupon rate on the purchased security. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the resale price, thus risk is limited to the ability of the seller to
pay the agreed-upon amount on the delivery date; however, if the seller
defaults, realization upon the collateral by the Portfolio may be delayed or
limited or the Portfolio might incur a loss if the value of the collateral
securing the repurchase agreement declines and might incur disposition costs in
connection with liquidating the collateral. The Portfolio will only enter into
repurchase agreements with broker/dealers or other financial institutions that
are deemed creditworthy by the investment manager under guidelines approved by
the Board of Directors. It is the policy of the Fund not to invest in repurchase
agreements that do not mature within seven days if any such investment together
with any other illiquid assets held by the Portfolio amount to more than 10% of
the Portfolio's total assets.
Securities Lending. The Portfolio may seek to increase its investment
income by lending its securities to unaffiliated brokers, dealers and other
financial institutions, provided such loans are callable at any time and are
continuously secured by cash, U.S. Government securities or other liquid,
high-grade debt securities equal to no less than the market value, determined
daily, of the securities loaned. Management will limit such lending to not more
than one-third of the value of the Port folio's total assets. The risks in
lending portfolio securities, as with other extensions of secured credit,
consist of possible delay in receiving additional collateral or in the recovery
of the securities or possible loss of rights in the collateral should the
borrower fail financially. Loans will only be made to borrowers whom the
investment manager deems to be of good standing and will not be made unless, in
the judgment of the investment manager, the consideration to be earned from such
loans would justify the risk.
Loan Participations and Assignments. The Portfolio may invest a portion of
its assets in loan participations ("Participations"). By purchasing a
Participation, the Portfolio acquires some or all of the interest of a bank or
other lending institution in a loan to a corporate or government borrower. The
Participations typically will result in the Portfolio having a contractual
relationship only with the lender and not with the borrower. The Portfolio will
have the right to receive payments of principal, interest and any fees to which
it is entitled only from the lender selling the Participation and only upon
receipt by the lender of the payments from the borrower. In connection with
purchasing Participations, the Portfolio generally will have no right to enforce
compliance by the borrower with the terms of the loan
16
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Investment Objective and Management Policies (continued)
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agreement relating to the loan, nor any rights of set-off against the borrower,
and the Portfolio may not directly benefit from any collateral supporting the
loan in which it has purchased the Participation. As a result, the Portfolio
will assume the credit risk of both the borrower and the lender that is selling
the Participation. In the event of the insolvency of the lender selling a
Participation, the Portfolio may be treated as a general creditor of the lender
and may not benefit from any set-off between the lender and the borrower. The
Portfolio will acquire Participations only if the lender interpositioned between
the Portfolio and the borrower is determined by management to be creditworthy.
The Portfolio may also invest in assignments of portions of loans from
third parties ("Assignments"). When it purchases Assignments from lenders, the
Portfolio will acquire direct rights against the borrower on the loan. However,
since Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the Portfolio as
the purchaser of an Assignment may differ from, and be more limited than, those
held by the assigning lender.
The Portfolio may have difficulty disposing of Assignments and
Participations. The liquidity of such securities is limited and, the Portfolio
anticipates that such securities could be sold only to a limited number of
institutional investors. The lack of a liquid secondary market could have an
adverse impact on the value of such securities and on the Portfolio's ability to
dispose of particular Assignments or Participations when necessary to meet the
Portfolio's liquidity needs or in response to a specific economic event, such as
a deterioration in the creditworthiness of the borrower. The lack of a liquid
secondary market for Assignments and Participations also may make it more
difficult for the Portfolio to assign a value to those securities for purposes
of valuing the Portfolio's portfolio and calculating its net asset value.
Options, Futures and Currency Strategies. The Portfolio may use forward
currency contracts and certain options and futures strategies to attempt to
hedge its portfolio, i.e., reduce the overall level of investment risk normally
associated with the Portfolio. There can be no assurance that such efforts will
succeed. These hedging techniques are described below and are further detailed
in the Statement of Additional Information.
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. The Portfolio, however, does not intend to use such
instruments for non-hedging purposes.
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Investment Objective and Management Policies (continued)
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To attempt to hedge against adverse movements in exchange rates between
currencies, the Portfolio may enter into forward currency contracts for the
purchase or sale of a specified currency at a specified future date. Such
contracts may involve the purchase or sale of a foreign currency against the
U.S. dollar or may involve two foreign currencies. The Portfolio may enter into
forward currency contracts either with respect to specific transactions or with
respect to its portfolio positions. For example, when the Portfolio anticipates
making a purchase or sale of a security, it may enter a forward currency
contract in order to set the rate (either relative to the U.S. dollar or another
currency) at which a currency exchange transaction related to the purchase or
sale will be made ("transaction hedging"). Further, when the investment manager
believes that a particular currency may decline compared to the U.S. dollar or
another currency, the Portfolio may enter into a forward contract to sell the
currency the investment manager expects to decline in an amount approximating
the value of some or all of the Portfolio's securities denominated in that
currency, or when the investment manager believes that one currency may decline
against a currency in which some or all of the portfolio securities held by the
Portfolio are denominated, it may enter into a forward contract to buy the
currency expected to decline for a fixed amount ("position hedging"). In this
situation, the Portfolio may, in the alternative, enter into a forward contract
to sell a different currency for a fixed amount of the currency expected to
decline where the investment manager believes that the value of the currency to
be sold pursuant to the forward contract will fall whenever there is a decline
in the value of the currency in which portfolio securities of the Portfolio are
denominated ("cross hedging"). The Custodian places cash or U.S. Government
securities or other high-quality debt securities denominated in certain
currencies in a separate account of the Portfolio having a value equal to the
aggregate amount of the Portfolio's commitments under forward contracts entered
into with respect to position hedges and cross-hedges. If the value of the
securities placed in a separate account declines, additional cash or securities
are placed in the account on a daily basis so that the value of the account will
equal the amount of the Portfolio's commitments with respect to such contracts.
For hedging purposes, the Portfolio may write covered call options and
purchase put and call options on currencies to hedge against movements in
exchange rates and on debt securities to hedge against the risk of fluctuations
in the prices of securities held by the Portfolio or which the investment
manager intends to include in its portfolio. The Portfolio also may use interest
rate futures contracts and options thereon to hedge against changes in the
general level of interest rates.
The Portfolio may write call options on securities and currencies only if
they are covered, and such options must remain covered so long as the Portfolio
is obligated as a writer. A call option written by the Portfolio is "covered" if
the Portfolio owns the securities or currency underlying the option or has an
absolute and immediate right to acquire that security or currency without
additional cash
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Investment Objective and Management Policies (continued)
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consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities or currencies held in its portfolio. A call option is also covered if
the Portfolio holds on a share-for-share basis a call on the same security or
holds a call on the same currency as the call written where the exercise price
of the call held is equal to or less than the exercise price of the call written
or greater than the exercise price of the call written if the difference is
maintained by the Portfolio in cash, Treasury bills or other high-grade,
short-term obligations in a segregated account with its custodian.
Although the Portfolio might not employ the use of forward currency
contracts, options and futures, the use of any of these strategies would involve
certain investment risks and transaction costs to which it might not otherwise
be subject. These risks include: dependence on the investment manager's ability
to predict movements in the prices of individual debt securities, fluctuations
in the general fixed-income markets and movements in interest rates and currency
markets; imperfect correlation between movements in the price of currency,
options, futures contracts or options thereon and movements in the price of the
currency or security hedged or used for cover; the fact that skills and
techniques needed to trade options, futures contracts and options thereon or to
use forward currency contracts are different from those needed to select the
securities in which the Portfolio invests; lack of assurance that a liquid
market will exist for any particular option, futures contract or option thereon
at any particular time and the possible need to defer or accelerate closing out
certain options, futures contracts and options thereon in order to continue to
qualify for the beneficial tax treatment afforded "regulated investment
companies" under the Internal Revenue Code of 1986, as amended (the "Code"). See
"Dividends, Distributions and Taxes."
The Portfolio's investment objective may be changed only by the "vote of a
majority of the outstanding voting securities" as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"). 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 below and in the Statement of Additional Informa tion) or
applicable law, and any such change will first be disclosed in the then current
prospectus.
RISK FACTORS
General. Investors should realize that risk of loss is inherent in the
ownership of any securities and that the Portfolio's net asset value will
fluctuate, reflecting fluctuations in the market value of its portfolio
positions. The value of the fixed-income securities held by the Portfolio
generally fluctuates inversely with interest rate movements. The Portfolio
normally will invest in a substantial number of issuers; however, the Port folio
has registered under the 1940 Act as a "non-
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Investment Objective and Management Policies (continued)
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diversified" fund so that it will be able to invest more than 5% of its assets
in high quality, fixed-income obligations of an issuer. Since, as a
"non-diversified" fund, the Portfolio is permitted to invest a greater
proportion of its assets in the securities of a smaller number of issuers, the
Portfolio may be subject to greater credit and liquidity risks with respect to
its individual portfolio than a fund that is more broadly diversified. 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. According to Smith Barney Global Capital Management,
Inc. ("Global Capital"), which will furnish the investment manager with advice
with respect to investments in the Portfolio (see "Management of the Fund"), as
of December 31, 1997 over 50% of the value of all outstanding government debt
obligations throughout the world was represented by obligations denominated in
currencies other than the U.S. dollar. Moreover, from time to time, primarily
because of the U.S. dollar -- domestic currency exchange rate and differing
demand -- supply relationships, the debt securities of issuers located outside
the U.S. have substantially outperformed the debt obligations of U.S. issuers in
U.S. dollar terms. Accordingly, the investment manager believes that the
Portfolio's policy of investing in debt securities of issuers throughout the
world may enable it to produce U.S. dollar-based returns greater than those
produced by funds investing solely in domestic debt securities.
Nonetheless, foreign investing does entail certain risks, such as the
Portfolio's income may be subject to foreign withholding taxes (see "Dividends,
Distributions and Taxes"), foreign brokerage fees generally are higher than in
the United States, and the potential difficulty in enforcing contractual
obligations outside the U.S. The securities of non-U.S. issuers generally will
not be registered with, nor will the issuers thereof be subject to, the
reporting requirements of the U.S. Securities and Exchange Commission.
Accordingly, there may be less publicly available information about foreign
securities and issuers than is available about domestic securities and issuers.
With respect to some foreign countries, there is the possibility of
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets of the Portfolio, political or social instability, or diplomatic
developments that could affect the Portfolio's investments in those countries.
In addition, foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic companies. Securities of some foreign
companies are less liquid and their prices may be more volatile than securities
of comparable domestic companies. Moreover, individual foreign economies may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross national product, rate of inflation, rate of savings and
capital reinvestment, resource self-sufficiency and balance of payments
positions. Global Capital will rely on its worldwide financial and investment
expertise to attempt to limit these risks.
20
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Investment Objective and Management Policies (continued)
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Since the Portfolio may invest substantially in securities denominated in
currencies other than the U.S. dollar, and since the Portfolio may hold foreign
currencies, the Portfolio will be affected favorably or unfavorably by exchange
control regulations or changes in the exchange rates between such currencies and
the U.S. dollar. Changes in currency exchange rates will influence the value of
the Portfolio's shares and also may affect the value of dividends and interest
earned by the Portfolio and gains and losses it realizes. Exchange rates are
determined by the forces of supply and demand in the foreign exchange markets.
These forces are affected by the international balance of payments and other
economic and financial conditions, government intervention and speculation.
Securities of Developing Markets. 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 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 or 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 investment 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 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 investment 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 year
2000 and expect that their systems will be compliant before that date. In
addition, the investment 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 investment 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.
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Investment Objective and Management Policies (continued)
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PORTFOLIO TURNOVER
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 investment
manager believes that portfolio changes are appropriate. Higher portfolio
turnover rates can result in corresponding increases in Portfolio expenses. See
"Financial Highlights" for the Portfolio's annual turnover rate during each year
since inception.
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Valuation of Shares
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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 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 investment
adviser.
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Valuation of Shares (continued)
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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 Portfolio 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 investment 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.
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Dividends, Distributions and Taxes
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DIVIDENDS AND DISTRIBUTIONS
The Fund declares and pays monthly income dividends 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.
TAXES
The Portfolio intends to continue to qualify as a regulated investment
company under Subchapter 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 share holders. To qualify, the Portfolio must meet certain tests,
including distributing at least 90% of its investment company taxable income.
23
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Dividends, Distributions and Taxes (continued)
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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 in come. The Portfolio's dividends will not qualify for
the dividends received deduction for corporations. Dividends and distributions
declared by the Port folio 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 share holders as early in
the succeeding year as practical but not later than January 31.
Under Internal Revenue Code sections 988 and 1256, unrealized gains
(losses) from certain foreign currency positions are treated as ordinary income
(loss) at year end. Due to the uncertainty during the taxable year surrounding
the amount that might ultimately be treated as a net ordinary loss under these
rules, dividends made during the year may have to be reclassified as
distributions of short-term capital gain at the end of the year. Distributions
of short-term capital gain and net investment income will generally be treated
as ordinary income to shareholders for tax purposes.
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.
Because, under normal market conditions, the Portfolio will invest at least 65%
of its total assets in securities issued or guaranteed by the United States or
foreign governments or their agencies, authorities or instrumentalities, it is
not likely that the Portfolio will be eligible to make this election. If the
Portfolio were entitled to and did make 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. The amount of
foreign taxes for which a shareholder can claim a credit in any year is
generally subject to limitation, including a separate limitation for "passive
income," which includes, among other items, dividends, interest and certain
foreign currency gains.
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
24
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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 four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC and
are available only to investors investing a minimum of $15,000,000 (except for
purchases of Class Y shares by Smith Barney Concert Allocation Series Inc., for
which there is no minimum purchase amount). See "Prospectus Summary-Alternative
Purchase Arrangements" for a discussion of factors to consider in selecting
which Class of shares to purchase.
Purchases of 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 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 broker-dealers may charge
their customers an annual account maintenance fee in connection with a brokerage
account through which an investor purchases or holds shares. Accounts held
directly at First Data are not subject to a maintenance fee.
Investors in Class A, Class B and Class C shares may open an account by
making an initial investment of at least $1,000 for each account, or $250 for an
IRA or a Self-Employed Retirement Plan, in the Portfolio. Investors in Class Y
shares may open an account by making an initial investment of $15,000,000.
Subsequent
25
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 mini mums, to decline
any order to purchase its shares and to suspend the offering of shares from time
to time. Shares purchased will be held in the shareholder's account by the
Fund's transfer agent, First Data. Share certificates are issued only upon a
shareholder's written request to First Data.
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 date. In all other
cases, payments must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by
purchasing shares through a service known as the Systematic Investment Plan.
Under the Systematic Investment Plan, Smith Barney or First Data is authorized
through preauthorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder, to provide systematic additions to the
shareholder's 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 share holder'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.
26
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the
Portfolio are as follows: Dealers'
Dealers
Sales Charge Reallowance
% of % of as % of
Amount of Investment Offering Price Amount Invested Offering Price
- --------------------------------------------------------------------------------
Less than $25,000 4.50% 4.71% 4.00%
$ 25,000 -- 49,999 4.00 4.17 3.60
50,000 -- 99,999 3.50 3.63 3.15
100,000 -- 249,999 2.50 2.56 2.25
250,000 -- 499,999 1.50 1.52 1.35
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 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
27
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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) 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); (g) purchases by separate accounts used to fund certain
unregistered variable annuity contracts; and (h) 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 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
28
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 pur chase 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 enables 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 Port folio in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes
purchases of all Class A shares of the Portfolio 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 re deemed. 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 $5,000,000 in Class Y shares of the
Portfolio
29
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
and agree to purchase a total of $15,000,000 of Class Y shares of the same
Portfolio within 13 months from the date of the Letter. If a total
investment of $15,000,000 is not made within the 13-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, 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 4.50%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
30
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 Dividend Shares converting at the time bears to the
total number of outstanding Class B shares (other than Class B Dividend Shares)
owned by the share holder. 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.
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
31
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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) Pro
grams. Class A and Class C shares acquired through the Participating Plans are
subject to the same service and/or distribution fees as the Class A and Class C
shares acquired by other investors; however, they are not subject to any initial
sales charge or CDSC. Once a Participating Plan has made an initial investment
in the 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 broker age 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
32
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 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 Par ticipating 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
33
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 share holders made the purchase payment from
which the amount is being redeemed.
The CDSC will be waived on redemptions of Class B shares in connection
with lump-sum or other distributions made by a Participating Plan as a result
of: (a) the retirement of an employee in the Participating Plan; (b) the
termination of employment of an employee in the Participating Plan; (c) the
death or disability of an employee in the Participating Plan; (d) the attainment
of age 591 1/42 by an employee in the Participating Plan; (e) hardship of an
employee in the Participating Plan to the extent permitted under Section 401(k)
of the Code; or (f) redemptions of shares in connection with a loan made by the
Participating Plan to an employee.
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
Except 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.
34
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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
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 Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Municipal High Income Fund
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
35
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- Income Portfolio
Money Market Funds
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
+++ Smith Barney Municipal Money Market Fund, Inc.
+++ Smith Barney Muni Funds -- California Money Market Portfolio
+++ Smith Barney Muni Funds -- New York Money Market Portfolio
- --------------------------------------------------------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the
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.
*** 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 higher CDSC
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.
36
<PAGE>
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Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Additional Information Regarding the Exchange Privilege. Although the
exchange 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 shareholder 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 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 shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until 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 days on which the
37
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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./Global Government Bond 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 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. 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
38
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 shareholder's shares subject to the CDSC at the time the withdrawal
plan commences. (With respect to withdrawal plans in effect prior to November
7, 1994, any applicable CDSC will be waived on amounts withdrawn that do not
exceed 2.00% per month of the value of the shareholder's shares subject to the
CDSC.) For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a
signature guarantee, that will be provided by First Data upon request.
(Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making his/her
initial investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares, may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day the NYSE is open. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not
permitted under this program.
A shareholder will have the option of having the redemption proceeds
mailed to his/her address of record or wired to a bank account predesignated by
the shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In order
to use 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.
39
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 Portfolio, each account must satisfy the minimum account size.)
The Fund, however, will not redeem shares based solely on market reductions in
net asset value. Before the Fund exercises such right, shareholders will receive
written notice and will be permitted 60 days to bring accounts up to the minimum
to avoid involuntary liquidation.
- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------
From time to time the Portfolio may advertise its total return, average
annual total return and yield 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, if any,
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
yield of a Portfolio class refers to the net investment income earned by
investments in the class over a thirty-day period. This net investment income
is then
40
<PAGE>
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
annualized, i.e., the amount of income earned by the investments during that
30-day period is assumed to be earned each 30-day period for twelve periods and
is expressed as a percentage of the investments. The yield is calculated
according to a formula prescribed by the SEC to facilitate comparison with
yields quoted by other investment companies. The Portfolio calculates current
dividend return for each Class by annualizing the most recent monthly
distribution and dividing 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 for a Portfolio class is presented. The current dividend return
for each Class may vary from time to time depending on market conditions, the
composition of its invest ment 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 investment manager. The Statement of
Additional Information contains background information regarding each Director
and executive officer of the Fund.
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 Portfolio advice and assistance with respect
to the acquisition, holding or disposal of securities and recommendations with
respect to other aspects and affairs of the Portfolio 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, Global Capital, a U.S. registered investment adviser located
at 10 Piccadilly, London, England, furnishes the Manager with information,
advice and assistance and is available for consultation on the Portfolio, thus
Global Capital may also be
41
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
considered an investment adviser to the Fund. Global Capital currently manages
the portfolios of clients in the international securities markets, particularly
in the fixed income area. Global Capital's services are paid for by the Manager;
there is no charge to the Fund for such services. Also, 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 0.75% of the Portfolio's average net assets
and the total operating expenses were 1.26% for Class A shares, 1.80% for Class
B shares, 1.69% for Class C shares and 0.89% 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
Victor S. Filatov and Simon R. Hildreth are responsible for management of
the Port folio within the investment framework described above. Mr. Filatov and
Mr. Hildreth are Vice Presidents of the Fund, Managing Directors of Smith Barney
and members of the Investment Policy Committee of Global Capital. Prior to
joining Smith Barney in 1993, Mr. Filatov was a Vice President at J.P. Morgan
Securities, Inc. Prior to joining Smith Barney in 1994, Mr. Hildreth was
Director of Mercury Asset Management, a fund manager located in the United
Kingdom.
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.
42
<PAGE>
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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 0.50% and 0.45%,
respectively, 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.
43
<PAGE>
- --------------------------------------------------------------------------------
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. Class A, Class B, Class C and Class Y shares of the
Portfolio represent interests in the assets of the Portfolio 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
pertain 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 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.
44
<PAGE>
SMITHBARNEY
A memberof Travelers Group [LOGO]
SMITHBARNEY
WORLD FUNDS, INC,
GLOBAL GOVERNMENT
BOND PORTFOLIO
388 Greenwich Street
New York, New York 10013
- --------------------------------------------------------------------------------
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
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Investment Objective and Management Policies (continued)
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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
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Investment Objective and Management Policies (continued)
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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
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Investment Objective and Management Policies (continued)
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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
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Investment Objective and Management Policies (continued)
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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
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Investment Objective and Management Policies (continued)
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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.
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Investment Objective and Management Policies (continued)
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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
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Investment Objective and Management Policies (continued)
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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.
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Valuation of Shares
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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
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Valuation of Shares (continued)
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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.
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Dividends, Distributions and Taxes
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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.
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Dividends, Distributions and Taxes (continued)
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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.
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Dividends, Distributions and Taxes (continued)
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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.
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Purchase of Shares
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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
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Purchase of Shares (continued)
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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>
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
(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
59 1/2 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.
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 Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Municipal High Income 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>
- --------------------------------------------------------------------------------
Redemption of Shares
- --------------------------------------------------------------------------------
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 shareholdersThe 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>
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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>
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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>
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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>
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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>
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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>
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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
- --------------------------------------------------------------------------------
PROSPECTUS
SMITH BARNEY
WORLD FUNDS, INC.
International
Equity
Portfolio
Class Z Shares Only
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 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.
The Class Z shares described in this Prospectus are currently offered
exclusively for sale to tax-exempt employee benefit and retirement plans of
Smith Barney Inc. ("Smith Barney") or any of its affiliates ("Qualified Plans").
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
- --------------------------------------------------------------------------------
Portfolio Expenses 3
- --------------------------------------------------------------------------------
Financial Highlights 4
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 5
- --------------------------------------------------------------------------------
Valuation of Shares 13
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 14
- --------------------------------------------------------------------------------
Purchase, Exchange and Redemption of Shares 16
- --------------------------------------------------------------------------------
Performance 16
- --------------------------------------------------------------------------------
Management of the Fund 17
- --------------------------------------------------------------------------------
Additional Information 19
- --------------------------------------------------------------------------------
================================================================================
No person has been authorized to give any information or to make any
representations 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>
- --------------------------------------------------------------------------------
Portfolio Expenses
- --------------------------------------------------------------------------------
The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of Class Z shares of the
Portfolio, based on operating expenses for Class Z shares for the fiscal year
ended October 31, 1997:
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management fees........................ 0.85%
Other expenses......................... 0.09
----
Total Portfolio Operating Expenses .... 0.94%
====
The nature of the services for which the Fund pays management fees is
described under "Management of the Fund." "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 and 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 in
Class Z shares of the Portfolio,
assuming (1) a 5.00% annual return
and (2) redemption at the end of
each time period: $10 $30 $52 $115
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.
3
<PAGE>
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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 capital stock outstanding throughout the year:
International Equity Portfolio 1997(1) 1996(1) 1995(2)
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $ 18.62 $ 17.12 $ 18.38
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.05 0.14 0.13*
Net realized and unrealized gain (loss) 1.75 1.57 (1.12)
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.80 1.71 (0.99)
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income(3) (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 $ 20.36 $ 18.62 $ 17.12
- --------------------------------------------------------------------------------
Total Return 9.69% 10.13% (5.03)%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $131,709 $119,408 $ 94,387
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 0.94% 0.97% 1.10%+
Net investment income 0.22 0.55 1.06+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 35% 46% 42%
================================================================================
Average commissions paid on
equity security 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 Z would have been 0.91% and 1.02%+, 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 0.05% 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.
4
<PAGE>
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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 Mutual Management Corp. (formerly, Smith
Barney Mutual Funds Management Inc.) (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 Netherlands, France, Italy, Switzerland), Eastern Europe
(e.g., Hungary, Poland,
5
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
the Czech Republic and the countries of the former Soviet Union), Central and
South 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
6
<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,
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Investment Objective and Management Policies (continued)
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such currency is 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 from an
8
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 the income or other gain derived from
securities purchased with borrowed funds exceeds the interest
9
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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
Portfolio 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 determined 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 then the
purchase price of 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 the manner permitted by applicable law, Smith Barney. In
order for Smith Barney
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Investment Objective and Management Policies (continued)
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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 the inception of Class Z shares.
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 exchange 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.
11
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Investment Objective and Management Policies (continued)
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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 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 or 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
and
12
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Investment Objective and Management Policies (continued)
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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 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.
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Valuation of Shares
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The net asset value per share of Class Z shares is determined as of the
close of regular trading on the New York Stock Exchange, Inc. ("NYSE") on each
day that the NYSE is open, by dividing the value of the Portfolio's net assets
attributable to Class Z by the total number of shares of the Class outstanding.
The per share net asset value of the Class Z shares may be higher than those of
other Classes because of the lower expenses attributable to Class Z shares.
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
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Valuation of Shares (continued)
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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 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 Portfolio 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.
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Dividends, Distributions and Taxes
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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.
Unless a shareholder is eligible for qualified distributions and instructs
that dividends and capital gain distributions on shares be paid in cash and
credited to the shareholder's account, dividends and capital gain distributions
will be reinvested automatically in additional shares of the Class at net asset
value as of the close of business on the payment date, subject to no sales
charge or CDSC.
Taxes
The Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended, to be relieved of
federal income tax on that part of its net investment income and realized
capital gains which it pays out to its shareholders. To qualify, the Portfolio
must meet certain tests, including distributing at least 90% of its investment
company taxable income, and deriving less than 30% of its gross income from the
sale or other disposition of certain investments held for less than three
months.
Dividends from net investment income and distributions of realized
short-term
14
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Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
capital gains on the sale of securities, whether paid in cash or automatically
invested in additional shares of the Portfolio, are taxable to shareholders of
the Portfolio 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. 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.
Shareholders should consult their plan document or tax advisers about the
tax consequences associated with participating in a Qualified Plan.
15
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Purchase, Exchange and Redemption of Shares
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Purchases of the Portfolio's Class Z shares must be made in accordance
with the terms of a Qualified Plan. Purchases are effected at the net asset
value next determined after a purchase order is received by Smith Barney (the
"trade date"). Payment is due to Smith Barney on the third business day (the
"settlement date") after the trade date. Investors who make payment prior to the
settlement date may designate a temporary investment (such as a money market
fund of the Smith Barney Mutual Funds) for such payment until settlement date.
The Fund reserves the right to reject any purchase order and to suspend the
offering of shares for a period of time. There are no minimum investment
requirements for Class Z shares; however, the Fund reserves the right to vary
this policy at any time.
Purchase orders received by Smith Barney prior to the close of regular
trading on the NYSE on any day that the Portfolio calculates its net asset
value, are priced according to the net asset value determined on that day.
Orders received after the close of regular trading on the NYSE are priced as of
the time that the net asset value per share is next determined. See "Valuation
of Shares." Certificates for Portfolio shares are issued upon request to the
Fund's transfer agent.
Shareholders may redeem their shares on any day on which the Portfolio
calculates its net asset value. See "Valuation of Shares." Redemption requests
received in proper form prior to the close of regular trading on the NYSE are
priced at the net asset value per share determined on that day. Redemption
requests received after the close of regular trading on the NYSE are priced at
the net asset value as next determined. Shareholders acquiring Class Z shares
should consult the terms of their Qualified Plan for redemption provisions.
Holders of Class Z shares should consult their Qualified Plans for
information about available exchange options.
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Performance
- --------------------------------------------------------------------------------
From time to time the Portfolio may include its total return and average
annual total return for Class Z share in advertisements. In addition, in other
types of sales literature the Portfolio may include its current dividend return.
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, if any, 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
16
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Performance(continued)
- --------------------------------------------------------------------------------
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 Class Z by dividing the
current dividend by the net asset value on the last day of the period for
which current dividend return is presented. The current dividend return 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 the Portfolio's 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 the Class Z shares. Such performance information
may include data from Lipper Analytical Services, Inc. and other financial
publications.
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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 its Manager. The Statement of Additional Information
contains background information regarding each Director and executive officer of
the Fund.
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 Portfolio advice and assistance with respect to the
acquisition, holding or disposal of securities and recommendations with respect
to other aspects and affairs of the Portfolio 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. The management fee for the
Portfolio is 0.85% of average net assets and the total operating expenses were
0.94% for Class Z Shares for the year ended October 31, 1997.
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Management of the Fund (continued)
- --------------------------------------------------------------------------------
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. As of January 31, 1998 the Manager
had aggregate assets under management of approximately $94 billion.
The Manager was incorporated on March 12, 1968 under the laws of Delaware.
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 of 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.
Distributor
Smith Barney is located at 388 Greenwich Street, New York, New York 10013,
and serves as the Fund's distributor. Smith Barney is a wholly owned subsidiary
of Travelers.
18
<PAGE>
- --------------------------------------------------------------------------------
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 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, ClassY and Class Z shares of the
Portfolio represent interests in the assets of the Portfolio 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 Investors Services Group, In., 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.
19
<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 0660 2/98
PROSPECTUS
SMITH BARNEY
WORLD FUNDS, INC.
International
Balanced
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 Balanced Portfolio
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The International Balanced Portfolio (the "Portfolio") is one of the
investment portfolios that currently comprise Smith Barney World Funds, Inc.
(the "Fund"). The Portfolio seeks a competitive total return on its assets from
growth of capital and income through a portfolio invested primarily in
securities of established non-U.S. issuers. The Portfolio may borrow up to 15%
of the value of its assets for investment purposes, which could be considered a
speculative activity and which could result in greater risks or costs to the
Portfolio. See "Borrowings" in the Appendix.
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 19
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 19
- --------------------------------------------------------------------------------
Purchase of Shares 22
- --------------------------------------------------------------------------------
Exchange Privilege 31
- --------------------------------------------------------------------------------
Redemption of Shares 34
- --------------------------------------------------------------------------------
Minimum Account Size 37
- --------------------------------------------------------------------------------
Performance 37
- --------------------------------------------------------------------------------
Management of the Fund 38
- --------------------------------------------------------------------------------
Distributor 40
- --------------------------------------------------------------------------------
Additional Information 41
- --------------------------------------------------------------------------------
Appendix A-1
- --------------------------------------------------------------------------------
================================================================================
No person has been authorized to give any information or to make any
representations 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 competitive total return on its
assets from growth of capital and income through a portfolio invested primarily
in securities of established non-U.S. 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 $15,000,000. 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 acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with no initial
3
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 $15,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to 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
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B and Class C shares are sold without any initial sales charge so the entire
purchase price is immediately invested in the 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 future, 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 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
4
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
by Smith Barney Inc. ("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 with 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
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 $15,000,000. 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 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."
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 are
declared and paid quarterly. 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."
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
6
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 Balanced 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 .......................... 0.61 0.63 0.66 0.39
- --------------------------------------------------------------------------------
Total Portfolio Operating Expenses ........ 1.71% 2.48% 2.51% 1.24%
================================================================================
*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.
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)
7
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 Balanced 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 ................................... $67 $101 $138 $242
Class B ................................... 75 107 142 263
Class C ................................... 35 78 134 285
Class Y ................................... 13 39 68 150
An investor would pay the following expenses on
the same investment, assuming the same
annual return and no redemption:
Class A ................................... $67 $101 $138 $242
Class B ................................... 25 77 132 263
Class C ................................... 25 78 134 285
Class Y ................................... 13 39 68 150
- -------------------------------------------------------------------------------
* 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 Balanced Portfolio 1997(1) 1996(1) 1995 1994(2)
==============================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.90 $12.64 $12.20 $12.00
- --------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(3) 0.18 0.26 0.35 0.07
Net realized and unrealized gain (loss) (0.41) 1.35 0.48 0.13
- --------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.23) 1.61 0.83 0.20
- --------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.15) (0.35) (0.39) --
Capital (0.20) -- -- --
- --------------------------------------------------------------------------------------------------------------
Total Distributions (0.35) (0.35 (0.39) --
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.32 $13.90 $12.64 $12.20
- --------------------------------------------------------------------------------------------------------------
Total Return* (1.71)% 12.89 7.05% 1.67%++
- --------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $11,072 $16,116 $17,667 $20,634
- --------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.71% 1.81% 1.62% 1.34%+
Net investment income 1.32 1.94 2.89 1.37+
- --------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 197% 189% 42% 6%
==============================================================================================================
Average commissions paid on
equity security transactions(4)(5) $0.03 $0.03 $0.02 --
==============================================================================================================
</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 August 25, 1994 (inception date) to October 31, 1994.
(3) The Manager waived all or part of its fees for the year ended October 31,
1995 and the period ended October 31, 1994. If such fees were not waived,
the per share effect on net investment income and the expense ratios would
have been as follows:
Expense Ratios
Per Share Decreases to Without Fee Waivers
Net Investment Income and Custody Credits
----------------- ----------------
1995 1994 1995 1994
----- ----- ----- -----
Class A $0.04 $0.02 1.96% 2.03%+
In addition, 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 1.72% and 1.52%, respectively; numbers prior to
October 31, 1995 have not been restated to reflect these credits.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(5) 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%.
++ 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.
9
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
Class B Shares
-------------------------------
International Balanced Portfolio 1997(1) 1996(1) 1995(2)
==============================================================================
Net Asset Value, Beginning of Year $13.90 $12.65 $12.08
- ------------------------------------------------------------------------------
Income From Operations:
Net investment income(3) 0.07 0.15 0.36
Net realized and unrealized gain (loss) (0.41) 1.36 0.50
- ------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.34) 1.51 0.86
- ------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.08) (0.26) (0.29)
Capital (0.10) -- --
- ------------------------------------------------------------------------------
Total Distributions (0.18) (0.26) (0.29)
- ------------------------------------------------------------------------------
Net Asset Value, End of Year $13.38 $13.90 $12.65
- ------------------------------------------------------------------------------
Total Return* (2.45)% 12.05% 7.33%++
- ------------------------------------------------------------------------------
Net Assets, End of Year (000s) $4,813 $5,258 $3,064
- ------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 2.48% 2.62% 2.49%+
Net investment income 0.53 1.14 3.11+
- ------------------------------------------------------------------------------
Portfolio Turnover Rate 197% 189% 42%
- ------------------------------------------------------------------------------
Average commissions paid on
equity security transactions(4)(5) $0.03 $0.03 $0.02
================================================================================
(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 per share data for the period.
(2) For the period from November 7, 1994 (inception date) to October 31, 1995.
(3) The Manager waived all or part of its fees for the year ended October 31,
1995. If such fees were not waived, the per share effect on net investment
income and the expense ratio would have been as follows:
Expense Ratio
Per Share Decrease to Without Fee Waivers
Net Investment Income and Custody Credits
----------------- ----------------
1995 1995
---- -----
Class B 0.04 2.86+
In addition, 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 2.53% and 2.39%+,
respectively.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(5) 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%.
++ 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 Balanced Portfolio 1997(1) 1996(1) 1995(2) 1994(3)
===========================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.87 $12.63 $12.18 $12.00
- -----------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(4) 0.08 0.15 0.28 0.05
Net realized and unrealized gain (loss) (0.42) 1.35 0.46 0.13
- -----------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.34) 1.50 0.74 0.18
- -----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.08) (0.26) (0.29) --
Capital (0.10) -- -- --
- -----------------------------------------------------------------------------------------------------------
Total Distributions (0.18) (0.26) (0.29) --
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.35 $13.87 $12.63 $12.18
- -----------------------------------------------------------------------------------------------------------
Total Return* (2.46)% 11.99% 6.29% 1.50%++
- -----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $3,642 $4,86 $4,317 $4,310
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 2.51% 2.62% 2.37% 2.03%+
Net investment income 0.60 1.14 2.33 0.79+
- -----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 197% 189% 42% 6%
===========================================================================================================
Average commissions paid on
equity security transactions(5)(6) $0.03 $0.03 $0.02 --
===========================================================================================================
</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 August 25, 1994 (inception date) to October 31, 1994.
(4) The Manager waived all or part of its fees for the year ended October 31,
1995 and the period ended October 31, 1994. If such fees were not waived,
the per share effect on net investment income and the expense ratios would
have been as follows:
Expense Ratio
Per Share Decrease to Without Fee Waivers
Net Investment Income and Custody Credits
----------------- ----------------
1995 1994 1995 1994
---- ---- ----- -----
Class C $0.04 $0.02 2.71% 2.74%+
In addition, 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 2.53% and 2.27%, respectively; numbers prior to
October 31, 1995 have not been restated to reflect these credits.
(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%.
++ 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 Balanced Portfolio 1997(1) 1996(1)(2)
==============================================================================
Net Asset Value, Beginning of Year $13.93 $13.15
- ------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.25 0.32
Net realized and unrealized gain(loss) (0.42) 0.75
- ------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.17) 1.07
- ------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.18) (0.29)
Capital (0.23) --
- ------------------------------------------------------------------------------
Total Distributions (0..41) (0.29)
- ------------------------------------------------------------------------------
Net Asset Value, End of Year $13.35 $13.93
- ------------------------------------------------------------------------------
Total Return (1.28)% 8.21%++
- ------------------------------------------------------------------------------
Net Assets, End of Year (000s) $42,380 $19,387
- ------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.24% 1.21%+
Net investment income 1.83 2.55+
- ------------------------------------------------------------------------------
Portfolio Turnover Rate 197% 189%
==============================================================================
Average commissions paid on
equity security transactions(4)(5) $0.03 $0.03
==============================================================================
(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 February 7, 1996 (inception date) to October 31, 1996.
(3) During the period ended October 31, 1996, the Portfolio earned credits from
the custodian which reduced service fees incurred. If the credits are taken
into consideration, the expense ratio for Class Y would have been 1.12%+.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(5) 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%.
++ 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 competitive
total return on its assets from growth of capital and income through a portfolio
invested primarily in securities of established non-U.S. issuers. The
Portfolio's investment objective may be changed only with the approval of a
majority of the Portfolio's outstanding shares. There can be no assurance that
the investment objective of the Portfolio will be achieved.
Under normal market conditions, the Portfolio will invest its assets in an
international portfolio of equity securities (consisting of dividend and
non-dividend paying common stocks, preferred stocks, convertible securities,
American Depositary Receipts and rights and warrants to such securities) and
debt securities (consisting of corporate debt securities, sovereign debt
instruments issued by governments or governmental entities, including
supranational organizations such as the World Bank, and U.S. and foreign money
market instruments). The Portfolio attempts to achieve a balance between equity
and debt securities. However, the proportion of equity and debt held by the
Portfolio at any one time will depend on the investment adviser's views on
current market and economic conditions. The investment adviser will evaluate
economic and political factors in attempting to identify countries and
industries likely to produce above-average investment opportunities. The
Portfolio will invest in securities of issuers that, in the investment adviser's
opinion, are well positioned to benefit from these factors.
Investments may be made for capital appreciation and 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. Under normal conditions, no more than 70%, nor less than 30%, of the
Portfolio's assets will be invested in either equity or debt securities;
however, 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 determining whether the Portfolio
will be invested for capital appreciation or for income or any combination of
both, the investment adviser 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 is organized as a non-diversified series, but will generally
invest its assets broadly among countries and will normally have at least 65% of
its assets invested in business activities in not less than three different
countries outside of the United States. The Portfolio may invest in companies
organized or governments located in any area of the world: the Far East (e.g.,
Hong Kong, Japan, Malaysia, Singapore), Western Europe (e.g., France, Germany,
Italy, the Netherlands, Switzerland, United Kingdom), Eastern Europe (e.g., the
Czech Republic, Hungary, Poland, and the countries of the former Soviet Union),
Central and South America
13
<PAGE>
Investment Objective and Management Policies (continued)
(e.g., Chile, Mexico and Venezuela), the Middle East, Africa, Asia, Australia,
New Zealand and Canada. 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
investment adviser, for defensive purposes the Portfolio may temporarily invest
all or a major portion of its assets in U.S. government securities, debt or
equity securities of companies incorporated in and having their principal
business activities in the United States or in U.S., as well as foreign, money
market instruments and equivalents. 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 analyzing a company for equity investment, the investment adviser
ordinarily looks at one or more of the following characteristics: earnings
growth per share; return on invested capital; balance sheet attributes;
financial and accounting policies and overall financial strength; competitive
advantages; research and product development and marketing; service; pricing
flexibility; management; and general operating characteristics which may enable
a company to compete successfully in its marketplaces. Ordinarily, the
investment adviser 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" issues.
It is expected that equity securities purchased by the Portfolio 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. The Portfolio will invest in a broad range of
industries and sectors and will mainly invest in securities issued by companies
with market capitalization of at least $50,000,000.
Investments in debt securities will be allocated based upon the investment
adviser's analysis of credit risk and its consideration of a number of factors,
including: prospects for relative economic growth between the different
countries in which the Portfolio may invest; expected levels of inflation;
government policies influencing business conditions; the outlook for currency
relationships; and the range of the individual investment opportunities
available to international investors. Particular debt securities will be
selected based upon credit risk analysis of potential issuers, the
characteristics of the security and interest rate sensitivity of the various
debt issues available with respect to a particular issuer, analysis of the
14
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
anticipated volatility and liquidity of the particular debt instruments, and the
tax implications to the Portfolio. The debt securities in which the Portfolio
expects to invest will generally range in maturity from two to ten years. Debt
securities of developed foreign countries must be rated as investment grade at
the time of purchase. Investment grade securities are those rated in the top
four ratings categories by a nationally recognized statistical rating
organization or that are unrated but judged by the investment adviser to be of
comparable quality. If the rating drops below investment grade subsequent to
purchase, the investment adviser will not necessarily sell the security, but
will consider such an event in determining whether the Portfolio should continue
to hold the security. Securities rated in the lowest category of investment
grade may have speculative characteristics and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case for higher grade securities.
Debt securities of emerging market countries may be rated below investment grade
(commonly known as "junk bonds") and could include securities that are in
default as to payments of principal or interest. Up to 25% of the total assets
of the Portfolio may be invested in securities of emerging market countries.
Please see the Statement of Additional Information for a complete description of
the ratings referred to above.
In determining the appropriate distribution of investments among various
countries and geographic regions, the investment adviser 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.
The relative performance of foreign currencies is an important factor in
the Portfolio's performance. The investment adviser may manage the Portfolio's
exposure to various currencies to take advantage of different yield, risk and
return characteristics that different currencies can provide for U.S. investors.
To manage exposure to currency fluctuations, the Portfolio may enter into
currency forward contracts (agreements to exchange one currency for another at a
future date) or currency swap agreements, buy and sell options and futures
contracts relating to foreign currencies, and purchase securities indexed to
foreign currencies. The Portfolio will use currency forward contracts in the
normal course of business to lock in an exchange rate in connection with
purchases and sales of securities denominated in foreign currencies. The
Portfolio will use options and futures contracts relating to foreign currencies
to allow the investment adviser to hedge portfolio securities, to shift
investment exposure from one currency to another, or to attempt to profit from
anticipated declines in the value of a foreign currency relative to the U.S.
dollar. There is no overall limitation on the amount of the Portfolio's assets
that may be committed to currency management strategies.
15
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Refer to the Appendix or the Statement of Additional Information for
further information on the Portfolio's investments, including options and
futures contracts, swap agreements and indexed securities (sometimes referred to
as "derivatives"); loans and other direct debt instruments, floating and
variable rate income securities, zero coupon, discount and payment-in-kind
securities, premium securities, Yankee bonds, borrowings, repurchase agreements,
reverse repurchase agreements, securities loans, foreign repurchase agreements,
illiquid investments, restricted securities, and delayed-delivery transactions.
PORTFOLIO TRANSACTIONS AND TURNOVER
All orders for transactions in securities and options on behalf of the
Portfolio are placed by the investment adviser with broker/dealers that the
investment adviser selects, including Smith Barney and other affiliated brokers.
Brokerage will be allocated to Smith Barney, to the extent and in the manner
permitted by applicable law, provided that, in the judgment of the Board of
Directors of the Fund, the commission, fee or other remuneration received or to
be received by Smith Barney (or any broker/dealer affiliate of Smith Barney that
is also a member of a securities exchange) is reasonable and fair compared to
the commission, fee or other remuneration received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during the same or comparable period
of time. The same standard applies to the use of Smith Barney as a commodities
broker in connection with entering into options and futures contracts. In all
trades directed to Smith Barney, the Fund has been assured that its orders will
be accorded priority over those received from Smith Barney for its own account
or for any of its directors, officers or employees. The Fund will not deal with
Smith Barney in any transaction in which Smith Barney acts as principal.
Under certain market conditions, the Portfolio may experience high
portfolio turnover as a result of its investment strategies. For example, the
exercise of a substantial number of options written by the Portfolio and the
purchase or sale of securities by the Portfolio in anticipation of a rise or
decline in interest rates could result in high portfolio turnover. Short-term
gains realized from portfolio transactions are taxable to shareholders as
ordinary income. In addition, higher portfolio turnover rates can result in
corresponding increases in brokerage commissions for the Portfolio. While the
Portfolio does not intend to engage in short-term trading, it will not consider
portfolio turnover rate a limiting factor in making investment decisions
consistent with its respective objectives and policies. Although the Portfolio
cannot predict precisely its portfolio turnover rate, it presently estimates
that its annualized portfolio turnover rate will generally not exceed 200% with
respect to the debt portion of its assets and 100% with respect to the equity
portion of its assets. See "Financial Highlights" for the Portfolio's annual
turnover rate during each year since inception.
16
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
RISK FACTORS
General. Investors should realize that risk of loss is inherent in the
ownership of any securities and that the Portfolio's net asset value will
fluctuate, reflecting fluctuations in the market value of its portfolio
positions. For debt securities, the market value is subject to changing interest
rates, which generally vary inversely from the prices of debt securities. The
Portfolio normally will invest in a substantial number of issuers; however, the
Portfolio has registered under the Investment Company Act of 1940 (the "Act") as
a "non-diversified" fund so that it will be able to invest more than 5% of its
assets in the securities of an issuer. Since, as a "non-diversified" fund, the
Portfolio is permitted to invest a greater proportion of its assets in the
securities of a smaller number of issuers, the Portfolio may be subject to
greater credit and liquidity risks with respect to its individual portfolio than
a fund that is more broadly diversified. 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. Please see the Appendix for additional information
about the risks associated with an investment in the Portfolio.
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 exchange 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, repatriation, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
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 Portfolio might
also have greater difficulty taking appropriate legal action in non-U.S. courts.
17
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 Emerging Market Countries. An emerging market 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
emerging market 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.
Many of the Portfolio's investments in the securities of emerging markets
may be unrated or rated below investment grade. Securities rated below
investment grade (and comparable unrated securities) are the equivalent of high
yield, high risk bonds, commonly known as "junk bonds." Such securities are
regarded as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligations
and involve major risk exposure to adverse business, financial, economic, or
political conditions.
Year 2000. The investment management services provided to the Portfolio by
the investment adviser 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 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 investment adviser and Smith Barney have advised the
Portfolio that they have been reviewing all of their computer systems and
actively working on necessary
18
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
changes to their systems to prepare for the year 2000 and expect that their
systems will be compliant before that date. In addition, the investment adviser
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 investment adviser,
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.
Generally, the Portfolio's investments are valued at market value or, in
the absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Fund's Board of Directors. Portfolio
securities which are traded primarily on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair market value of
those securities will be determined by consideration of other factors or under
the direction of the Board of Directors. A security that is traded primarily on
an exchange is valued at the last sale price on that exchange or, if there were
no sales during the day, at the current quoted bid price. Over-the-counter
securities are valued on the basis of the bid price at the close of business on
each day. Long-term debt obligations are valued at the average of the quoted bid
and asked prices for such securities or, if such prices are not available, at
the prices for securities of comparable maturity, quality and type; however,
when the investment adviser deems it appropriate, prices obtained for the day of
valuation from a bond pricing service will be used. Short-term investments that
will mature in 60 days or less are stated at amortized cost, which approximates
market value. An option generally is valued at the last sale price or, in the
absence of the last sale price, the last offer price.
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund declares and pays quarterly income dividends on shares of the
Portfolio and makes annual distributions of capital gains, if any, on such
shares.
19
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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.
TAXES
The Portfolio intends to continue to qualify as a regulated investment
company under Subchapter 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 3l.
Under Internal Revenue Code sections 988 and 1256, unrealized gains
(losses) from certain foreign currency positions are treated as ordinary income
(loss) at year end. Due to the uncertainty during the taxable year surrounding
the amount that might ultimately be treated as a net ordinary loss under these
rules, dividends made during the year may have to be reclassified as
distributions of short-term capital gain at the end of the year. Distributions
of short-term capital gain and net investment income will generally be treated
as ordinary income to shareholders for tax purposes.
20
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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 consist 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 nonresident 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. 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 the 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
21
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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 four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC and
are available only to investors investing a minimum of $15,000,000 (except for
purchases of Class Y shares by Smith Barney Concert Allocation Series Inc., for
which there is no minimum purchase amount). See "Prospectus Summary
- --Alternative Purchase Arrangements" for a discussion of factors to consider in
selecting which Class of shares to purchase.
Purchases of 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 institutional investors, may purchase shares
directly from the Fund. 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 broker/dealers may charge their customers an annual
account maintenance fee in connection with a brokerage account through which an
investor purchases or holds shares. Accounts held directly at First Data are not
subject to a maintenance fee.
Investors in Class A, Class B and Class C shares may open an account by
making an initial investment of at least $1,000 for each account, or $250 for an
IRA or a Self-Employed Retirement Plan, in the Portfolio. Investors in Class Y
shares may open an account by making an initial investment of $15,000,000.
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
22
<PAGE>
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 the
Fund's transfer agent, 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 date. In all other
cases, payment must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by
purchasing shares through a service known as the Systematic Investment Plan.
Under the Systematic Investment Plan, Smith Barney or First Data is authorized
through preauthorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder to provide systematic additions to the
shareholder's 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.
23
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 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
24
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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) 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); (g)
purchases by separate accounts used to fund certain unregistered variable
annuity contracts; and (h) 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 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
25
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 Section 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
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 Portfolio 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 $5,000,000 in Class Y shares of the
Portfolio
26
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
and agree to purchase a total of $15,000,000 of Class Y shares of the same
Portfolio within 13 months from the date of the Letter. If a total investment of
$15,000,000 is not made within the 13-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 Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares that were purchased without an initial sales
charge but subject to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their net asset value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) capital appreciation
of 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, 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
================================================================================
27
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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.
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
28
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 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,
29
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 or
ExecChoice(TM), 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) Program or
ExecChoice(TM), 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 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
30
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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: (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 59 1/2 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
31
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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
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 Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Municipal High Income 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
32
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- Income Portfolio
Money Market Funds
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
+++ Smith Barney Municipal Money Market Fund, Inc.
+++ Smith Barney Muni Funds -- California Money Market Portfolio
+++ Smith Barney Muni Funds -- New York Money Market Portfolio
================================================================================
* Available for exchange with Class A, Class C and Class Y shares of the
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. *** 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.
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 higher CDSC
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 Portfolio
that have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Portfolio who wish to exchange all or a portion of their shares for shares of
the respective Class in any of the funds identified above may do so without
imposition of any charge.
33
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Additional Information Regarding the Exchange Privilege. Although the
exchange 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 shareholder at least 15 days prior to
suspending the exchange privilege and during the 15 day period the shareholder
will be required to (a) redeem his or her shares in the 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 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 shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until 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
34
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
NYSE is closed or as permitted under the 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 Balanced 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 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. 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
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds
35
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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
shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not exceed
2.00% per month of the value of the shareholder's shares subject to the CDSC.)
For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a
signature guarantee, that will be provided by First Data upon request.
(Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making his/her
initial investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares, may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day the NYSE is open. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not
permitted under this program.
A shareholder will have the option of having the redemption proceeds
mailed to his/her address of record or wired to a bank account predesignated by
the shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In order
to use 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.
36
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 Portfolio, each account must satisfy the minimum account size.)
The Fund, however, will not redeem shares based solely on market reductions in
net asset value. Before the Fund exercises such right, shareholders will receive
written notice and will be permitted 60 days to bring accounts up to the minimum
to avoid involuntary liquidation.
- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------
From time to time the Portfolio may include its total return, average
annual total return and current dividend return in advertisements and or other
types of sales literature. 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, if any, 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 annualizing the most recent monthly distribution and dividing by
the net asset value or the maximum public offering price (including
37
<PAGE>
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
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 its investment portfolio and
operating expenses. These factors and possible differences in the methods used
in calculating current dividend return should be considered when comparing a
Class's 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 investment manager. The Statement of
Additional Information contains background information regarding each Director
and executive officer of the Fund.
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 is responsible for furnishing or causing to be furnished to
the Portfolio advice and assistance with respect to the acquisition, holding or
disposal of securities and recommendations with respect to other aspects and
affairs of the Portfolio 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 the
research and other departments and staff of Smith Barney furnish the Manager
with information, advice and assistance and are available for consultation on
the Portfolio, 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 services provided by the
Manager, the Portfolio pays the Manager an annual fee calculated at the rate of
0.85% of the Portfolio's average daily net assets, paid monthly. Although this
fee is higher than that paid by most investment companies, the Portfolio's
management has determined that it is comparable to the
38
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
fee charged by other investment advisers of investment companies that have
similar investment objectives and policies. Total operating expenses incurred by
the Portfolio during its last fiscal year were 1.71% for Class A shares; 2.48%
for Class B shares; 2.51% for Class C shares; and 1.24% for Class Y shares.
The management agreement further provides that all other expenses not
specifically assumed by the Manager under the management agreement on behalf of
the Portfolio are borne by the Fund. Expenses payable by the Fund include, but
are not limited to, all charges of custodians (including sums as custodian and
sums for keeping books and for rendering other services to the Fund) and
shareholder servicing agents, expenses of preparing, printing and distributing
all prospectuses, proxy material, reports and notices to shareholders, all
expenses of shareholders' and directors' meetings, filing fees and expenses
relating to the registration and qualification of the Fund's shares and the Fund
under federal or state securities laws and maintaining such registrations and
qualifications (including the printing of the Fund's registration statements),
fees of auditors and legal counsel, costs of performing portfolio valuations,
out-of-pocket expenses of directors and fees of directors who are not
"interested persons" as defined in the Act, interest, taxes and governmental
fees, fees and commissions of every kind, expenses of issue, repurchase or
redemption of shares, insurance expense, association membership dues, all other
costs incident to the Fund's existence and extraordinary expenses such as
litigation and indemnification expenses. Direct expenses are charged to each of
the Fund's Portfolios; general corporate expenses are allocated on the basis of
relative net assets.
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, Jeffrey Russell, James
Conheady and Victor Filatov. Mr. Edersheim is Chairman and Advisory Director of
the Fund and is Deputy Chairman of Smith Barney International Incorporated. Mr.
Conheady and Mr. Russell, both Vice Presidents of the Fund and Managing
Directors of Smith Barney, are members of the International Money Management
team. Mr. Filatov is a Vice President of the Fund and President and Director of
Smith Barney Global Capital Management, Inc., an affiliate of Smith Barney. He
is also a Managing Director of Smith Barney. Prior to joining Smith Barney in
1993, Mr. Filatov was a Vice President of J.P. Morgan Securities, Inc.
39
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
The percentage of the Portfolio's assets to be invested in equity and debt
securities will be determined by an asset allocation committee, made up of Mr.
Russell, Mr. Filatov and Heath B. McLendon, who is President and Chief Executive
Officer of the Fund.
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.
- --------------------------------------------------------------------------------
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 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
40
<PAGE>
- --------------------------------------------------------------------------------
Distributor (continued)
- --------------------------------------------------------------------------------
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 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 and Class Y shares of the
Portfolio represent interests in the assets of the Portfolio 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
pertain 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 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.
41
<PAGE>
- --------------------------------------------------------------------------------
Appendix
- --------------------------------------------------------------------------------
FOREIGN CURRENCIES. The value of the Portfolio's investments, and the
value of dividends and interest earned by the Portfolio, may be significantly
affected by changes in currency exchange rates. Some foreign currency values may
be volatile, and there is the possibility of governmental controls on currency
exchange or governmental intervention in currency markets, which could adversely
affect the Portfolio. Although the investment adviser may attempt to manage
currency exchange rate risks, there is no assurance that the investment adviser
will do so at an appropriate time or that the investment adviser will be able to
predict exchange rates accurately. For example, if the investment adviser
increases the Portfolio's exposure to a foreign currency, and that currency's
value subsequently falls, the investment adviser's currency management may
result in increased losses to the Portfolio. Similarly, if the investment
adviser hedges the Portfolio's exposure to a foreign currency, and that
currency's value rises, the Portfolio will lose the opportunity to participate
in the currency's appreciation.
OPTIONS AND FUTURES CONTRACTS. The Portfolio may buy and sell options and
futures contracts to manage its exposure to changing interest rates, security
prices, and currency exchange rates. Some options and futures strategies,
including selling futures, buying puts, and writing calls, tend to hedge the
Portfolio's investments against price fluctuations. Other strategies, including
buying futures, writing puts, and buying calls, tend to increase market
exposure. Options and futures may be combined with each other or with forward
contracts in order to adjust the risk and return characteristics of the overall
strategy. The Portfolio may invest in options and futures based on any type of
security, index, or currency, including options and futures traded on foreign
exchanges and options not traded on exchanges.
Options and futures can be volatile investments, and involve certain
risks. If the investment adviser applies a hedge at an inappropriate time or
judges market conditions incorrectly, options and futures strategies may lower
the Portfolio's return. The Portfolio could also experience losses if the prices
of its options and futures positions were poorly correlated with its other
investments, or if it could not close out its positions because of an illiquid
secondary market.
The Portfolio will not hedge more than 25% of its total assets by selling
futures, buying puts, and writing calls under normal conditions. In addition,
the Portfolio will not buy futures or write puts whose underlying value exceeds
25% of its total assets, and will not buy calls with a value exceeding 5% of its
total assets.
SWAP AGREEMENTS. As one way of managing its exposure to different types of
investments, the Portfolio may enter into interest rate swaps, currency swaps,
and other types of swap agreements such as caps, collars, and floors. In a
typical interest rate swap, one party agrees to make regular payments equal to a
floating interest rate times a "notional principal amount," in return for
payments equal to a fixed rate times the same amount for a specified period of
time. If a swap
A-1
<PAGE>
- --------------------------------------------------------------------------------
Appendix (continued)
- --------------------------------------------------------------------------------
agreement provides for payments in different currencies, the parties might agree
to exchange the notional principal amount as well. Swaps may also depend on
other prices or rates, such as the value of a index or mortgage prepayment
rates.
Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed.
As a result, swaps can be highly volatile and may have a considerable impact on
the Portfolio's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Portfolio may also suffer
losses if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions.
INDEXED SECURITIES. The Portfolio may invest in indexed securities,
including inverse floaters, whose value is linked to currencies, interest rates,
commodities, indices, or other financial indicators. Most indexed securities are
short to intermediate term fixed-income securities whose values at maturity or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be positively or negatively
indexed (i.e., their value may increase or decrease if the underlying instrument
appreciates), and may have return characteristics similar to direct investments
in the underlying instrument or to one or more options on the underlying
instrument. Indexed securities may be more volatile than underlying instrument
itself. No more than 5% of the Portfolio's assets will be invested in inverse
floaters.
SOVEREIGN DEBT OBLIGATIONS. The Portfolio may purchase sovereign debt
instruments issued or guaranteed by foreign governments or their agencies,
including debt of developing countries. Sovereign debt may be in the form of
conventional securities or other types of debt instruments such as loans or loan
participations. Sovereign debt of developing countries may involve a high degree
of risk, and may be in default or present the risk of default. Governmental
entities responsible for repayment of the debt may be unable or unwilling to
repay principal and interest when due, and may require renegotiation or
rescheduling of debt payments. In addition, prospects for repayment of principal
and interest may depend on political as well as economic factors. Although some
sovereign debt, such as Brady Bonds, is collateralized by U.S. Government
securities, repayment of principal and interest is not guaranteed by the U.S.
Government.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. The Portfolio may purchase
interests in amounts owed by a corporate, governmental, or other borrower to
another party. These interests may represent amounts owed to lenders or lending
syndicates (loans and loan participations), to suppliers of goods or services
(trade claims or other receivables), or to other parties. Direct debt
instruments involve the risk of loss in case of default or insolvency of the
borrower and may offer less legal protection to the Portfolio in the event of
fraud or mis-
A-2
<PAGE>
- --------------------------------------------------------------------------------
Appendix (continued)
- --------------------------------------------------------------------------------
representation. In addition, loan participations involve a risk of insolvency of
the lending bank or other financial intermediary. Direct debt instruments may
also include standby financing commitments that obligate the Portfolio to supply
additional cash to the borrower on demand.
FLOATING AND VARIABLE RATE INCOME SECURITIES. Income securities may
provide for floating or variable rate interest or dividend payments. The
floating or variable rate may be determined by reference to a known lending
rate, such as a bank's prime rate, a certificate of deposit rate or the London
InterBank Offered Rate (LIBOR). Alternatively, the rate may be determined
through an auction or remarketing process. The rate also may be indexed to
changes in the values of interest rate or securities indexes, currency exchange
rates or other commodities. The amount by which the rate paid on an income
security may increase or decrease and may be subject to periodic or lifetime
caps. Floating and variable rate income securities include securities whose
rates vary inversely with changes in market rates of interest. Such securities
may also pay a rate of interest determined by applying a multiple to the
variable rate. The extent of increases and decreases in the value of securities
whose rates vary inversely with changes in market rates of interest generally
will be larger than comparable changes in the value of an equal principal amount
of a fixed rate security having similar credit quality, redemption provisions
and maturity.
ZERO COUPON, DISCOUNT AND PAYMENT-IN-KIND SECURITIES. The Portfolio may
invest in "zero coupon" and other deep discount securities of governmental or
private issuers. Zero coupon securities generally pay no cash interest (or
dividends in the case of preferred stock) to their holders prior to maturity.
Payment-in-kind securities allow the lender, at its option, to make current
interest payments on such securities either in cash or in additional securities.
Accordingly, such securities usually are issued and traded at a deep discount
from their face or par value and generally are subject to greater fluctuations
of market value in response to changing interest rates than securities of
comparable maturities and credit quality that pay cash interest (or dividends in
the case of preferred stock) on a current basis.
PREMIUM SECURITIES. The Portfolio may invest in income securities bearing
coupon rates higher than prevailing market rates. Such "premium" securities are
typically purchased at prices greater than the principal amounts payable on
maturity. The Portfolio will not amortize the premium paid for such securities
in calculating its net investment income. As a result, in such cases the
purchase of such securities provides the Portfolio a higher level of investment
income distributable to shareholders on a current basis than if the Portfolio
purchased securities bearing current market rates of interest. If securities
purchased by the Portfolio at a premium are called or sold prior to maturity,
the Portfolio will recognize a capital loss to the extent the call or sale price
is less than the purchase
A-3
<PAGE>
- --------------------------------------------------------------------------------
Appendix (continued)
- --------------------------------------------------------------------------------
price. Additionally, the Portfolio will recognize a capital loss if it holds
such securities to maturity.
YANKEE BONDS. The Portfolio may invest in U.S. dollar-denominated bonds
sold in the United States by non-U.S. issuers ("Yankee bonds"). As compared with
bonds issued in the United States, such bond issues normally carry a higher
interest rate but are less actively traded.
BORROWINGS. The Portfolio may borrow from banks, on a secured or unsecured
basis, up to 25% of the value of its assets so long as the Portfolio maintains
asset coverage ratios specified in the Act. 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 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 SECURITIES LOANS. The Portfolio may enter into
repurchase agreements on up to 25% of its assets and may lend for a fee
portfolio securities amounting to up to one-third of its assets. These
transactions must be fully collateralized at all times, and the investment
adviser 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.
FOREIGN REPURCHASE AGREEMENTS. In addition to repurchase agreements solely
in U.S. markets, the Portfolio may enter into repurchase agreements
A-4
<PAGE>
- --------------------------------------------------------------------------------
Appendix (continued)
- --------------------------------------------------------------------------------
with respect to foreign securities and repurchase agreements denominated in
foreign currencies. Foreign repurchase agreements may be less well secured than
repurchase agreements in U.S. markets, and may involve greater risks of loss if
the counterparty should default on its obligations. As a result, the
creditworthiness of the other party is an especially important concern.
ILLIQUID INVESTMENTS. The Portfolio may invest up to 15% of its assets in
illiquid investments. Under the supervision of the Board of Directors, the
investment adviser determines the liquidity of the Portfolio's investments. The
absence of a trading market can make it difficult to ascertain a market value
for illiquid investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult or
impossible for a Portfolio to sell them promptly at an acceptable price.
RESTRICTED SECURITIES. The Portfolio may invest no more than 5% of its
total assets in securities which cannot be sold to the public without
registration under the Securities Act of 1933 (restricted securities). Unless
registered for sale, these securities can only be sold in privately negotiated
transactions or pursuant to an exemption from registration. Restricted
securities (excluding securities issued pursuant to Rule 144A of the Securities
Act of 1933) are considered to be illiquid and are subject to the 15% limitation
on investments in illiquid securities.
DELAYED-DELIVERY TRANSACTIONS. The Portfolio may buy and sell securities
on a when-issued or delayed-delivery basis, with payment and delivery taking
place at a future date. The market value of securities purchased in this way may
change before the delivery date, which could increase fluctuation in the
Portfolio's yield. Although the Portfolio has not established any limit on the
percentage of its assets that may be committed in connection with such
transactions, the Portfolio will maintain a segregated account with its
custodian of cash, debt securities of any grade or equity securities,
denominated in U.S. dollars or non-U.S. currencies in an aggregate amount equal
to the amount of its commitment in connection with such transactions, provided
such securities have been determined by the investment adviser to be liquid and
unencumbered, and are marked to market daily, pursuant to guidelines established
by the Directors.
A-5
<PAGE>
SMITH BARNEY
------------
A Member of TravelersGroup[LOGO]
Smith Barney
World Funds, Inc.
International
Balanced Portfolio
388 Greenwich Street
New York, New York 10013
FD 0575 2/98
<PAGE>
P R O S P E C T U S
SMITH BARNEY WORLD FUNDS, INC.
Pacific 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.
Pacific Portfolio
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The Pacific Portfolio (the "Portfolio") is one of the investment portfolios
that currently comprise Smith Barney World Funds, Inc. (the "Fund"). The Port-
folio's primary investment objective is long-term capital appreciation. In
seeking to achieve its objective, the Portfolio will invest primarily in a
diversified portfolio of equity securities of companies in Australia, Hong
Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Papua New Guin-
ea, the People's Republic of China, the Philippines, Singapore, South Korea,
Sri Lanka, Taiwan and Thailand.
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 con-
tacting a Smith Barney Financial Consultant. The Statement of Additional Infor-
mation 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
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 10
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 13
- -------------------------------------------------
VALUATION OF SHARES 20
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 21
- -------------------------------------------------
PURCHASE OF SHARES 24
- -------------------------------------------------
EXCHANGE PRIVILEGE 33
- -------------------------------------------------
REDEMPTION OF SHARES 36
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 38
- -------------------------------------------------
PERFORMANCE 39
- -------------------------------------------------
MANAGEMENT OF THE FUND 39
- -------------------------------------------------
DISTRIBUTOR 41
- -------------------------------------------------
ADDITIONAL INFORMATION 42
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations 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 Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Portfolio is an open-end, management investment com-
pany whose primary investment objective is to seek long-term capital apprecia-
tion. In seeking to achieve its objective, the Portfolio will invest primarily
in a diversified portfolio of equity securities of companies in Australia,
Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Papua New
Guinea, the People's Republic of China, the Philippines, Singapore, South
Korea, Sri Lanka, Taiwan and Thailand ("Asia Pacific Countries"). See "Invest-
ment 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
$15,000,000. 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
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
been acquired through the reinvestment of dividends and distributions ("Class
B Dividend Shares") will be converted at that time. See "Purchase of Shares--
Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.75% of the average daily net assets of the Class C
shares, and investors pay a CDSC of 1.00% if they redeem Class C shares within
12 months of purchase. The CDSC may be waived for certain redemptions. The
Class C shares' distribution fee may cause that Class to have higher expenses
and pay lower dividends than Class A shares. Purchases of 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 $15,000,000. 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 cir-
cumstances:
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 regu-
lar investment may wish to consider Class A shares; as the investment accumu-
lates shareholders may qualify for reduced sales charges and the shares are
subject to lower ongoing expenses over the term of the investment. As an
alternative, Class B and Class C shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Portfolio.
Any investment return on these additional invested amounts may partially or
wholly offset the higher annual expenses of these Classes. Because the Portfo-
lio'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
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
$500,000 or more will be made at net asset value with no initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase. The $500,000 investment may be met by adding the purchase to the net
asset value of all Class A shares offered with a sales charge held in funds
sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange Privi-
lege." 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 eli-
gible 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 pur-
pose 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 descrip-
tion of the sales charges and service and distribution fees for each Class of
shares and "Valuation of Shares," "Dividends, Distributions and Taxes" and "Ex-
change 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 main-
tained with 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 Retire-
ment Plan. Investors in Class Y shares may open an account for an initial
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
investment of $15,000,000. 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 invest-
ment requirement for all Classes of shares is $25. The minimum investment
requirements for purchases of Portfolio shares through the Systematic Invest-
ment 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 subse-
quent investment requirement for all Classes for shareholders purchasing shares
through the Systematic Investment Plan on a monthly basis is $25 and on a quar-
terly 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 "Re-
demption of Shares."
MANAGEMENT OF THE PORTFOLIO Mutual Management Corp. (formerly, Smith Barney
Mutual Funds Management Inc.) (the "Manager") serves as the Portfolio's invest-
ment 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 "Man-
agement 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 may be
quoted daily in the financial section of many newspapers and is also available
from a Smith Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income and distribu-
tions 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 rein-
vestments
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
will become eligible for conversion to Class A shares on a pro rata basis. See
"Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The value of the Portfo-
lio'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 Portfo-
lio 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 operat-
ing expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
PACIFIC PORTFOLIO CLASS A CLASS B CLASS C CLASS Y
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None None None
Maximum 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 2.27 2.39 2.59 2.27
- ------------------------------------------------------------------------------
TOTAL PORTFOLIO OPERATING EXPENSES 3.37% 4.24% 4.44% 3.12%
- ------------------------------------------------------------------------------
</TABLE>
* 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.
**For Class Y shares, "Other expenses" have been estimated based on expenses
incurred by Class A shares because no Class Y shares were outstanding for
the year ended October 31, 1997.
*** 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 per-
mitted by the National Association of Securities Dealers, Inc.
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class A shares of the Portfolio purchased through the Smith Barney
AssetOne SM Program will be subject to an annual asset-based fee, payable quar-
terly, 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.
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 account-
ing 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 indirect-
ly. 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."
<TABLE>
<CAPTION>
PACIFIC PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemption
at the end of each time period:
Class A.................................. $82 $148 $217 $397
Class B.................................. 93 159 226 424
Class C.................................. 55 134 225 457
Class Y.................................. 31 96 163 343
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A.................................. $82 $148 $217 $397
Class B.................................. 43 129 216 424
Class C.................................. 45 134 225 457
Class Y.................................. 31 96 163 343
- ------------------------------------------------------------------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
8
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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 REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
9
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP, indepen-
dent 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. No information is presented for Class Y
shares because there were no Class Y shares outstanding during the presented
years.
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
CLASS A SHARES
----------------------------------
PACIFIC PORTFOLIO 1997 1996(1) 1995 1994(2)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.18 $10.07 $12.92 $12.50
- -----------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss(3) (0.17) (0.14) (0.01) (0.07)
Net realized and unrealized gain (loss) (1.55) 0.25 (2.84) 0.49
- -----------------------------------------------------------------------------
Total Income (Loss) From Operations (1.72) 0.11 (2.85) 0.42
- -----------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- -- -- --
- -----------------------------------------------------------------------------
Total Distributions -- -- -- --
- -----------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $8.46 $10.18 $10.07 $12.92
- -----------------------------------------------------------------------------
TOTAL RETURN(P) (16.90)% 1.09% (22.06)% 3.36%++
- -----------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $4,750 $4,929 $4,409 $7,538
- -----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) 3.37% 2.64% 1.97% 1.51%+
Net investment loss (2.36) (1.38) (0.71) (0.82)+
- -----------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 154% 86% 31% 6%
- -----------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON
EQUITY
TRANSACTIONS(4)(5) $0.01 $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 February 7, 1994 (inception date) to October 31, 1994.
(3)The Manager waived all or part of its fees for the year ended October 31,
1995 and the period ended October 31, 1994. In addition, the Manager agreed
to reimburse the Pacific Portfolio for $30,862 of the Portfolio's expenses
for the year ended October 31, 1995. If such fees and expenses were not
waived or reimbursed, the per share effect on net investment and the expense
ratios would have been as follows:
<TABLE>
<CAPTION>
Expense
Ratios
Without
Per Share Fee
Decreases Waivers
to Net and
Investment Custody
Income Credits
---------- -------
1995 1994 1995 1994
----- ----- ---- ----
<S> <C> <C> <C> <C>
Class A $0.14 $0.03 3.18% 1.87%+
</TABLE>
In addition, 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 2.51% and 1.70%, respectively; numbers prior to
October 31, 1995 have not been restated to reflect these credits.
(4)As of September 1995, the SEC instituted new guidelines requiring the dis-
closure of average commissions per share.
(5)Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commissions on trades executed outside these coun-
tries are generally executed as a percentage of cost or proceeds ranging
from 0.5% to 1.0%.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+Annualized.
(P)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 B SHARES
-------------------------
PACIFIC PORTFOLIO 1997 1996(1) 1995(2)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.01 $ 9.99 $12.64
- --------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss(3) (0.27) (0.23) (0.01)
Net realized and unrealized gain (loss) (1.49) 0.25 (2.64)
- --------------------------------------------------------------------------
Total Income (Loss) From Operations (1.76) 0.02 (2.65)
- --------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- -- --
- --------------------------------------------------------------------------
Total Distributions -- -- --
- --------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $8.25 $10.01 $9.99
- --------------------------------------------------------------------------
TOTAL RETURN(P) (17.58)% 0.20% (20.97)%++
- --------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $3,558 $4,009 $1,031
- --------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) 4.24% 3.65% 3.39%+
Net investment loss (3.07) (2.26) (1.47)+
- --------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 154% 86% 31%
- --------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY
TRANSACTIONS(4)(5) $0.01 $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 November 7, 1994 (inception date) to October 31, 1995.
(3)The Manager waived all or part of its fees for the period ended October 31,
1995. In addition, the Manager agreed to reimburse the Pacific Portfolio for
$30,862 of the Portfolio's expenses for the period ended October 31, 1995.
If such fees and expenses were not waived or reimbursed, the per share
effect on net investment and the expense ratio would have been as follows:
<TABLE>
<CAPTION>
Expense Ratio
Per Share Decrease to Without Fee Waivers
Net Investment Income and Custody Credits
--------------------- -------------------
1995 1995
--------------------- -------------------
<S> <C> <C>
Class B 0.16 4.90+
</TABLE>
In addition, 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 3.47% and 3.06% (annualized),
respectively; numbers prior to October 31, 1995 have not been restated to
reflect these credits.
(4)As of September 1995, the SEC instituted new guidelines requiring the dis-
closure of average commissions per share.
(5)Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commissions on trades executed outside these coun-
tries are generally executed as a percentage of cost or proceeds ranging
from 0.5% to 1.0%.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+Annualized.
(P)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:
<TABLE>
<CAPTION>
CLASS C SHARES
-----------------------------------
PACIFIC PORTFOLIO 1997 1996(1) 1995(2) 1994(3)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $9.98 $9.95 $12.86 $12.50
- ------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss(4) (0.27) (0.24) (0.02) (0.11)
Net realized and unrealized gain (loss) (1.50) 0.27 (2.89) 0.47
- ------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.77) 0.03 (2.91) 0.36
- ------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- -- -- --
- ------------------------------------------------------------------------------
Total Distributions -- -- -- --
- ------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $8.21 $9.98 $9.95 $12.86
- ------------------------------------------------------------------------------
TOTAL RETURN(P) (17.74)% 0.30% (22.63)% 2.88%++
- ------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $1,493 $1,612 $1,952 $3,167
- ------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(4) 4.44% 3.46% 2.69% 2.29%+
Net investment loss (3.21) (2.22) (1.45) (1.49)+
- ------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 154% 86% 31% 6%
- ------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY TRANSACTIONS(5)(6) $0.01 $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 February 11, 1994 (inception date) to October 31, 1994.
(4)The Manager waived all or part of its fees for the year ended October 31,
1995 and the period ended October 31, 1994. In addition, the Manager agreed
to reimburse the Portfolio for $30,862 of the Portfolio's expenses for the
year ended October 31, 1995. If such fees and expenses were not waived or
reimbursed, the per share effect on net investment income and the expense
ratios would have been as follows:
<TABLE>
<CAPTION>
Expense
Ratios
Without
Per Share Fee
Decreases Waivers
to Net and
Investment Custody
Income Credits
---------- -------
1995 1994 1995 1994
----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Class C $0.13 $0.03 3.88% 2.70%+
</TABLE>
In addition, 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 3.29% and 2.42%, respectively; numbers prior to
October 31, 1995 have not been restated to reflect these credits.
(5) As of September 1995, the SEC instituted new guidelines requiring the dis-
closure 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 coun-
tries are generally executed as a percentage of cost or proceeds ranging
from 0.5% to 1.0%.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+Annualized.
(P)Total returns do not reflect any applicable sales loads or contingent
deferred sales charges.
12
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Portfolio's investment objective is long-term capital appreciation
through investment primarily in equity securities of companies in Australia,
Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Papua New
Guinea, the People's Republic of China, the Philippines, Singapore, South
Korea, Sri Lanka, Taiwan and Thailand. The Manager may add or delete countries
from this list without prior notice to shareholders. There can be no assurance
that the Portfolio will achieve its investment objective. The Portfolio is
designed for investors seeking experienced professional management of a diver-
sified portfolio of equity securities in the Asia Pacific Countries.
The Portfolio's investment objective may be changed only by the "vote of a
majority of the outstanding voting securities" as defined in the Investment
Company Act of 1940 (the "1940 Act"). The Portfolio's investment policies are
nonfundamental and, as such, may be changed by the Board of Directors, pro-
vided 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.
The Portfolio's investments will primarily consist of (i) securities traded
principally on stock exchanges in the Asia Pacific Countries, (ii) securities
of companies that derive 50% or more of their total revenue from either goods
produced, sales made, or services performed in the Asia Pacific Countries and
(iii) securities (including American Depositary Receipts) of companies orga-
nized under the laws of an Asia Pacific Country that are publicly traded on
recognized securities exchanges outside of the Asia Pacific Countries.
The Portfolio will normally invest at least 80% of its total assets in
equity securities of companies in the Asia Pacific Countries, consisting of
the securities listed above. For the purposes of the foregoing limitation
equity securities include common stocks, preferred stocks, securities convert-
ible into common or preferred stocks and warrants. The Portfolio may also
invest up to 20% of its total assets in debt securities and other types of
investments if the Manager believes they would help achieve the Portfolio's
investment objective. 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. However, the Portfolio
has no predetermined policy on the allocation of funds for investment among
such countries or securities and allocation of the Portfolio's investments
will depend upon the relative attractiveness of the Asian Pacific markets and
particular issuers. Concentration of the Portfolio's assets in one or a few of
the Asian Pacific Countries and Asian Pacific currencies will subject the
Portfolio to greater risks than if the Portfolio's assets were not geographi-
cally concentrated.
Under unusual economic or market conditions as determined by the Manager,
the Portfolio may temporarily invest for defensive purposes all or a major
portion of its assets in U.S. government securities or debt or equity securi-
ties of
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
companies incorporated in and having their principal business activities in
the U.S. 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 follow-
ing factors: prospects for relative economic growth between countries;
expected levels of inflation; government policies influencing business condi-
tions; 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 advan-
tages; 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 suffi-
ciently 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 princi-
pally 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. The Portfolio may invest in companies, large or small, whose earnings
are believed to be in a relatively strong growth trend, or in companies in
which significant further growth is not anticipated but whose market value per
share is thought to be undervalued. It may also invest in small and relatively
less well-known companies. Debt securities in which the Portfolio may invest
will generally be rated at the time of purchase at least Baa by Moody's
Investors Service, LP ("Moody's") or BBB by Standard & Poor's Ratings Group
("S&P"). Debt securities rated Baa or BBB may have speculative characteristics
and changes in economic conditions or other circumstances are more likely to
lead to a weakened capacity of their issuers to pay interest and repay princi-
pal than is the case with higher rated securities.
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 equiva-
lents.
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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.
Currency, Interest Rate and Other Hedging Transactions. 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.
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 cur-
rency 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 circum-
stances: to "lock in" the U.S. dollar equivalent price of a security the Port-
folio is contemplating to buy or sell that is denominated in a non-U.S. cur-
rency; 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 essentially corre-
lated 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 con-
tracts and on such financial instruments and interest rate swaps. The Portfo-
lio 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 pur-
chasing at a later date. Interest rate swaps involve the exchange by the Port-
folio with another party of their respective commitment to pay or
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 from the
interest receivable on specific portfolio securities. Interest rate swaps may
be combined with currency swaps to take advantage of rate differentials in dif-
ferent markets on the same or similar securities.
The Portfolio may enter into futures contracts and options on futures con-
tracts 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. securi-
ties markets or industry segments and related put and call options. These con-
tracts 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. Invest-
ment 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 particu-
lar, the variable degree of correlation between price movements of futures con-
tracts 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 instru-
ments may not be liquid in all circumstances and are generally closed out by
entering into offsetting transactions rather than by disposing of the Portfo-
lio's obligations. As a result, in volatile markets, the Portfolio may not be
able to close out a transaction without incurring losses. Although the contem-
plated 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 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. Finally, the
daily deposit requirements in futures contracts create an ongoing greater
potential financial risk than do option purchase transactions, where the expo-
sure 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
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
owed to it under a swap as an illiquid security for purposes of the Portfo-
lio'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 val-
ue. In order to assure that the Portfolio will not be deemed to be a "commod-
ity pool" for purposes of the Commodity Exchange Act, regulations of the Com-
modity 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 pre-
miums 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 borrow-
ing 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 Portfo-
lio'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 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, securi-
ties might have to be liquidated to obtain required funds. Depending on market
or other conditions, such liquidations could be disadvantageous to the Portfo-
lio.
Repurchase Agreements and Lending Securities. The Portfolio may enter into
repurchase agreements with up to 25% of its assets and may lend for a fee
portfolio
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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.
Reverse Repurchase Agreements. The Portfolio may invest up to 5% of its
assets in reverse repurchase agreements. Reverse repurchase agreements are
considered to be borrowings by the Portfolio and involve the sale of portfolio
securities with an agreement to repurchase the securities at an agreed-upon
price, date and interest payment.
Illiquid Securities. The Portfolio may invest up to 15% of its assets in
securities (excluding those subject to Rule 144A under the Securities Act of
1933, as amended (the "1933 Act")), with contractual or other restrictions on
resale and other instruments that are not readily marketable, including (a)
repurchase agreements with maturities greater than seven days, (b) time depos-
its maturing from two business days through seven calendar days, (c) to the
extent that a liquid secondary market does not exist for the instruments,
futures contracts and options on those contracts and (d) other securities that
are subject to restrictions on resale that the investment adviser has deter-
mined are not liquid under guidelines established by the Fund's Board of
Directors; provided, however, that the Portfolio will not invest more than 5%
of its assets in securities that are restricted from resale to the public
until they have been registered under the 1933 Act.
PORTFOLIO TRANSACTIONS AND TURNOVER
All orders for transactions in securities and options on behalf of the Port-
folio are placed by the investment manager with broker/dealers that the
investment manager selects, including Smith Barney and other affiliated bro-
kers. Brokerage will be allocated to Smith Barney, to the extent and in the
manner permitted by applicable law, provided that, in the judgement of the
Board of Directors of the Fund, the commission, fee or other remuneration
received or to be received by Smith Barney (or any broker-dealer affiliate of
Smith Barney that is also a member of a securities exchange) is reasonable and
fair compared to the commission, fee or other remuneration received by other
brokers in connection with comparable transactions involving similar securi-
ties being purchased or sold on a securities exchange during the same or com-
parable period of time. In all trades directed to Smith Barney, the Fund has
been assured that its orders will be accorded priority over those received
from Smith Barney for its own accounts or for any of its directors, officers
or employees. The Fund will not deal with Smith Barney in any transaction in
which Smith Barney acts as principal.
18
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 Port-
folio's annual turnover rate will not exceed 100% in normal circumstances.
Higher portfolio turnover rates can result in corresponding increases in bro-
kerage commissions for the Portfolio. See "Financial Highlights" for the Port-
folio'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 of the Asian Pacific countries or currencies will subject the
Portfolio to greater risks than if the Portfolio's assets were not geographi-
cally 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 cur-
rencies other than the U.S. dollar, changes in foreign currency exchange rates
will, to the extent the Portfolio does not adequately hedge against such fluc-
tuations, affect the value of securities in its portfolio and the unrealized
appreciation or depreciation of investments so far as U.S. investors are con-
cerned. In addition, with respect to certain countries, there is the possibil-
ity of expropriation of assets, confiscatory taxation, political or social
instability or diplomatic developments which could adversely affect invest-
ments in those countries.
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 com-
parable to or as uniform as those of U.S. companies. Non-U.S. securities mar-
kets, 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 price more volatile than securities of comparable U.S. compa-
nies. 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 Portfolio
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.
19
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Special Risks of Asia Pacific Countries. The Portfolio invests primarily in
equity securities of issuers located in Asia Pacific countries. Certain of the
risks associated with international investments are heightened for investments
in these countries. For example, some of the currencies of these countries have
experienced devaluations relative to the U.S. dollar, and adjustments have been
made periodically in certain of such currencies. Certain countries, such as
Indonesia, face serious exchange constraints. Jurisdictional disputes also
exist, for example, between South Korea and North Korea. In addition, Hong Kong
reverted to Chinese Administration on July 1, 1997. The long-term effects of
this reversion are not known at this time.
Securities of Developing Countries. A developing country generally is consid-
ered to be a country that is in the initial stages of its industrialization
cycle. Investing in the equity markets of developing countries involves expo-
sure 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 devel-
oping 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.
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 and calculated. That failure could have a negative impact on the Port-
folio'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 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 serv-
ice 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 Portfolios 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 val-
ue. Securities
20
<PAGE>
VALUATION OF SHARES (CONTINUED)
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 valua-
tion, 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 securi-
ties 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 sales on the valuation date, the last quoted sale, up to the time of valu-
ation, 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 of Directors 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 invest-
ments 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 deter-
mined by the Board of Directors in good faith. This value generally is deter-
mined as the amount that the Portfolio could reasonably expect to receive from
an orderly disposition of these assets over a reasonable period of time but in
no event more than seven days. The value of any security or commodity denomi-
nated 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 Portfolio may not take place contemporaneously with the determina-
tion 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 materi-
ally 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.
21
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
If a shareholder does not otherwise instruct, dividends and capital gain dis-
tributions 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 cred-
ited 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.
TAXES
The Portfolio intends to continue to qualify as a regulated investment com-
pany under Subchapter 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 conven-
tions 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 dis-
tributed to shareholders.
22
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
If, at the end of the Portfolio's taxable year, more than 50% of the value
of the Portfolio's total assets consist of stock or securities of foreign cor-
porations, 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 for-
eign 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. The
Portfolio's gains and losses from the sale of securities and from certain for-
eign 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 pro-
portionate 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 invest-
ing 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 divi-
dends, distributions and redemption proceeds to shareholders who fail to pro-
vide 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.
23
<PAGE>
PURCHASE OF SHARES
GENERAL
The Portfolio offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC
and are available only to investors investing a minimum of $15,000,000 (except
for purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount). See "Prospectus Summa-
ry--Alternative Purchase Arrangements" for a discussion of factors to consider
in selecting which Class of shares to purchase.
Purchases of Portfolio shares must be made through a brokerage account main-
tained 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 broker/dealers may charge their cus-
tomers 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 mak-
ing 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 $15,000,000.
Subsequent investments of at least $50 may be made for all Classes. For par-
ticipants in retirement plans qualified under Section 403(b)(7) or Section
401(a) of the Code, the minimum initial and subsequent investment requirement
for Class A, Class B and Class C shares and the subsequent investment require-
ment 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 System-
atic Investment Plan on a quarterly basis, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent invest-
ment requirement for all Classes is $50. There are no minimum investment
requirements in Class A shares for employees of Travelers and its subsidiar-
ies, 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 the Fund's transfer agent, First Data.
Share certificates are issued only upon a shareholder's written request to
First Data.
24
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 and
Introducing Brokers purchasing through Smith Barney, payment for Portfolio
shares is due on the third business day after the trade date. In all other
cases, payment must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis to charge the regular bank account or other financial institu-
tion 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:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------ DEALERS'
% OF % OF REALLOWANCE AS % OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
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 * * *
- ---------------------------------------------------------------------------
</TABLE>
* 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 applica-
ble to Class B and Class C shares is waived. See "Deferred Sales Charge
Alternatives" and "Waivers of CDSC."
25
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 1933 Act.
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 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 per-
sons 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 com-
pany with the Portfolio by merger, acquisition of assets or otherwise; (c) pur-
chases of Class A shares by any client of a newly employed Smith Barney Finan-
cial Consultant (for a period up to 90 days from the commencement of the Finan-
cial 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 employ-
er, (ii) was sold to the client by the Financial Consultant and (iii) was sub-
ject 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) 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); (g) purchases by separate accounts used to fund certain unregis-
tered variable annuity contracts; and (h) 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.
26
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 aggregat-
ing 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 applying the sales charge applicable to such aggregate. In
order to obtain such discount, the purchaser must provide sufficient informa-
tion at the time of purchase to permit verification that the purchase qualifies
for the reduced sales charge. The right of accumulation is subject to modifica-
tion or discontinuance at any time with respect to all shares purchased there-
after.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or pur-
chase 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 meet-
ing 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 Port-
folio 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
27
<PAGE>
PURCHASE OF SHARES (CONTINUED)
purchaser must provide sufficient information at the time of purchase to per-
mit verification that the purchase qualifies for the reduced sales charge.
Approval of group purchase reduced sales charge plans is subject to the dis-
cretion of Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes pur-
chases of all Class A shares of the Portfolio 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 $5,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $15,000,000 of Class Y shares of
the same Portfolio within 13 months from the date of the Letter. If a total
investment of $15,000,000 is not made within the 13-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 cer-
tain 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
28
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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, 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."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ---------------------------------
<S> <C>
First 5.00%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
- ---------------------------------
</TABLE>
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 pro-
portion 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 distribu-
tions 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
29
<PAGE>
PURCHASE OF SHARES (CONTINUED)
gain distribution reinvestments in such other funds. For Federal income tax
purposes, the amount of the CDSC will reduce the gain or increase the loss, as
the case may be, on the amount realized on redemption. The amount of any CDSC
will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her invest-
ment. Assuming at the time of the redemption the net asset value had appreci-
ated 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 oth-
erwise. 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 par-
ticipating ("Participating Plans") in these programs.
30
<PAGE>
PURCHASE OF SHARES (CONTINUED)
The Portfolio offers to Participating Plans Class A and Class C shares as
investment alternatives under the Smith Barney 401(k) and ExecChoiceTM Pro-
grams. 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 ini-
tial sales 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 ExecChoiceTM 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 ExecChoiceTM 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 Par-
ticipating 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
31
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 anni-
versary of the enrollment date and, unless the exchange has been rejected in
writing, the exchange will occur on or about the eighth anniversary date. Once
an exchange has occurred, a Participating Plan will not be eligible to acquire
additional Class C shares of the 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 regard-
ing these Programs, investors should contact a Smith Barney Financial Consul-
tant.
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 con-
version 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 dur-
ing the preceding eight years. Whether or not the CDSC applies to the redemp-
tion by a Participating Plan depends on the number of years since the Partici-
pating 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
32
<PAGE>
PURCHASE OF SHARES (CONTINUED)
those shareholders made the purchase payment from which the amount is being
redeemed.
The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the termina-
tion 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
59 1/2 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 Par-
ticipating 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 min-
imum investment requirements and all shares are subject to the other require-
ments 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
33
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
+++ 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
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.--International Equity 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
34
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
++ 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.
*** 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 higher CDSC
than that imposed by the Portfolio, the exchanged Class B shares will be sub-
ject 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 Portfolio
that have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the Port-
folio who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without imposi-
tion of any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Portfolio's performance and its shareholders. The invest-
ment 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 pur-
chases and/or exchanges by the shareholder. Upon such a determination, the Fund
will provide notice in writing or by telephone to the shareholder at least 15
days prior to suspending the exchange privilege and during the 15 day period
the shareholder will be required to (a) redeem his or her shares in the Portfo-
lio 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 "Re-
demption of Shares--Telephone Redemptions and Exchange Program." Exchanges
35
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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 reg-
istration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Portfolio reserves the right to modify or discon-
tinue 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 shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, 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 ten-
der, 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 Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
Smith Barney World Funds, Inc./Pacific 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
36
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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 regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates 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 guar-
antor institution, such as a domestic bank, savings and loan institution,
domestic credit union, member bank of the Federal Reserve System or member firm
of a national securities exchange. Written redemption requests of $2,000 or
less do not require a signature guarantee unless more than one such redemption
request is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting doc-
uments for redemptions made by corporations, executors, administrators, trust-
ees 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 shareholder's shares subject to the CDSC at the time the with-
drawal 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 guaran-
tee, 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.)
37
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not per-
mitted 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 instruc-
tions 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 Portfolio, each account must satisfy the minimum account
size.) The Fund, however, will not redeem shares based solely on market reduc-
tions 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.
38
<PAGE>
PERFORMANCE
From time to time the Portfolio may include its total return, average annual
total return and current dividend return in advertisements and/or other types
of sales literature. 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, if any, from the initial amount invested and reinvest-
ment of all income dividends and capital gain distributions on the reinvest-
ment 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 ini-
tial 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 differ-
ing 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 its investment portfolio and operating
expenses. These factors and possible differences in the methods used in calcu-
lating 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 informa-
tion may include data from Lipper Analytical Services, Inc. and other finan-
cial 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 Addi-
tional Information contains background information regarding each Director and
executive officer of the Fund.
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
39
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
which the Manager is responsible for furnishing or causing to be furnished to
the Portfolio advice and assistance with respect to the acquisition, holding
or disposal of securities and recommendations with respect to other aspects
and affairs of the Portfolio 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 the
Research and other departments and staff of Smith Barney furnish the Manager
with information, advice and assistance and are available for consultation on
the Portfolio, 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 services provided by
the Manager, the management agreement provides that the Portfolio will pay the
Manager an annual fee calculated at the rate of 0.85% of the Portfolio's aver-
age daily net assets, paid monthly. Although this fee is higher than that paid
by most investment companies, the Portfolio's management has determined that
it is comparable to the fee charged by other investment advisers of investment
companies that have similar investment objectives and policies. Total operat-
ing expenses incurred by the Portfolio for its last fiscal year were 3.37% for
Class A shares, 4.24% for Class B shares and 4.44% for Class C shares.
The management agreement further provides that all other expenses not spe-
cifically assumed by the Manager under the management agreement on behalf of
the Portfolio are borne by the Fund. Expenses payable by the Fund include, but
are not limited to, all charges of custodians (including sums as custodian and
sums for keeping books and for rendering other services to the Fund) and
shareholder servicing agents, expenses of preparing, printing and distributing
all prospectuses, proxy material, reports and notices to shareholders, all
expenses of shareholders' and directors' meetings, filing fees and expenses
relating to the registration and qualification of the Fund's shares and the
Fund under federal or state securities laws and maintaining such registrations
and qualifications (including the printing of the Fund's registration state-
ments), fees of auditors and legal counsel, costs of performing portfolio val-
uations, out-of-pocket expenses of directors and fees of directors who are not
"interested persons" as defined in the 1940 Act, interest, taxes and govern-
mental fees, fees and commissions of every kind, expenses of issue, repurchase
or redemption of shares, insurance expense, association membership dues, all
other costs incident to the Fund's existence and extraordinary expenses such
as litigation and indemnification expenses. Direct expenses are charged to
each of the Fund's Portfolios; general corporate expenses are allocated on the
basis of relative net assets.
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
40
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
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 of 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 Interna-
tional Incorporated. Mr. David S. Ishibashi, a Vice President of Smith Barney,
and Mr. Scott Kalb, a Managing Director of Smith Barney, are responsible for
the day-to-day operations of the Portfolio, making all of the investment deci-
sions since October, 1996. Mr. Ishibashi joined Smith Barney in 1993 and Mr.
Kalb joined Smith Barney in 1990, as members of the international equity team.
Prior to joining Smith Barney, Mr. Ishibashi was responsible for Japanese equi-
ties and headed the Japan desk at SG Warburg, and Mr. Kalb served as Vice Pres-
ident of Equity Research at Drexel Burnham.
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.
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 serv-
ice 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; pay-
41
<PAGE>
DISTRIBUTOR (CONTINUED)
ments 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 Bar-
ney 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 con-
tinuing 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 appropriate-
ness 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 issu-
ance 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 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 and Class Y shares of the Portfolio
represent interests in the assets of the Portfolio 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 pertain
to a particular Class. As described under "Voting" in the Statement of Addi-
tional 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 direc-
tors, 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 pre-
emptive rights and are fully paid, transferable and nonassessable when issued
for payment as described in this Prospectus.
42
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
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
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<PAGE>
SMITH BARNEY
--------------------------------
A Member of TravelersGroup LOGO
SMITH BARNEY
WORLD FUNDS, INC.
PACIFIC PORTFOLIO
388 Greenwich Street
New York, New York 10013
FD 0479 2/98
PART B
SMITH BARNEY WORLD FUNDS, INC.
388 Greenwich Street
New York, New York 10013
STATEMENT OF ADDITIONAL INFORMATION
February 27, 1998
Shares of Smith Barney World Funds, Inc. (the "Fund") are offered
with a choice of six Portfolios:
The Global Government Bond Portfolio seeks as high a level
of current income and capital appreciation as is consistent
with its policy of investing principally in high quality
bonds of the United States and foreign governments.
The International Equity Portfolio seeks a total return on
its assets from growth of capital and income. The Portfolio
seeks to achieve its objective principally through a
diversified portfolio of equity securities of established
non-United States issuers.
The Pacific Portfolio seeks long-term capital appreciation
by investing primarily in a diversified portfolio of equity
securities of companies in the Asian Pacific Countries.
The European Portfolio seeks long-term capital appreciation
by investing primarily in equity securities of issuers based
in countries of Europe.
The International Balanced Portfolio seeks a competitive
total return on its assets from growth of capital and income
through a portfolio invested primarily in securities of
established non-United States issuers.
The Emerging Markets Portfolio seeks long-term capital
appreciation on its assets through a portfolio invested
primarily in securities of emerging country issuers.
The Fund offers three classes of shares which may be purchased at the
next-determined net asset value per share plus a sales charge which, at
the election of the investor, may be imposed (i) at the time of purchase
(Class A shares) or (ii) on a deferred basis (Class B and Class C
shares). A fourth class of shares (the Class Y shares) is sold at net
asset value and is available only to investors investing a minimum of
$5,000,000 with respect to the International Equity Portfolio and
$15,000,000 with respect to each of the other Portfolios. A fifth class
of shares of the International Equity Portfolio (the Class Z shares) are
offered only to tax-exempt retirement plans of Smith Barney Inc. These
alternatives permit an investor to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other
circumstances.
This Statement of Additional Information is not a prospectus. It is
intended to provide more detailed information about Smith Barney World
Funds, Inc. as well as matters already discussed in the Prospectus of
the applicable Portfolio and therefore should be read in conjunction
with each Prospectus dated February 27, 1998 for the International
Equity Portfolio, the Global Government Bond Portfolio, the Pacific
Portfolio, the European Portfolio, the International Balanced Portfolio
and the Emerging Markets Portfolio, which may be obtained from the Fund
or your Smith Barney Financial Consultant.
TABLE OF CONTENTS
Page
Directors, Advisory Director and Officers 3
Investment Policies 5
Investment Restrictions 16
Additional Tax Information 20
IRA and Other Prototype Retirement Plans 22
Performance Information 23
Determination of Net Asset Value 27
Redemption of Shares 27
Investment Management Agreement and Other Services 27
Custodian 31
Independent Auditors 31
Voting 31
Financial Statements 35
Appendix - Ratings of Debt Obligations A-1
DIRECTORS, ADVISORY DIRECTOR AND OFFICERS
VICTOR K. ATKINS, Director
Retired; 120 Montgomery Street, San Francisco, CA. Former President of
Lips Propellers, Inc., a ship propeller repair company. Director of two
investment companies associated with Smith Barney; 76.
ROBERT A. FRANKEL, Director
Managing Partner of Robert A. Frankel Managing Consultants, 102 Grand
Street, Croton-on-Hudson, NY. Director of seven investment companies
associated with Smith Barney. Former Vice President of The Readers
Digest Association, Inc.; 70.
RAINER GREEVEN, Director
Partner of the law firm of Greeven & Ercklentz; 630 Fifth Avenue, New
York, NY. Director of two investment companies associated with Smith
Barney; 62.
SUSAN M. HEILBRON, Director
Attorney; Lacey & Heilbron, 3 East 54th Street, New York, NY. Prior to
November 1990, Vice President and General Counsel of MacMillan, Inc. and
Executive Vice President of The Trump Organization. Director of two
investment companies associated with Smith Barney; 53.
*BRUCE D. SARGENT, Vice President and Director
Managing Director of Smith Barney Inc. ("Smith Barney ") and Vice
President of Mutual Management Corp. (the "Manager"), and three
investment companies associated with Smith Barney; 54.
JAMES M. SHUART, Director
President, Hofstra University; 1000 Fulton Avenue, Hempstead, NY.
Director of European American Bank; Director of Long Island Tourism and
Convention Commission; and Director of Association of Colleges and
Universities of the State of New York. Director of two investment
companies associated with Smith Barney; 66.
*HEATH B. McLENDON, Chairman of the Board, President and Chief Executive
Officer
Managing Director of Smith Barney; Director of forty-two investment
companies associated with Smith Barney; Director and President of the
Manager and Travelers Investment Adviser, Inc. ("TIA"); Chairman of
Smith Barney Strategy Advisers Inc.; prior to July 1993, Senior
Executive Vice President of Shearson Lehman Brothers, Inc., Vice
Chairman of Shearson Asset Management, Director of PanAgora Asset
Management, Inc. and PanAgora Asset Management Limited; 64
*MAURITS E. EDERSHEIM, Chairman of the Fund and Advisory Director
Deputy Chairman of Smith Barney International Incorporated; Director and
President of Amstel Hudson Management Corp. (offshore investment
management); Director Esfinco NV (U.S. subsidiary of Spanish
Construction Company). Formerly Deputy Chairman and Director of Drexel
Burnham Lambert Incorporated, The Drexel Burnham Lambert Group Inc., and
various of their subsidiaries; 79.
*LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Smith Barney, and Senior Vice President and
Treasurer of forty-two investment companies associated with Smith
Barney; and Director and Senior Vice President of the Manager and TIA;
40
*JAMES B. CONHEADY, Vice President
Managing Director of Smith Barney. Formerly First Vice President of
Drexel Burnham Lambert Incorporated; 62.
*JEFFREY RUSSELL, Vice President
Managing Director of Smith Barney. Formerly Vice President of Drexel
Burnham Lambert Incorporated; 40.
*REIN VAN DER DOES, Vice President
Managing Director of Smith Barney. Formerly Managing Director of Drexel
Burnham Lambert Incorporated; 58.
*SCOTT KALB, Vice President
Managing Director of Smith Barney. Formerly Vice President of Drexel
Burnham Lambert Incorporated; 41
*VICTOR S. FILATOV, Vice President
Managing Director of Smith Barney, President and Director of Smith
Barney Global Capital Management Inc. Formerly Vice President of J.P.
Morgan Securities Inc.; 46.
*SIMON R. HILDRETH, Vice President
Senior Vice President of Smith Barney, Managing Director of Smith Barney
Global Capital Management Inc. Formerly Director of Mercury Asset
Management Ltd; 43.
*DENIS P. MANGAN, Vice President
Vice President of Smith Barney Global Capital Management Inc. Formerly
Vice President of J.P. Morgan and Citibank; 44.
*DONALD ELEFSON, Vice President
Vice President of Smith Barney; Formerly Analyst of emerging markets at
Merrill Lynch Asset Management; 38.
*DAVID S. ISHIBASHI, Vice President
Vice President of Smith Barney; Formerly Head of Japanese equities desk
at SG Warburg; 42
*IRVING DAVID, Controller
Director of Smith Barney. Formerly Assistant Treasurer of First
Investment Management Company; 37.
*CHRISTINA T. SYDOR, Secretary
Managing Director of Smith Barney and Secretary of forty-two investment
companies associated with Smith Barney; Secretary and General Counsel of
the Manager and TIA; 47.
* Designates an "interested person" as defined in the Investment
Company Act of 1940, as amended (the "1940 Act") whose business address
is 388 Greenwich Street, New York, New York 10013. Such person is not
separately compensated for services as a Fund officer or director.
On February 6, 1998 the directors and officers owned, in the
aggregate, less than 1% of the outstanding shares of each of the
Portfolios.
The following table shows the compensation paid by the Fund to
each director during the Fund's last fiscal year. None of the officers
of the Fund received any compensation from the Fund for such period.
Officers and interested directors of the Fund are compensated by Smith
Barney.
COMPENSATION TABLE
Name of Person
Aggregate
Compensation
from the
Fund
Total
Pension
or
Retirement
Benefits
Accrued as
Part of Fund
Expenses
Compensation
from Fund
and Complex
Paid
to Directors
Number of
Funds for
Which
Director
Serves
Within
Fund Complex
Victor Atkins
$11,94
6
0
$27,400
2
Alger B.
Chapman*
9,078
0
20,600
2
Robert A.
Frankel
11,946
0
65,900
8
Ranier Greeven
11,346
0
25,600
2
Susan M.
Heilbron
11,946
0
27,400
2
Heath B.
McLendon
0
0
0
42
Bruce D.
Sargent
0
0
0
3
James M. Shuart
11,946
0
27,400
2
*Effective June 20, 1997, Mr. Chapman resigned from the Fund's Board of
Directors.
INVESTMENT POLICIES
Except as described under "INVESTMENT RESTRICTIONS," the
investment policies described in the Prospectuses and in this Statement
of Additional Information are not fundamental and the Board of Directors
may change such policies without shareholder approval.
The Fund effects transactions with a view towards attaining each
Portfolio's investment objective, and although it is not limited by a
predetermined rate of portfolio turnover, it is expected that the annual
turnover rate for each of the International Equity Portfolio, the Global
Government Bond Portfolio, the European Portfolio, the Pacific Portfolio
and the equity portion of each of the International Balanced Portfolio
and the Emerging Markets Portfolio will not exceed 100% in normal
circumstances and that the annual turnover rate for the debt portion of
each of the International Balanced Portfolio and the Emerging Markets
Portfolio will not exceed 200% in normal circumstances. A high
portfolio turnover results in correspondingly greater transaction costs
in the form of brokerage commissions or dealer spreads that a Portfolio
will bear directly, and may result in the realization of net capital
gains which are taxable when distributed to shareholders. See
"Investment Management Agreement and Other Services--Brokerage and
Portfolio Transactions" in this Statement of Additional Information.
Each of the following investment policies is subject to the
limitations set forth under "Investment Restrictions."
Repurchase Agreements. As described in the applicable Prospectus, each
Portfolio may enter into repurchase agreements. A repurchase agreement
is a contract under which a Portfolio acquires a security for a
relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Portfolio to resell such
security at a fixed time and price (representing the Portfolio's cost
plus interest). It is each Portfolio's present intention to enter into
repurchase agreements only upon receipt of fully adequate collateral and
only with commercial banks (whether U.S. or foreign) and registered
broker-dealers. Repurchase agreements may also be viewed as loans made
by a Portfolio which are collateralized primarily by the securities
subject to repurchase. A Portfolio bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its
obligations and the Portfolio is delayed or prevented from exercising
its rights to dispose of the collateral securities. Pursuant to
policies established by the Board of Directors, the investment adviser
monitors the creditworthiness of all issuers with which each Portfolio
enters into repurchase agreements.
Reverse Repurchase Agreements. The Fund does not currently intend to
commit more than 5% of a Portfolio's net assets to reverse repurchase
agreements. The Fund may enter into reverse repurchase agreements with
broker/dealers and other financial institutions. Such agreements
involve the sale of Portfolio securities with an agreement to repurchase
the securities at an agreed-upon price, date and interest payment and
are considered to be borrowings by a Portfolio and are subject to the
borrowing limitations set forth under "Investment Restrictions." Since
the proceeds of reverse repurchase agreements are invested, this would
introduce the speculative factor known as "leverage." The securities
purchased with the funds obtained from the agreement and securities
collateralizing the agreement will have maturity dates no later than the
repayment date. Generally the effect of such a transaction is that the
Fund can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement,
while in many cases it will be able to keep some of the interest income
associated with those securities. Such transactions are only
advantageous if the Portfolio has an opportunity to earn a greater rate
of interest on the cash derived from the transaction than the interest
cost of obtaining that cash. Opportunities to realize earnings from the
use of the proceeds equal to or greater than the interest required to be
paid may not always be available, and the Fund intends to use the
reverse repurchase technique only when the Manager believes it will be
advantageous to the Portfolio. The use of reverse repurchase agreements
may exaggerate any interim increase or decrease in the value of the
participating Portfolio's assets. The Fund's custodian bank will
maintain a separate account for the Portfolio with securities having a
value equal to or greater than such commitments.
Restricted Securities. Each Portfolio may invest in securities the
disposition of which is subject to legal or contractual restrictions.
The sale of restricted securities often requires more time and results
in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of securities eligible for trading on a
national securities exchange that are not subject to restrictions on
resale. Restricted securities often sell at a price lower than similar
securities that are not subject to restrictions on resale.
Securities Lending. Each Portfolio may seek to increase its net
investment income by lending its securities provided such loans are
callable at any time and are continuously secured by cash or U.S.
Government Obligations equal to no less than the market value,
determined daily, of the securities loaned. Each Portfolio will receive
amounts equal to dividends or interest on the securities loaned. It
will also earn income for having made the loan because cash collateral
pursuant to these loans will be invested in short-term money market
instruments. In connection with lending of securities the Fund may pay
reasonable finders, administrative and custodial fees. Management will
limit such lending to not more than one-third of the value of the total
assets of each Portfolio. Where voting or consent rights with respect
to loaned securities pass to the borrower, management will follow the
policy of calling the loan, in whole or in part as may be appropriate,
to permit the exercise of such voting or consent rights if the issues
involved have a material effect on the Portfolio's investment in the
securities loaned. Apart from lending its securities and acquiring debt
securities of a type customarily purchased by financial institutions, no
Portfolio will make loans to other persons.
Commercial Bank Obligations. For the purposes of each Portfolio's
investment policies with respect to bank obligations, obligations of
foreign branches of U.S. banks and of foreign banks may be general
obligations of the parent bank in addition to the issuing bank, or may
be limited by the terms of a specific obligation and by government
regulation. As with investment in non-U.S. securities in general,
investments in the obligations of foreign branches of U.S. banks and of
foreign banks may subject the Portfolio to investment risks that are
different in some respects from those of investments in obligations of
domestic issuers. Although a Portfolio will typically acquire
obligations issued and supported by the credit of U.S. or foreign banks
having total assets at the time of purchase in excess of U.S. $1 billion
(or the equivalent thereof), this U.S. $1 billion figure is not a
fundamental investment policy or restriction of the Portfolio. For
calculation purposes with respect to the U.S. $1 billion figure, the
assets of a bank will be deemed to include the assets of its U.S. and
non-U.S. branches.
Commercial Paper. Commercial paper consists of short-term (usually from
1 to 270 days) unsecured promissory notes issued by corporations in
order to finance their current operations. A variable amount master
demand note (which is a type of commercial paper) represents a direct
borrowing arrangement involving periodically fluctuating rates of
interest under a letter agreement between a commercial paper issuer and
an institutional lender, such as one of the Portfolios, pursuant to
which the lender may determine to invest varying amounts. Transfer of
such notes is usually restricted by the issuer, and there is no
secondary trading market for such notes. Each Portfolio, therefore, may
not invest in a master demand note, if as a result more than 15% of the
value of the Portfolio's total assets would be invested in such notes
and other illiquid securities.
ADRs, EDRs and GDRs. Each Portfolio may also purchase American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
Global Depositary Receipts ("GDRs") or other securities representing
underlying shares of foreign companies. ADRs are publicly traded on
exchanges or over-the-counter in the United States and are issued
through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or
all of the depository's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligation and the
depository's transaction fees are paid by the ADR holders. In addition,
less information is available in the United States about an unsponsored
ADR than about a sponsored ADR, and the financial information about a
company may not be as reliable for an unsponsored ADR as it is for a
sponsored ADR. The Portfolios may invest in ADRs through both sponsored
and unsponsored arrangements.
Writing Covered Call Options. Each Portfolio may write (sell) covered
call options for hedging purposes. Covered call options will generally
be written on securities and currencies which, in the opinion of the
investment adviser, are not expected to make any major price moves in
the near future but which, over the long term, are deemed to be
attractive investments for the Portfolio.
A call option gives the holder (buyer) the right to purchase a
security or currency at a specified price (the exercise price) at any
time until a certain date (the expiration date). So long as the
obligation of the writer of a call option continues, he may be assigned
an exercise notice by the broker-dealer through whom such option was
sold, requiring him to deliver the underlying security or currency
against payment of the exercise price. This obligation terminates upon
the expiration of the call option, or such earlier time at which the
writer effects a closing purchase transaction by purchasing an option
identical to that previously sold. The Manager and the Fund believe that
writing of covered call options is less risky than writing uncovered or
"naked" options, which the Portfolios will not do.
Portfolio securities or currencies on which call options may be
written will be purchased solely on the basis of investment
considerations consistent with each Portfolio's investment objective.
When writing a covered call option, the Portfolio, in return for the
premium, gives up the opportunity for profit from a price increase in
the underlying security or currency above the exercise price and retains
the risk of loss should the price of the security or currency decline.
Unlike one who owns securities or currencies not subject to an option,
the Portfolio has no control over when it may be required to sell the
underlying securities or currencies, since the option may be exercised
at any time prior to the option's expiration. If a call option which
the Portfolio has written expires, the Portfolio will realize a gain in
the amount of the premium; however, such gain may be offset by a decline
in the market value of the underlying security or currency during the
option period. If the call option is exercised, the Portfolio will
realize a gain or loss from the sale of the underlying security or
currency. The security or currency covering the call option will be
maintained in a segregated account of the Portfolio's custodian. The
Portfolio does not consider a security or currency covered by a call
option to be "pledged" as that term is used in the Portfolio's policy
which limits the pledging or mortgaging of its assets.
The premium the Portfolio receives for writing a call option is
deemed to constitute the market value of an option. The premium the
Portfolio will receive from writing a call option will reflect, among
other things, the current market price of the underlying security or
currency, the relationship of the exercise price to such market price,
the implied price volatility of the underlying security or currency, and
the length of the option period. In determining whether a particular
call option should be written on a particular security or currency, the
Manager will consider the reasonableness of the anticipated premium and
the likelihood that a liquid secondary market will exist for those
options. The premium received by the Portfolio for writing covered call
options will be recorded as a liability in the Portfolio's statement of
assets and liabilities. This liability will be adjusted daily to the
option's current market value, which will be calculated as described in
"Determination of Net Asset Value" in the Prospectus. The liability
will be extinguished upon expiration of the option or delivery of the
underlying security or currency upon the exercise of the option. The
liability with respect to a listed option will also be extinguished upon
the purchase of an identical option in a closing transaction.
Closing transactions will be effected in order to realize a profit
or to limit losses on an outstanding call option, to prevent an
underlying security or currency from being called, or to permit the sale
of the underlying security or currency. Furthermore, effecting a
closing transaction will permit the Portfolio to write another call
option on the underlying security or currency with either a different
exercise price, expiration date or both. If the Portfolio desires to
sell a particular security or currency from its portfolio on which it
has written a call option or purchases a put option, it will seek to
effect a closing transaction prior to, or concurrently with, the sale of
the security or currency. There is no assurance that the Portfolio will
be able to effect such closing transactions at a favorable price. If
the Portfolio cannot enter into such a transaction, it may be required
to hold a security or currency that it might otherwise have sold, in
which case it would continue to be a market risk with respect to the
security or currency.
Each Portfolio will pay transaction costs in connection with the
writing of options and in entering into closing purchase contracts.
Transaction costs relating to options activity are normally higher than
those applicable to purchases and sales of portfolio securities.
Call options written by each Portfolio, other than the
International Balanced Portfolio, will normally have expiration dates of
less than nine months from the date written. Call options written by
the International Balanced Portfolio will normally have expiration dates
of less than twelve months from the date written. The exercise price of
the options may be below, equal to or above the current market values of
the underlying securities or currencies at the time the options are
written. From time to time, the Portfolio may purchase an underlying
security or currency for delivery in accordance with the exercise of an
option, rather than delivering such security or currency from its
portfolio. In such cases, additional costs will be incurred.
Each Portfolio will realize a profit or loss from a closing
purchase transaction if the cost of the transaction is less or more,
respectively, than the premium received from the writing of the option.
Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security or
currency, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Portfolio.
See "Additional Tax Information" for a discussion of federal
income tax treatment of covered call options.
Purchasing Put Options. Each Portfolio may purchase put options. As
the holder of a put option, the Portfolio has the right to sell the
underlying security or currency at the exercise price at any time during
the option period. The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them
to expire.
Each Portfolio may purchase a put option on an underlying security
or currency (a "protective put") owned by the Portfolio as a hedging
technique in order to protect against an anticipated decline in the
value of the security or currency. Such hedge protection is provided
only during the life of the put option when the Portfolio, as the holder
of the put option, is able to sell the underlying security or currency
at the put exercise price regardless of any decline in the underlying
security's market price or currency's exchange value. For example, a
put option may be purchased in order to protect unrealized appreciation
of a security or currency when the Manager deems it desirable to
continue to hold the security or currency because of tax considerations.
The premium paid for the put option and any transaction costs would
reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
Each Portfolio may also purchase put options at a time when the
Portfolio does not own the underlying security or currency. By
purchasing put options on a security or currency it does not own, the
Portfolio seeks to benefit from a decline in the market price of the
underlying security or currency. If the put option is not sold when it
has remaining value, and if the market price of the underlying security
or currency remains equal to or greater than the exercise price during
the life of the put option, the Portfolio will lose its entire
investment in the put option. In order for the purchase of a put option
to be profitable, the market price of the underlying security or
currency must decline sufficiently below the exercise price to cover the
premium and transaction costs, unless the put option is sold in a
closing sale transaction.
The premium paid by a Portfolio when purchasing a put option will
be recorded as an asset in the Portfolio's statement of assets and
liabilities. This asset will be adjusted daily to the option's current
market value, which will be calculated as described in "Determination of
Net Asset Value" in the Prospectus. The asset will be extinguished upon
expiration of the option or the delivery of the underlying security or
currency upon the exercise of the option. The asset with respect to a
listed option will also be extinguished upon the writing of an identical
option in a closing transaction.
Purchasing Call Options. Each Portfolio may purchase call options. As
the holder of a call option, a Portfolio has the right to purchase the
underlying security or currency at the exercise price at any time during
the option period. The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them
to expire. Call options may be purchased by the Portfolio for the
purpose of acquiring the underlying security or currency for its
portfolio. Utilized in this fashion, the purchase of call options
enables the Portfolio to acquire the security or currency at the
exercise price of the call option plus the premium paid. At times the
net cost of acquiring the security or currency in this manner may be
less than the cost of acquiring the security or currency directly. This
technique may also be useful to the Portfolio in purchasing a large
block of securities that would be more difficult to acquire by direct
market purchases. So long as it holds such a call option rather than
the underlying security or currency itself, the Portfolio is partially
protected from any unexpected decline in the market price of the
underlying security or currency and in such event could allow the call
option to expire, incurring a loss only to the extent of the premium
paid for the option.
Each Portfolio may also purchase call options on underlying
securities or currencies it owns in order to protect unrealized gains on
call options previously written by it. A call option would be purchased
for this purpose where tax considerations make it inadvisable to realize
such gains through a closing purchase transaction. Call options may
also be purchased at times to avoid realizing losses that would result
in a reduction of the Portfolio's current return.
Interest Rate and Currency Futures Contracts. Each Portfolio may enter
into interest rate or currency futures contracts ("Futures" or "Futures
Contracts") as a hedge against changes in prevailing levels of interest
rates or currency exchange rates in order to establish more definitely
the effective return on securities or currencies held or committed to be
acquired by the Portfolio. A Portfolio's hedging may include holding
Futures as an offset against anticipated changes in interest or currency
exchange rates. A Portfolio may also enter into Futures Contracts based
on financial indices including any index of U.S. Government securities,
foreign government securities or corporate debt securities.
A Futures Contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument or currency for a specified price at a designated date, time
and place. The purchaser of a Futures Contract on an index agrees to
take or make delivery of an amount of cash equal to the difference
between a specified dollar multiple of the value of the index on the
expiration date of the contract ("current contract value") and the price
at which the contract was originally struck. No physical delivery of
the debt securities underlying the index is made. Brokerage fees are
incurred when a Futures Contract is bought or sold, and margin deposits
must be maintained at all times that the Futures Contract is
outstanding.
Although techniques other than sales and purchases of Futures
Contracts could be used to reduce the Portfolio's exposure to interest
rate and currency exchange rate fluctuations, the Portfolio may be able
to hedge its exposure more effectively and at a lower cost through using
Futures Contracts.
Although Futures Contracts typically require future delivery of
and payment for financial instruments or currencies, Futures Contracts
are usually closed out before the delivery date. Closing out an open
Futures Contract sale or purchase is effected by entering into an
offsetting Futures Contract purchase or sale, respectively, for the same
aggregate amount of the identical financial instrument or currency and
the same delivery date. If the offsetting purchase price is less than
the original sale price, the Portfolio realizes a gain; if it is more,
the Portfolio realizes a loss. Conversely, if the offsetting sale price
is more than the original purchase price, the Portfolio realizes a gain;
if it is less, the Portfolio realizes a loss. The transaction costs
must also be included in these calculations. There can be no assurance,
however, that the Portfolio will be able to enter into an offsetting
transaction with respect to a particular Futures Contract at a
particular time. If the Portfolio is not able to enter into an
offsetting transaction, the Portfolio will continue to be required to
maintain the margin deposits of the underlying financial instrument or
currency on the relevant delivery date. The Fund intends to enter into
Futures transactions only on exchanges or boards of trade where there
appears to be a liquid secondary market. However, there can be no
assurance that such a market will exist for a particular contract at a
particular time.
As an example of an offsetting transaction, the contractual
obligations arising from the sale of one Futures Contract of September
Treasury Bills on an exchange may be fulfilled at any time before
delivery under the Futures Contract is required (i.e., on a specific
date in September, the "delivery month") by the purchase of another
Futures Contract of September Treasury Bills on the same exchange. In
such instance the difference between the price at which the Futures
Contract was sold and the price paid for the offsetting purchase, after
allowance for transaction costs, represents the profit or loss to the
Portfolio.
Persons who trade in Futures Contracts may be broadly classified
as "hedgers" and "speculators." Hedgers, whose business activity
involves investment or other commitment in securities or other
obligations, use the Futures markets to offset unfavorable changes in
value that may occur because of fluctuations in the value of the
securities and obligations held or committed to be acquired by them or
fluctuations in the value of the currency in which the securities or
obligations are denominated. Debtors and other obligors may also hedge
the interest cost of their obligations. The speculator, like the
hedger, generally expects neither to deliver nor to receive the
financial instrument underlying the Futures Contract, but, unlike the
hedger, hopes to profit from fluctuations in prevailing interest rates
or currency exchange rates.
Each Portfolio's Futures transactions will be entered into for
traditional hedging purposes; that is, Futures Contracts will be sold to
protect against a decline in the price of securities or currencies that
the Portfolio owns, or Futures Contracts will be purchased to protect a
Portfolio against an increase in the price of securities or currencies
it has committed to purchase or expects to purchase. The International
Equity Portfolio, the Pacific Portfolio, the International Balanced
Portfolio and the Emerging Market Portfolio may each also enter into
Futures transactions for non-hedging purposes, subject to applicable
law.
"Margin" with respect to Futures Contracts is the amount of funds
that must be deposited by the Portfolio with a broker in order to
initiate Futures trading and to maintain the Portfolio's open positions
in Futures Contracts. A margin deposit made when the Futures Contract
is entered into ("initial margin") is intended to assure the Portfolio's
performance of the Futures Contract. The margin required for a
particular Futures Contract is set by the exchange on which the Futures
Contract is traded, and may be significantly modified from time to time
by the exchange during the term of the Futures Contract. Futures
Contracts are customarily purchased and sold on margins, which may be 5%
or less of the value of the Futures Contract being traded.
If the price of an open Futures Contract changes (by increase in
the case of a sale or by decrease in the case of a purchase) so that the
loss on the Futures Contract reaches a point at which the margin on
deposit does not satisfy margin requirements, the broker will require an
increase in the margin deposit ("variation margin"). If, however, the
value of a position increases because of favorable price changes in the
Futures Contract so that the margin deposit exceeds the required margin,
it is anticipated that the broker will pay the excess to the Portfolio.
In computing daily net asset values, the Portfolio will mark to market
the current value of its open Futures Contracts. Each Portfolio expects
to earn interest income on its margin deposits.
Risks of Using Futures Contracts. The prices of Futures Contracts are
volatile and are influenced, among other things, by actual and
anticipated changes in interest rates, which in turn are affected by
fiscal and monetary policies and national and international political
and economic events.
At best, the correlation between changes in prices of Futures
Contracts and of the securities or currencies being hedged can be only
approximate. The degree of imperfection of correlation depends upon
circumstances such as: variations in speculative market demand for
Futures and for debt securities or currencies, including technical
influences in Futures trading; and differences between the financial
instruments being hedged and the instruments underlying the standard
Futures Contracts available for trading, with respect to interest rate
levels, maturities, and creditworthiness of issuers. A decision of
whether, when, and how to hedge involves skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of
unexpected market behavior or interest rate trends.
Because of the low margin deposits required, Futures trading
involves an extremely high degree of leverage. As a result, a
relatively small price movement in a Futures Contract may result in
immediate and substantial loss, as well as gain, to the investor. For
example, if at the time of purchase, 10% of the value of the Futures
Contract is deposited as margin, a subsequent 10% decrease in the value
of the Futures Contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account
were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the Futures Contract were closed
out. Thus, a purchase or sale of a Futures Contract may result in
losses in excess of the amount invested in the Futures Contract. A
Portfolio, however, would presumably have sustained comparable losses
if, instead of the Futures Contract, it had invested in the underlying
financial instrument and sold it after the decline. Where a Portfolio
enters into Futures transactions for non-hedging purposes, it will be
subject to greater risks and could sustain losses which are not offset
by gains on other portfolio assets.
Furthermore, in the case of a Futures Contract purchase, in order
to be certain that each Portfolio has sufficient assets to satisfy its
obligations under a Futures Contract, the Portfolio segregates and
commits to back the Futures Contract an amount of cash, U.S. Government
securities and other liquid, high-grade debt securities equal in value
to the current value of the underlying instrument less the margin
deposit.
Most U.S. Futures exchanges limit the amount of fluctuation
permitted in Futures Contract prices during a single trading day. The
daily limit establishes the maximum amount that the price of a Futures
Contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been
reached in a particular type of Futures Contract, no trades may be made
on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures Contract prices have occasionally moved
to the daily limit for several consecutive trading days with little or
no trading, thereby preventing prompt liquidation of Futures positions
and subjecting some Futures traders to substantial losses.
See "Additional Tax Information" for a discussion of federal tax
treatment of Futures Contracts.
Options on Futures Contracts. Options on Futures Contracts are similar
to options on securities or currencies except that options on Futures
Contracts give the purchaser the right, in return for the premium paid,
to assume a position in a Futures Contract (a long position if the
option is a call and a short position if the option is a put), rather
than to purchase or sell the Futures Contract, at a specified exercise
price at any time during the period of the option. Upon exercise of the
option, the delivery of the Futures position by the writer of the option
to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's Futures margin account which
represents the amount by which the market price of the Futures Contract,
at exercise, exceeds (in the case of a call) or is less than (in the
case of a put) the exercise price of the option on the Futures Contract.
If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in
cash equal to the difference between the exercise price of the option
and the closing level of the securities or currencies upon which the
Futures Contracts are based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise date
suffer a loss of the premium paid.
As an alternative to purchasing call and put options on Futures,
each Portfolio may purchase call and put options on the underlying
securities or currencies themselves (see "Purchasing Put Options" and
"Purchasing Call Options" above). Such options would be used in a
manner identical to the use of options on Futures Contracts.
To reduce or eliminate the leverage then employed by the Portfolio
or to reduce or eliminate the hedge position then currently held by the
Portfolio, the Portfolio may seek to close out an option position by
selling an option covering the same securities or currency and having
the same exercise price and expiration date. The ability to establish
and close out positions on options on Futures Contracts is subject to
the existence of a liquid market. It is not certain that this market
will exist at any specific time.
In order to assure that the Portfolios will not be deemed to be
"commodity pools" for purposes of the Commodity Exchange Act,
regulations of the Commodity Futures Trading Commission ("CFTC") require
that each Portfolio enter into transactions in Futures Contracts and
options on Futures Contracts only (i) for bona fide hedging purposes (as
defined in CFTC regulations), or (ii) for non-hedging purposes, provided
that the aggregate initial margin and premiums on such non-hedging
positions does not exceed 5% of the liquidation value of the Portfolio's
assets. The Global Government Bond Portfolio and the European Portfolio
will enter into transactions in Futures Contracts and options on Futures
Contracts only for hedging purposes.
Forward Currency Contracts and Options on Currency. A forward currency
contract is an obligation to purchase or sell a currency against another
currency at a future date and price as agreed upon by the parties. A
Portfolio may either accept or make delivery of the currency at the
maturity of the forward contract or, prior to maturity, enter into a
closing transaction involving the purchase or sale of an offsetting
contract. Each Portfolio engages in forward currency transactions in
anticipation of, or to protect itself against, fluctuations in exchange
rates. A Portfolio might sell a particular foreign currency forward,
for example, when it holds bonds denominated in that currency but
anticipates, and seeks to be protected against, decline in the currency
against the U.S. dollar. Similarly, a Portfolio might sell the U.S.
dollar forward when it holds bonds denominated in U.S. dollars but
anticipates, and seeks to be protected against, a decline in the U.S.
dollar relative to other currencies. Further, a Portfolio might
purchase a currency forward to "lock in" the price of securities
denominated in that currency which it anticipates purchasing.
The matching of the increase in value of a forward contract and
the decline in the U.S. dollar equivalent value of the foreign currency
denominated asset that is the subject of the hedge generally will not be
precise. In addition, a Portfolio may not always be able to enter into
foreign currency forward contracts at attractive prices and this will
limit the Portfolio's ability to use such contract to hedge or cross-
hedge its assets. Also, with regard to a Portfolio's use of cross-
hedges, there can be no assurance that historical correlations between
the movement of certain foreign currencies relative to the U.S. dollar
will continue. Thus, at any time poor correlation may exist between
movements in the exchange rates of the foreign currencies underlying the
Portfolio's cross-hedges and the movements in the exchange rates of the
foreign currencies in which the Portfolio's assets that are the subject
of such cross-hedges are denominated.
Forward contracts are traded in an interbank market conducted
directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit
requirement and is consummated without payment of any commission. Each
Portfolio, however, may enter into forward contracts with deposit
requirements or commissions.
A put option gives a Portfolio, as purchaser, the right (but not
the obligation) to sell a specified amount of currency at the exercise
price until the expiration of the option. A call option gives a
Portfolio, as purchaser, the right (but not the obligation) to purchase
a specified amount of currency at the exercise price until its
expiration. A Portfolio might purchase a currency put option, for
example, to protect itself during the contract period against a decline
in the value of a currency in which it holds or anticipates holding
securities. If the currency's value should decline, the loss in
currency value should be offset, in whole or in part, by an increase in
the value of the put. If the value of the currency instead should rise,
any gain to the Portfolio would be reduced by the premium it had paid
for the put option. A currency call option might be purchased, for
example, in anticipation of, or to protect against, a rise in the value
of a currency in which the Portfolio anticipates purchasing securities.
Each Portfolio's ability to establish and close out positions in
foreign currency options is subject to the existence of a liquid market.
There can be no assurance that a liquid market will exist for a
particular option at any specific time. In addition, options on foreign
currencies are affected by all of those factors that influence foreign
exchange rates and investments generally.
A position in an exchange-listed option may be closed out only on
an exchange that provides a secondary market for identical options.
Exchange markets for options on foreign currencies exist but are
relatively new, and the ability to establish and close out positions on
the exchanges is subject to maintenance of a liquid secondary market.
Closing transactions may be effected with respect to options traded in
the over-the-counter ("OTC") markets (currently the primary markets for
options on foreign currencies) only by negotiating directly with the
other party to the option contract or in a secondary market for the
option if such market exists. Although each Portfolio intends to
purchase only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market
will exist for any particular option at any specific time. In such
event, it may not be possible to effect closing transactions with
respect to certain options, with the result that the Portfolio would
have to exercise those options which it has purchased in order to
realize any profit. The staff of the Securities and Exchange Commission
("SEC") has taken the position that, in general, purchased OTC options
and the underlying securities used to cover written OTC options are
illiquid securities. However, a Portfolio may treat as liquid the
underlying securities used to cover written OTC options, provided it has
arrangements with certain qualified dealers who agree that the Portfolio
may repurchase any option it writes for a maximum price to be calculated
by a predetermined formula. In these cases, the OTC option itself would
only be considered illiquid to the extent that the maximum repurchase
price under the formula exceeds the intrinsic value of the option.
Swap Agreements. Among the hedging transactions into which the
Portfolios may enter are interest rate swaps and the purchase or sale of
interest rate caps and floors. Each Portfolio expects to enter into
these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio or to protect against
any increase in the price of securities the Portfolio anticipates
purchasing at a later date. Each Portfolio intends to use these
transactions as a hedge and not as a speculative investment. Each
Portfolio will not sell interest rate caps or floors that it does not
own. Interest rate swaps involve the exchange by a Portfolio with
another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments. The purchase of an interest rate cap entitles the purchaser,
to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party
selling such interest rate floor.
A Portfolio may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, depending on whether it
is hedging its assets or its liabilities, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are
netted but, with the Portfolio receiving or paying, as the case may be,
only the net amount of the two payments. Inasmuch as these hedging
transactions are entered into for good faith hedging purposes, the
investment adviser and the Portfolios believe such obligations do not
constitute senior securities and, accordingly will not treat them as
being subject to its borrowing restrictions. The net amount of the
excess, if any, of a Portfolio's obligations over its entitlement with
respect to each interest rate swap will be accrued on a daily basis and
an amount of cash or liquid securities having an aggregate net asset
value at least equal to the accrued excess will be maintained in a
segregated account by a custodian that satisfies the requirements of the
Investment Company Act of 1940 (the "1940 Act"). The Portfolios will
not enter into any interest rate swap, cap or floor transaction unless
the unsecured senior debt or the claims-paying ability of the other
party thereto is rated in the highest rating category of at least one
nationally recognized rating organization at the time of entering into
such transaction. If there is a default by the other party to such a
transaction, a Portfolio will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents
utilizing swap documentation. As a result, the swap market has become
relatively liquid. Caps and floors are more recent innovations for
which standardized documentation has not yet been developed and,
accordingly, they are less liquid than swaps.
New options and Futures Contracts and various combinations thereof
continue to be developed and the Portfolios may invest in any such
options and contracts as may be developed to the extent consistent with
its investment objective and regulatory requirements applicable to
investment companies.
The Articles of Incorporation of the Fund permit the Board of
Directors to establish additional Portfolios of the Fund from time to
time. The investment objectives, policies and restrictions applicable
to additional Portfolios would be established by the Board of Directors
at the time such Portfolios were established and may differ from those
set forth in the Prospectus and this Statement of Additional
Information.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and fundamental
policies that cannot be changed without approval by a "vote of a
majority of the outstanding voting securities" of each Portfolio
affected by the change as defined in the 1940 Act and Rule 18f-2
thereunder (see "Voting").
Without the approval of a majority of its outstanding voting
securities, the Global Government Bond Portfolio may not:
1. Change its subclassification as an open-end fund; 2. Change
its subclassification as a non-diversified company; 3. Invest more than
25% of its total assets in a particular industry, except that this
limitation shall not apply to securities issued or guaranteed as to
principal and interest by the U.S. Government or any of its agencies or
instrumentalities; 4. Purchase any securities on margin, provided that
the Portfolio may obtain such short-term credits as may be necessary for
the clearance of purchases and sales of securities; except that it may
make margin deposits in connection with futures contracts subject to
Investment Restriction 14. below; 5. Make short sales of securities or
maintain a short position in securities unless at all times when a short
position in securities is open, the Portfolio owns or has the right to
obtain, at no added cost, securities identical to those sold short; 6.
Buy or sell real estate (including real estate limited partnerships) and
real estate mortgage loans, commodities or commodity contracts, or issue
senior securities; however, the Portfolio may invest in debt securities
secured by real estate or interests therein or issued by companies that
invest in real estate or interest therein, including real estate
investment trusts, provided such securities are readily marketable and
may purchase or sell currencies (including forward currency contracts),
futures contracts and related options generally as described in the
Prospectus and this Statement of Additional Information and subject to
Investment Restriction 14. below; 7. Invest in securities of another
investment company except as permitted by Section 12(d) (1)(A) of the
1940 Act or as part of a merger, consolidation, or acquisition; 8. Have
more than 15% of its total assets at any time invested in or subject to
puts, calls or combinations thereof; 9. Borrow money, except from banks
for temporary or emergency purposes not in excess of 33-1/3% of the
value of the Portfolio's total assets. Whenever such borrowings exceed
5% of the value of the Portfolio's total assets, the Portfolio will not
make any additional investments. This restriction shall not prevent the
Portfolio from entering into reverse repurchase agreements, provided
that reverse repurchase agreements and any other transactions
constituting borrowing by the Portfolio may not exceed one-third of the
Portfolio's total assets. In the event that the asset coverage for the
Portfolio's borrowings falls below 300%, the Portfolio would reduce,
within three days (excluding Saturdays, Sundays and holidays), the
amount of its borrowings in order to provide for 300% asset coverage;
10. Pledge, mortgage or hypothecate its assets other than (i) in
connection with the investment strategies described in Investment
Restriction 9. above, (ii) to secure letters of credit solely for
purposes of participating in a captive insurance company sponsored by
the Investment Company Institute to provide fidelity and directors and
officers liability insurance, or (iii) in connection with short sales
and collateral arrangements with respect to options and Futures
Contracts including deposits of initial and variation margin; 11. Make
loans, except the Portfolio may purchase debt obligations, enter into
repurchase agreements and lend its securities; 12. Acquire securities
subject to restrictions on disposition or securities for which there is
no readily available market; enter into repurchase agreements, or
purchase time deposits or variable amount master demand notes, if any of
the foregoing have a term or demand feature of more than seven days; or
purchase OTC options or set aside assets to cover OTC options written by
the Portfolio if, immediately after and as a result, the value of such
securities would exceed, in the aggregate, 10% of the Portfolio's total
assets; 13. Engage in the business of underwriting securities of other
issuers, except to the extent that the disposal of an investment
position may technically cause it to be considered an underwriter as
that term is defined under the Securities Act of 1933 (the "1933 Act");
14. Enter into a Futures Contract or a commodity option other than for
bona fide hedging purposes and, if, as a result thereof, more than 5% of
the Portfolio's total assets (taken at market value at the time of
entering into the contract or commodity option) would be committed to
initial margin on futures contracts and premiums on commodity options
all within the meaning of Regulation 4.5 of the CFTC; and 15. Invest in
companies for the purpose of exercising control or management.
In order to comply with certain state statutes and policies, the
Global Government Bond Portfolio also will not, as a matter of operating
policy:
1. Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that the
Portfolio may invest in, or sponsor such programs; 2. Invest more than
5% of its total assets in securities of companies having, together with
their predecessors, a record of less than three years of continuous
operation; 3. Purchase or retain the securities of any Fund, if those
individual officers and directors of the Fund, its investment adviser,
or distributor, each owning beneficially more than 1/2 of 1% of the
securities of such issuer, together own more than 5% of the securities
of such issuer; and 4. Purchase puts, calls, straddles, spreads, and any
combination thereof, if by reason thereof the value of its aggregate
investment in such classes of securities will exceed 5% of its total
assets.
A further investment policy of the Global Government Bond
Portfolio, which may be changed by action of the Fund's Board of
Directors without shareholder approval, is that the Portfolio shall not
invest in securities of an issuer if the investment would cause the
Portfolio to own more than 10% of any class of securities of any one
issuer.
Without the approval of a majority of its outstanding voting
securities, the International Equity Portfolio, the Pacific Portfolio,
the European Portfolio, the International Balanced Portfolio and the
Emerging Markets Portfolio each may not:
1. Purchase the securities of issuers conducting their principal
business activities in the same industry if immediately after a
particular purchase the value of the Portfolio's investments in such
industry would exceed 25% of the value of its total assets; 2. (a) With
respect to the International Equity Portfolio only, purchase the
securities of any one issuer, if immediately after such purchase (i)
more than 5% of the value of the total assets of the Portfolio would be
invested in securities of such issuer, provided that such limitation
does not apply to the U.S. Government, its agencies or
instrumentalities, or (ii) the Portfolio would own more than 10% of the
outstanding voting securities of such issuer; (b) With respect to 75% of
the value of the total assets of each of the European Portfolio and the
Pacific Portfolio, purchase the securities of any one issuer, if
immediately after such purchase (i) more than 5% of the value of the
total assets of the Portfolio would be invested in securities of such
issuer, provided that such limitation does not apply to the U.S.
Government, its agencies or instrumentalities, or (ii) the Portfolio
would own more than 10% of the outstanding voting securities of such
issuer (under the 1940 Act, each Portfolio may not, under any
circumstance, own more than 10% of the outstanding voting securities of
an issuer); (c) With respect to 50% of the value of the total assets of
the International Balanced Portfolio, purchase the securities of any one
issuer, if immediately after such purchase more than 5% of the value of
the total assets of the Portfolio would be invested in securities of
such issuer, provided that such limitation does not apply to the U.S.
Government, its agencies or instrumentalities, or (ii) the Portfolio
would own more than 10% of the outstanding voting securities of such
issuer (under the 1940 Act, the Portfolio may not, under any
circumstance, own more than 10% of the outstanding voting securities of
an issuer); (d) With respect to 50% of the value of the total assets of
the Emerging Markets Portfolio, purchase the securities of any one
issuer, if immediately after such purchase more than 5% of the value of
the total assets of the Portfolio would be invested in securities of
such issuer, provided that such limitation does not apply to the U.S.
Government, its agencies or instrumentalities; (e) with respect to the
Emerging Markets Portfolio, purchase more than 10% of the outstanding
voting securities of any issuer; 3. Invest in real estate or real estate
mortgage loans, real estate limited partnerships, commodities or
commodity contracts, or interests in oil, gas and/or mineral exploration
or development programs (including mineral leases), except for purchases
of currencies and futures and options and other related contracts as
described in the Prospectus from time to time and except for the
purchase of marketable securities issued by companies that have such
interests; 4. Purchase securities of any other registered investment
company, except in connection with a merger, consolidation,
reorganization or acquisition of assets; provided, however, that each of
the European, Pacific, International Balanced and Emerging Markets
Portfolios may also purchase shares of other investment companies
pursuant to Section 12(d)(1)(A) of the 1940 Act; 5. Make investments in
securities for the purpose of exercising control over or managing the
issuer; 6. Make loans, except, to the extent any of such transactions
may be deemed to be loans, for (a) the purchase of publicly distributed
debt securities, (b) entry into repurchase agreements or (c) the lending
of its securities; 7. Purchase securities of any issuer (including any
predecessor) which has been in operation for less than three years if
immediately after such purchase more than 5% of the value of the total
assets of the Portfolio would be invested in such securities; 8. Sell
securities short, unless at all times when a short position is open the
Portfolio owns an equal amount of the securities or of securities
convertible into, or exchangeable without payment of any further
consideration for, securities of the same issue as the securities sold
short; 9. Issue securities senior to its common stock or borrow money,
except that the Portfolio may borrow money from banks to provide greater
liquidity or to make additional portfolio investments so long as the
aggregate amount borrowed does not exceed 10% of the value of the
European Portfolio's total assets (including the proceeds of the
borrowing) or 25% of the value of each of the International Equity
Portfolio's, the Pacific Portfolio's, the International Balanced
Portfolio's or the Emerging Markets Portfolio's total assets, as the
case may be, (including the proceeds of the borrowing) immediately after
the borrowing and so long as the Portfolio maintains asset coverage
ratios specified in the 1940 Act. This restriction shall not prevent a
Portfolio from entering into reverse repurchase agreements, provided
that reverse repurchase agreements and any transactions constituting
borrowing by the Portfolio may not exceed one-third of the Portfolio's
total assets. 10. Mortgage or pledge any assets except to secure
borrowings permitted under the previous restriction; 11. Purchase the
securities of an issuer if, at the time of such purchase, one or more of
the directors or officers of the Fund or the investment adviser
individually own beneficially more than 0.5% of the outstanding
securities of such issuer and together such trustees, directors and
officers owning more than 0.5% own beneficially more than 5% of such
securities; 12. Purchase a security which is not readily marketable,
which is subject to legal or contractual restrictions, including
repurchase agreements and interest rate swaps having more than seven
days remaining to maturity, if, as a result, more than 5% of total
assets with respect to the International Equity Portfolio and more than
15% of total assets with respect to each of the Pacific Portfolio, the
European Portfolio, the International Balanced Portfolio and the
Emerging Markets Portfolio would consist of such securities; provided
that each of the Pacific, European, and International Balanced
Portfolios will not invest more than 5% of its assets in securities that
are restricted from sale to the public until they have been registered
under the 1933 Act; or act as an underwriter, except in connection with
the resale of portfolio securities; or 13. Purchase any securities on
margin, provided that the Portfolio may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities and except that it may make margin deposits in connection
with futures contracts.
In order to comply with certain state statutes and policies, the
International Equity Portfolio, the Pacific Portfolio, the European
Portfolio, the International Balanced Portfolio and the Emerging Markets
Portfolio each may not:
1. Purchase warrants if as a result the Portfolio would then have
more than 5% of its net assets (determined at the time of investment)
invested in warrants. Warrants will be valued at the lower of cost or
market and investment in warrants which are not listed on the New York
Stock Exchange ("NYSE") or American Stock Exchange ("AMEX") will be
limited to 2% of the Portfolio's net assets (determined at the time of
investment). For the purpose of this limitation, warrants acquired in
units or attached to securities are deemed to be without value.
ADDITIONAL TAX INFORMATION
The following is a summary of the material federal tax
considerations affecting a Portfolio of the Fund. In addition to the
considerations described below there may be other federal, state, local
or foreign tax applications to consider. Because taxes are a complex
matter, prospective shareholders are urged to consult their tax advisors
for more detailed information with respect to the tax consequences of
any investment.
General
Each Portfolio intends to qualify, as it has in prior years, under
Subchapter M of the Internal Revenue Code (the "Code") for tax treatment
as a regulated investment company. In each taxable year that each
Portfolio qualifies, so long as such qualification is in the best
interest of its shareholders, each Portfolio will pay no federal income
tax on its net investment income and long-term capital gain that is
distributed to shareholders.
To so qualify, a Portfolio must, among other things, (i) derive at
least 90% of its gross income in each taxable year from dividends,
interest, proceeds from loans of stock and securities, gains from the
sale or other disposition of stock, securities or foreign currency, or
certain other income (including but not limited to gains from options,
Futures and forward contracts) derived from its business of investing in
stock, securities or currency; and (ii) diversify its holdings so that,
at the end of each quarter of its taxable year, the following two
conditions are met: (a) at least 50% of the market value of the
Portfolio's total assets is represented by cash, U.S. Government
securities, securities of other regulated investment companies and other
securities, with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the Portfolio's assets and
not more than 10% of the outstanding voting securities of such issuer;
and (b) not more than 25% of the value of the Portfolio's assets is
invested in securities of any one issuer (other than U.S. Government
securities or securities of other regulated investment companies). The
diversification requirements described above may limit the Portfolio's
ability to engage in hedging transactions by writing or buying options
or by entering into Futures or forward contracts.
Foreign currency gains that are not directly related to a
Portfolio's principal business of investing in stock or securities, or
options or forward contracts thereon, might be excluded by regulations
from income that counts toward the 90% gross income requirement
described above.
As a regulated investment company, each Portfolio will not be
subject to U.S. federal income tax on net investment income and net
long-term capital gains distributed to shareholders if, as is intended,
the Portfolio distributes at least 90% of its ordinary income and net
short-term capital gains to the Portfolio's shareholders each year.
Each Portfolio, however, will generally be subject to a
nondeductible excise tax of 4% to the extent that it does not meet
certain minimum distribution requirements as of the end of each calendar
year. Each Portfolio intends to make timely distributions of its income
(including any net capital gains) in compliance with these requirements.
As a result, it is anticipated that each Portfolio will not be subject
to the excise tax.
For federal income tax purposes, dividends declared by each
Portfolio in October, November or December as of a record date in such
month and which are actually paid in January of the following year will
be treated as if they were paid on December 31. These dividends will be
taxable to shareholders in the year declared, and not in the year in
which shareholders actually receive the dividend.
Gains or losses that a Portfolio recognizes upon the sale or other
disposition of stock or securities will be treated as long-term capital
gains or losses if the securities have been held by it for more than one
year, except in certain cases where the Portfolio sells the stock or
security short or acquires a put or writes a call thereon. Other gains
or losses on the sale of stock or securities will be short-term capital
gains or losses. Gains and losses on the sale, lapse or other
termination of options on stock or securities will generally be treated
as gains and losses from the sale of stock or securities. If an option
written for a Portfolio lapses or is terminated through a closing
transaction the Portfolio may realize a short-term capital gain or loss,
depending on whether the premium income is greater or less than the
amount paid in the closing transaction. If a Portfolio sells stock or
securities pursuant to the exercise of a call option written by it, the
Portfolio will add the premium received to the sale price of the stock
or securities delivered in determining the amount of gain or loss on the
sale. The requirement that a Portfolio derive less than 30% of its
gross income from gains from the sale of stock or securities held for
less than three months may limit the Portfolio's ability to acquire put
options or make short sales.
Under the Code, gains or losses attributable to foreign currency
contracts, or to fluctuations in exchange rates between the time a
Portfolio accrues income or receivables or expenses or other liabilities
denominated in a foreign currency and the time the Portfolio actually
collects such income or pays such liabilities, are treated as ordinary
income or ordinary loss. Similarly, gains or losses on the disposition
of debt securities held by the Portfolio denominated in foreign
currency, to the extent attributable to fluctuations in exchange rates
between the acquisition and disposition dates, are also treated as
ordinary income or loss.
Forward currency contracts, options and Futures contracts entered
into by a Portfolio may create "straddles" for federal income tax
purposes and this may affect the character and timing of gains or losses
realized by the Portfolio on such contracts or options or on the
underlying securities. Under regulations yet to be issued, straddles
may also result in the loss of the holding period of underlying
property, and therefore, the Portfolio's ability to enter into forward
currency contracts, options and Futures contracts may be limited by the
30% of gross income test described above.
Certain options, Futures and foreign currency contracts held by a
Portfolio at the end of each fiscal year will be required to be "marked
to market" for federal income tax purposes; that is, treated as having
been sold at market value. Sixty percent of any capital gain or loss
recognized on these deemed sales and on actual dispositions will be
treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss regardless of how long the
Portfolio has held such options or contracts.
If a Portfolio purchases shares in certain foreign investment
entities, referred to as "passive foreign investment companies," the
Portfolio itself may be subject to U.S. federal income tax and an
additional charge in the nature of interest on a portion of any "excess
distribution" from such company or gain from the disposition of such
shares, even if the distribution or gain is distributed by the Portfolio
to its shareholders in a manner that satisfies the requirements
described above. If the Portfolio were able and elected to treat a
passive foreign investment company as a "qualified electing fund," in
lieu of the treatment described above, the Portfolio would be required
each year to include in income, and distribute to shareholders in
accordance with the distribution requirements described above, the
Portfolio's pro rata share of the ordinary earnings and net capital
gains of the company, whether or not actually received by the Portfolio.
Distributions
If the net asset value of shares of a Portfolio is reduced below a
shareholder's cost as a result of distribution by the Portfolio, such
distribution will be taxable even though it represents a return of
invested capital.
Redemption of Shares
Any gain or loss realized on the redemption or exchange of
Portfolio shares by a shareholder who is not a dealer in securities will
be treated as long-term capital gain or loss if the shares have been
held for more than one year, and otherwise as short-term capital gain or
loss.
However, any loss realized by a shareholder upon the redemption or
exchange of Portfolio shares held six months or less will be treated as
long-term capital loss to the extent of any long-term capital gain
distributions received by the shareholder with respect to such shares.
Additionally, any loss realized on a redemption or exchange of Portfolio
shares will be disallowed to the extent the shares disposed of are
replaced within a period of 61 days beginning 30 days before and ending
30 days after such disposition, such as pursuant to reinvestment of
dividends in Portfolio shares.
IRA AND OTHER PROTOTYPE RETIREMENT PLANS
Copies of the following plans with custody or trust agreements
have been approved by the Internal Revenue Service and are available
from the Fund or Smith Barney; investors should consult with their own
tax or retirement planning advisors prior to the establishment of a
plan.
IRA, Rollover IRA and Simplified Employee Pension - IRA
The Small Business Job Protection Act of 1996 changed the
eligibility requirements for participants in Individual Retirement
Accounts ("IRAs"). Under these new provisions, if you or your spouse
have earned income, each of you may establish an IRA and make maximum
annual contributions equal to the lesser of earned income or $2,000. As
a result of this legislation, married couples where one spouse is non-
working may now contribute a total of $4,000 annually to their IRAs.
The Taxpayer Relief Act of 1997 has changed the requirements for
determining whether or not you are eligible to make a deductible IRA
contribution. Under the new rules effective beginning January 1, 1998,
if you are considered an active participant in an employer-sponsored
retirement plan, you may still be eligible for a full or partial
deduction depending upon your combined adjusted gross income* ("AGI").
For married couples filing jointly, a full deduction is permitted if
your combined AGI is $50,000 or less ($30,000 for unmarried
individuals); a partial deduction will be allowed when AGI is between
$50,000-$60,000 ($30,000-$40,000 for an unmarried individual); and no
deduction when AGI is $60,000 ($40,000 for an unmarried individual).
However, if you are married and your spouse is covered by a employer-
sponsored retirement plan, but you are not, you will be eligible for a
full deduction if your combined AGI is $150,000 or less. A partial
deduction is permitted if your combined AGI is between $150,000-$160,000
and no deduction is permitted after $160,000.
A Rollover IRA is available to defer taxes on lump sum payments
and other qualifying rollover amounts (no maximum) received from another
retirement plan.
An employer who has established a Simplified Employee Pension -
IRA ("SEP-IRA") on behalf of eligible employees may make a maximum
annual contribution to each participant's account of 15% (up to $24,000)
of each participant's compensation. Compensation is capped at $160,000
for 1997.
Paired Defined Contribution Prototype
Corporations (including Subchapter S corporations) and non-
corporate entities may purchase shares of the Fund through the Smith
Barney Prototype Paired Defined Contribution Plan (the "Prototype").
The Prototype permits adoption of profit-sharing provisions, money
purchase pension provisions, or both, to provide benefits for eligible
employees and their beneficiaries. The Prototype provides for a maximum
annual tax deductible contribution on behalf of each Participant of up
to 25% of compensation, but not to exceed $30,000 (provided that a money
purchase pension plan or both a profit-sharing plan and a money purchase
pension plan are adopted thereunder).
PERFORMANCE INFORMATION
From time to time the Fund may advertise a Portfolio's total
return, average annual total return and yield in advertisements. In
addition, in other types of sales literature the Fund may include a
Portfolio's current dividend return. These figures are based on
historical earnings and are not intended to indicate future performance.
The total return shows what an investment in the Portfolio would have
earned over a specified period of time (one, five or ten years) assuming
the payment of the maximum sales load when the investment was first
made, that all distributions and dividends by the Portfolio were
invested on the reinvestment dates during the period less all recurring
fees. The average annual total return is derived from this total
return, which provides the ending redeemable value. The Fund may also
quote the Portfolio's total return for present shareholders that
eliminates the sales charge on the initial investment. The following
chart reflects the financial performance of the Portfolios through the
period ended October 31, 1997 for the one, and five year periods and
since inception:
Average Annual Total Returns
SEC Returns
5 Year
Since Inception
Name of Portfolio
Class
1 Year
Annualized
Cumulative
Annualized
Cumulative
International Equity1
inception: 11-22-91
A
inception: 11-7-94
B
inception: 1-4-93
C
inception: 6-16-94
Y
inception: 11-7-94
Z
3.85%
3.42%
7.43%
9.68%
9.69%
10.55%
- --
- --
- --
- --
65.08%
--
10.95%*
2.60%
10.83%
5.45%
4.71%
237.55%*
7.97%
64.21%
19.64%
14.73%
Global Government Bond
inception: 7-22-91
A
inception: 11-18-94
B
inception: 1-4-93
C
inception: 2-19-93
Y
3.35%
3.22%
6.75%
8.61%
7.47%
- --
- --
- --
43.34
- --
- --
- --
8.16%
8.76%
8.35%
8.62%
63.69%
28.15%
47.27%
47.45%
International Balanced
inception: 8-25-94
A
inception: 11-7-94
B
inception: 8-25-94
C
inception: 2-7-96
Y
(6.62)%
(7.27)%
(3.42)%
(1.28)%
- --
- --
- --
- --
- --
- --
- --
- --
4.41%
4.58%
5.29%
3.88%
14.74%
14.31%
17.84%
6.82%
Pacific
inception: 2-7-94
A
inception: 11-7-94
B
inception: 2-11-94
C
(21.08)%
(21.70)%
(18.56)%
- --
- --
- --
- --
- --
- --
(11.17)%
(14.21)%
(10.68)%
(35.71)%
(36.69)%
(34.32)%
European
inception: 2-7-94
A
inception: 11-7-94
B
inception: 2-14-94
C
7.22%
7.08%
11.06%
- --
- --
- --
- --
- --
- --
11.34%
14.36%
12.23%
49.31%
49.22%
53.45%
Emerging Markets
inception: 5-12-95
A
inception: 5-12-95
B
inception: 5-12-95
C
(2.12)%
(2.82)%
1.26%
- --
- --
- --
- --
- --
- --
(0.58)%
(0.51)%
0.74%
(1.43)%
(1.25)%
1.83%
The International Equity Portfolio's performance record includes
the performance of the Fenimore International Fund through November 22,
1991. The shareholders of the Fenimore International Fund approved a
reorganization with the Portfolio at their October 31, 1991
shareholder's meeting. As a result, all shares of the Fenimore
International Fund were exchanged at the close of business on November
22, 1991 for shares of the Portfolio. Prior to November 22, 1991 the
Portfolio had not made an offering of its shares.
* These numbers represent the financial performance for the ten-year
period ended October 31, 1997.
Note that, prior to November 7, 1994, (i) with respect to each
Portfolio, Class C shares were designated as Class B shares; and (ii)
with respect to Global Government Bond Portfolio, Class Y shares were
designated as Class C shares. Note further, that effective October 3,
1994, with respect to the International Equity, International Balanced,
European and Pacific Portfolios, Class C shares of each such Portfolio
were reclassified as additional Class A shares.
The Global Government Bond Portfolio's yield is computed by
dividing the net investment income per share earned during a specified
thirty day period by the maximum offering price per share on the last
day of such period and analyzing the result. For purposes of the yield
calculation, interest income is determined based on a yield to maturity
percentage for each long-term debt obligation in the portfolio; income
on short-term obligations is based on current payment rate.
The Fund calculates current dividend return for each Portfolio by
dividing the dividends from investment income declared during the most
recent twelve months by the net asset value or the maximum public
offering price (including sales charge) on the last day of the period
for which current dividend return is presented. From time to time, the
Fund may include the Portfolio's current dividend return in information
furnished to present or prospective shareholders and in advertisements.
Each Portfolio's current dividend return may vary from time to
time depending on market conditions, the composition of its investment
portfolio and operating expenses. These factors and possible
differences in the methods used in calculating current dividend return
should be considered when comparing the Portfolio's current dividend
return to yields published for other investment companies and other
investment vehicles. Current dividend return should also be considered
relative to changes in the value of the Portfolio's shares and to the
risks associated with the Portfolio's investment objective and policies.
For example, in comparing current dividend returns with those offered
by Certificates of Deposit ("CDs"), it should be noted that CDs are
insured (up to $100,000) and offer a fixed rate of return.
Performance information may be useful in evaluating a Portfolio
and for providing a basis for comparison with other financial
alternatives. Since the performance of the Portfolio changes in
response to fluctuations in market conditions, interest rates and
Portfolio expenses, no performance quotation should be considered a
representation as to the Portfolio's performance for any future period.
A Portfolio may from time to time compare its investment results
with the following:
(1) Various Salomon Smith Barney World Bond Indices and J.P.
Morgan Global Bond Indices, which measure the total return
performance of high-quality securities in major sectors of
the worldwide bond markets.
(2) The Shearson Lehman Government/Corporate Bond Index,
which is a comprehensive measure of all public obligations
of the U.S. Treasury (excluding flower bonds and foreign
targeted issues), all publicly issued debt of agencies of
the U.S. Government (excluding mortgage-backed securities),
and all public, fixed-rate, non-convertible investment grade
domestic corporate debt rated at least Baa by Moody's
Investors Service ("Moody's") or BBB by Standard and Poor's
Ratings Group ("S&P"), or, in the case of nonrated bonds,
BBB by Fitch Investors Service (excluding Collateralized
Mortgage Obligations).
(3) Average of Savings Accounts, which is a measure of all
kinds of savings deposits, including longer-term
certificates (based on figures supplied by the U.S. League
of Savings Institutions). Savings accounts offer a
guaranteed rate of return on principal, but no opportunity
for capital growth. During a portion of the period, the
maximum rates paid on some savings deposits were fixed by
law.
(4) The Consumer Price Index, which is a measure of the
average change in prices over time in a fixed market basket
of goods and services (e.g., food, clothing, shelter, fuels,
transportation fares, charges for doctors' and dentists'
services, prescription medicines, and other goods and
services that people buy for day-to-day living).
(5) Data and mutual fund rankings published or prepared by
Lipper Analytical Services, Inc., which ranks mutual funds
by overall performance, investment objectives and assets.
(6) Ibbottson Associates International Bond Index, which
provides a detailed breakdown of local market and currency
returns since 1960.
(7) Standard & Poor's 500 Index ("S&P 500") which is a
widely recognized index composed of the capitalization-
weighted average of the price of 500 of the largest publicly
traded stocks in the U.S.
(8) Salomon Smith Barney Broad Investment Grade Bond Index
which is a widely used index composed of U.S. domestic
government, corporate and mortgage-back fixed income
securities.
(9) Dow Jones Industrial Average which is a price-weighted
average of 30 actively traded stocks of highly reputable
companies prepared by Dow Jones & Co.
(10) Financial News Composite Index.
(11) Morgan Stanley Capital International World Indices,
including, among others, the Morgan Stanley Capital
International Europe, Australia, Far East Index ("EAFE
Index"). The EAFE Index is an unmanaged index of more than
800 companies of Europe, Australia and the Far East.
(12) Data and comparative performance rankings published or
prepared by CDA Investment Technologies, Inc.
(13) Data and comparative performance rankings published or
prepared by Wiesenberger Investment Company Service.
Indices prepared by the research departments of such financial
organizations as Salomon Smith Barney, Inc., Merrill Lynch, Bear Stearns
& Co., Inc., Morgan Stanley, and Ibbottson Associates may be used, as
well as information provided by the Federal Reserve Board. In addition,
performance rankings and ratings reported periodically in national
financial publications, including but not limited to Money Magazine,
Forbes, Business Week, The Wall Street Journal and Barron's may also be
used.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Portfolio's shares will be determined
on any day that the NYSE is open. The NYSE is closed for the following
holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
REDEMPTION OF SHARES
In conformity with applicable rules of the SEC, redemptions may be
paid in portfolio securities, in cash or any combination of both, as the
Board of Directors may deem advisable; however, payments shall be made
wholly in cash unless the Board of Directors believes that economic
conditions exist that would make such a practice detrimental to the best
interests of the Fund and its remaining shareholders. If a redemption
is paid in portfolio securities, such securities will be valued in
accordance with the procedures described under "Determination of Net
Asset Value" in the Prospectus and a shareholder would incur brokerage
expenses if these securities were then converted to cash.
INVESTMENT MANAGEMENT AGREEMENT AND OTHER SERVICES
Manager
The Management Agreement for the Global Government Bond Portfolio
provides for an annual fee calculated at the rate of 0.75% of the
Portfolio's average daily net assets, paid monthly; each of the
Management Agreements for the International Equity Portfolio, the
Pacific Portfolio, the European Portfolio and the International Balanced
Portfolio provides for an annual fee calculated at the rate of 0.85% of
the Portfolio's average daily net assets, paid monthly; and the
Management Agreement for the Emerging Markets Portfolio provides for an
annual fee calculated at the rate of 1.00% of the Portfolio's average
daily net assets, paid monthly.
For the fiscal years 1995, 1996 and 1997 the management fees for
each Portfolio were as follows:
Portfolio
1995
1996
1997
International Equity
$8,452,273
$10,047,384
$11,766,569
Global Government
Bond
901,693
1,150,340
l,123,627
European
202,500
314,805
390,268
Pacific
74,052
82,839
79,628
International
Balanced
213,800
274,278
471,084
Emerging Markets
69,254
227,869
380,979
For the year ended October 31, 1995, the manager waived $8,684, $74,052,
$87,233 and $64,107 of management fees for European, Pacific,
International Balanced and Emerging Markets Portfolios, respectively,
and agreed to reimburse the Pacific Portfolio for expenses in the amount
of $30,862.
Each Management Agreement further provides that all other expenses
not specifically assumed by the Manager under the Management Agreement
on behalf of the Portfolio are borne by the Fund. Expenses payable by
the Fund include, but are not limited to, all charges of custodians
(including sums as custodian and sums for keeping books and for
rendering other services to the Fund) and shareholder servicing agents,
expenses of preparing, printing and distributing all prospectuses, proxy
material, reports and notices to shareholders, all expenses of
shareholders' and directors' meetings, filing fees and expenses relating
to the registration and qualification of the Fund's shares and the Fund
under Federal or state securities laws and maintaining such
registrations and qualifications (including the printing of the Fund's
registration statements), fees of auditors and legal counsel, costs of
performing portfolio valuations, out-of-pocket expenses of directors and
fees of directors who are not "interested persons" as defined in the
Act, interest, taxes and governmental fees, fees and commissions of
every kind, expenses of issue, repurchase or redemption of shares,
insurance expense, association membership dues, all other costs incident
to the Fund's existence and extraordinary expenses such as litigation
and indemnification expenses. Direct expenses are charged to each
Portfolio; general corporate expenses are allocated on the basis of the
relative net assets. Mutual Management Corp., the investment manager of
the Fund, also acts as investment adviser to numerous other open-end
investment companies. Smith Barney also advises profit-sharing and
pension accounts. Smith Barney and its affiliates may in the future act
as investment advisers for other accounts.
Distributor
For the year ended October 31, 1997, the table below represents
the fees which have been accrued and/or paid to Smith Barney under the
Plans of Distribution pursuant to Rule 12b-1 for the Fund's Portfolios.
The distribution expenses for 1997 included compensation of financial
consultants and printing costs of prospectuses and marketing materials.
Pursuant to a Plan of Distribution adopted by the Fund on behalf
of each Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"),
Smith Barney incurs the expenses of distributing the Fund's Class A,
Class B and Class C shares. See "Management of the Fund--Distributor"
in the Prospectus.
Portfolio
Class A
Class B
Class C
Total
International
Equity
$1,282,917
$2,375,547
$2,261,441
$5,919,905
Global Government
Bond
249,862
169,569
25,078
444,509
European
32,501
302,094
27,521
362,116
Pacific
9,943
37,798
16,217
63,958
International
Balanced
34,903
56,286
42,281
133,470
Emerging Markets
37,470
189,861
41,594
268,925
During the fiscal years 1995, 1996 and 1997 aggregate sales
commissions of $1,929,000, $1,438,000, and $1,613,000, respectively,
were paid to Smith Barney by the purchasers of Fund shares. A contingent
deferred sales charge ("CDSC") may be imposed on certain redemptions of
Class A, Class B shares and Class C shares. The amount of the CDSC will
depend on the number of years since the shareholder made the purchase
payment from which the amount is being redeemed. For Class B shares, for
each of the Fund's Portfolios except the Global Government Bond
Portfolio, the maximum CDSC is 5.00% of redemption proceeds, declining
by 1.00% each year after the date of purchase to zero. For Class B
shares of the Global Government Bond Portfolio the maximum CDSC is 4.50%
of redemption proceeds, declining by 0.50% the first year after purchase
and by 1.00% each year thereafter to zero. A CDSC of 1.00% is imposed on
redemptions of Class A shares that were purchased without an initial
sales charge but subject to a CDSC if such redemptions occur within 12
months from the date such investment was made. Any sales charge imposed
on redemptions is paid to the distributor of the Fund shares.
Smith Barney will pay for the printing, at printer's overrun cost, of
prospectuses and periodic reports after they have been prepared, set in
type and mailed to shareholders, and will also pay the cost of
distributing such copies used in connection with the offering to
prospective investors and will also pay for supplementary sales
literature and other promotional costs. Such expenses incurred by Smith
Barney are distribution expenses within the meaning of the Plan and may
be paid from amounts received by Smith Barney from the Fund under the
Plan.
Brokerage and Portfolio Transactions
The Manager is responsible for allocating the Fund's brokerage.
Orders may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Smith Barney . No Portfolio will
deal with Smith Barney in any transaction in which Smith Barney acts as
principal.
The Fund attempts to obtain the most favorable execution of each
portfolio transaction in the International Equity Portfolio, the Pacific
Portfolio, the European Portfolio, the International Balanced Portfolio
and the Emerging Markets Portfolio, that is, the best combination of
net price and prompt reliable execution. In the opinion of the Manager,
however, it is not possible to determine in advance that any particular
broker will actually be able to effect the most favorable execution
because, in the context of a constantly changing market, order execution
involves judgments as to price, commission rates, volume, the direction
of the market and the likelihood of future change. In making its
decision as to which broker or brokers are most likely to provide the
most favorable execution, the management of the Fund takes into account
the relevant circumstances. These include, in varying degrees, the size
of the order, the importance of prompt execution, the breadth and trends
of the market in the particular security, anticipated commission rates,
the broker's familiarity with such security including its contacts with
possible buyers and sellers and its level of activity in the security,
the possibility of a block transaction and the general record of the
broker for prompt, competent and reliable service in all aspects of
order processing, execution and settlement.
Commissions are negotiated and take into account the difficulty
involved in execution of a transaction, the time it took to conclude,
the extent of the broker's commitment of its own capital, if any, and
the price received. Anticipated commission rates are an important
consideration in all trades and are weighed along with the other
relevant factors affecting order execution set forth above. In
allocating brokerage among those brokers who are believed to be capable
of providing equally favorable execution, the Fund takes into
consideration the fact that a particular broker may, in addition to
execution capability, provide other services to the Fund such as
research and statistical information. It is not possible to place a
dollar value on such services nor does their availability reduce the
Manager's expenses in a determinable amount. These various services
may, however, be useful to the Manager or Smith Barney in connection
with its services rendered to other advisory clients and not all such
services may be used in connection with the Fund.
The Board of Directors of the Fund has adopted certain policies
and procedures incorporating the standard of Rule 17e-1 issued by the
SEC under the 1940 Act which requires that the commissions paid to Smith
Barney must be "reasonable and fair compared to the commission fee or
other remuneration received or to be received by other brokers in
connection with comparable transactions involving similar securities
during a comparable period of time." The Rule and the policy and
procedures also contain review requirements and require the Manager to
furnish reports to the Board of Directors and to maintain records in
connection with such reviews.
In placing orders for the Global Government Bond Portfolio's
transactions, the Manager seeks to obtain the best net results. The
Manager has no agreement or commitment to place orders with any broker-
dealer. Debt securities are generally traded on a "net" basis with a
dealer acting as principal for its own account without stated
commission, although the price of the security usually includes a profit
to the dealer. United States and foreign government securities and
money market instruments are generally traded in the OTC markets. In
underwritten offerings, securities are usually purchased at a fixed
price which includes an amount of compensation to the underwriter. On
occasion, securities may be purchased directly from an issuer, in which
case no commissions or discounts are paid. Dealers may receive
commissions on Futures, currency and options transactions purchased on
behalf of the Portfolio. Commissions or discounts in foreign securities
exchanges or OTC markets typically are fixed and generally are higher
than those in U.S. securities exchanges or OTC markets.
Shown below are the total brokerage fees paid by the Fund on
behalf of the International Equity Portfolio, European Portfolio,
Pacific Portfolio, International Balanced Portfolio and the Emerging
Markets Portfolio during 1995, 1996 and 1997. Also shown is the portion
paid to Smith Barney and the portion paid to other brokers for the
execution of orders allocated in consideration of research and
statistical services or solely for their ability to execute the order.
During fiscal year 1997, the total amount of commissionable transactions
was $1,215,395,099 of which $14,300,215 (1%) was directed to Smith
Barney and executed by unaffiliated brokers and $1,201,094,884 (99%) of
which was directed to other brokers.
Commissions
For Execution Only
Total
To Smith Barney
To Others
1995
$2,907,454
$38,786* (1.33%)
$2,868,668 (98.67%)
1996
3,971,236
31,857* (.80%)
3,939,379 (99.20%)
1997
3,310,496
52,098* (1.57%)
3,258,398 (98.43%)
_________________
* Directed to Smith Barney and executed by unaffiliated brokers.
CUSTODIAN
Portfolio securities and cash owned by the Fund are held in the
custody of The Chase Manhattan Bank, Chase Metrotech Center, Brooklyn,
New York 11245.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has
been selected as the Fund's independent auditors to examine and report
on the financial statements and financial highlights of the Fund for its
fiscal year ending October 31, 1998.
VOTING
As permitted by Maryland law, there will normally be no meetings of
shareholders for the purpose of electing directors unless and until such
time as less than a majority of the directors holding office have been
elected by shareholders. At that time, the directors then in office
will call a shareholders' meeting for the election of directors. The
directors must call a meeting of shareholders for the purpose of voting
upon the question of removal of any director when requested in writing
to do so by the record holders of not less than 10% of the outstanding
shares of the Fund. At such a meeting, a director may be removed after
the holders of record of not less than a majority of the outstanding
shares of the Fund have declared that the director be removed either by
declaration in writing or by votes cast in person or by proxy. The Fund
will assist shareholders in calling such a meeting as required by the
Act. Except as set forth above, the directors shall continue to hold
office and may appoint successor directors.
As used in the Prospectus and this Statement of Additional
Information, a "vote of a majority of the outstanding voting securities"
means the affirmative vote of the lesser of (a) more than 50% of the
outstanding shares of the Fund (or the affected Portfolio or class) or
(b) 67% or more of such shares present at a meeting if more than 50% of
the outstanding shares of the Fund (or the affected Portfolio or class)
are represented at the meeting in person or by proxy.
The following table contains a list of shareholders who of record
or beneficially owned at least 5% of the outstanding shares of a
particular class of shares of a Portfolio of the Fund as of February 6,
1998.
Global Government Bond Portfolio
Class A
Srs. of Providence Community
Support Trust - Intl Inv
Generalate - Finance Office
Owens Hall
St Mary of the W IN 47876-1096
owned 500,318,344(6.5778%) shares
Class C
Richard J. Horbal & Linda
Horbal TTEES FBO Richard J. Horbal
MD PC EMP. Retirement
Plan UAD 12/01/82
4196 Old Pine Trail
Midland, MI 48642-8892
owned 39,524.368 (15.2563%) shares
Class Y
Smith Barney Concert Series, Inc.
Balanced Portfolio PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113-1522
owned 1,747,519.597 (71.6142%) shares
Smith Barney Concert Series, Inc.
Conservative Portfolio PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113-1522
owned 451,650.086 (18.5088%) shares
Smith Barney Concert Series, Inc
Select Balanced Portfolio PNC Bank
Attn: Beverly Timpson
200 Steven Drive Suite 440
Lester, PA 19113-1522
owned 195,285.214 (8.0028) shares
International Balanced Portfolio
Class C
NR Ernest H Lorch
200 East End Avenue
New York, NY 10128-7831
owned 14,569.774 (5.9117%) shares
Class Y
Smith Barney Concert Series, Inc.
Balanced Portfolio PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113-1522
owned 3,033,105.860 (78.9382%) shares
Smith Barney Concert Series, Inc.
Conservative Portfolio PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113-1522
owned 416,763.846 (10.8465%) shares
Smith Barney Concert Series, Inc.
Select Balanced Portfolio PNC Bank
Attn: Beverly Timson
200 Steven Drive
Suite 440
Lester, PA 19113-1522
owned 351,002.485 (9.1350) shares
International Equity Portfolio
Class Y
Smith Barney Concert Series, Inc.
High Growth Portfolio PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19133-1522
owned 5,275,866.243 (31.8316) shares
Smith Barney Concert Series, Inc.
Growth Portfolio PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113-1522
owned 3,398,089.846 (20.5021) shares
Wachovia Bank of North Carolina, NA
Successor Trustee U/A DRD 7-1-95
For USAA Savings & Investment Plan
Attn: Mutual Funds
301 North Main Street- MC: NC-31051
Winston-Salem, NC 27150
owned 2,380,027.838 (14.3597%) shares
Wachovia Bank of North Carolina, NA
USAA Retirement Trust
Smith Barney Internat'l Equity
Attn: Mutual Funds Mc: NC-31051
301 North Main Street
Winston-Salem, NC 27150
owned 2,061,044.665 (12.4351) shares
Class Z
Citibank N A TTEE
Travelers Group Master Trust
Smith Barney 401K Savings Plan
111 Wall Street - 20th Floor
Attn: N. Kronenberg
New York, NY 10043
owned 6,170,398.219 (99.9928) shares
Pacific Portfolio
Class A
Phil D. Pitchford
87 Aspen Way
Rolling Hills EST CA 90274-3429
owned 38,472.812 (12.0999) shares
Clyde Pitchford TTEE
FBO The Miller Survivor's
Trust U/A/D 9/8/75
595 Market Street Suite 1470
San Francisco, CA 94105-2821
owned 17,359.820 (5.4597) shares
Michael F. Konak
Holanda 337, D-805
Santiago, Chile
owned 16,920.056 (5.3214) shares
FINANCIAL STATEMENTS
The following financial information is hereby incorporated by reference
to the indicated pages of the Fund's 1997 Annual Report to Shareholders,
copies of which are furnished with this Statement of Additional
Information.
Page(s) in
Annual Report
(Global
Government Bond,
International
Balanced and
International
Equity
Portfolios)
Page(s) in
Annual
Report
(Emerging
Markets,
European and
Pacific
Portfolios)
5,11,15
6,12,18
Average Annual Total Return
Line Graph Showing Growth of
$10,000 Investment
6,12,16
7,13,19
Statements of Assets and
Liabilities
31
32
Statements of Operations
32
33
Statement of Changes in Net Assets
33-34
34-35
Notes to Financial Statements
35-43
36-41
Financial Highlights
44-56
42-50
Independent Auditor's Report
57
51
APPENDIX - RATINGS OF DEBT OBLIGATIONS
BOND (AND NOTE) RATINGS
Moody's Investors Service, Inc. ("Moody's")
Aaa - Bonds that are rated "Aaa" are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected
by a large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds that are rated "Aa" are judged to be of high quality by
all standards. Together with the "Aaa" group they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in "Aaa"
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present that make the long term
risks appear somewhat larger than in "Aaa" securities.
A - Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate but elements may be present that suggest a susceptibility to
impairment sometime in the future.
Baa - Bonds that are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa - Bonds that are rated Caa are of poor standing. These issues
may be in default or present elements of danger may exist with respect
to principal or interest.
Ca - Bonds that are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked short-comings.
C - Bonds that are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B. The modifier 1 indicates that
the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Ratings Group ("Standard & Poors")
AAA - Debt rated "AAA" has the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated "AA" has a very strong capacity to pay interest
and repay principal and differs from the highest rated issues only in
small degree.
A - Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher rated categories.
BBB - Debt rated "BBB" is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB, B and CCC - Bonds rated BB and B are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB
represents a lower degree if speculation than B and CCC the highest
degree of speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C - The rating C is reserved for income bonds on which no interest
is being paid.
D - Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or
a minus sign, which is used to show relative standing within the major
rating categories, except in the AAA category.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Issuers rated "Prime-1" (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well-established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earnings coverage of fixed financial
charges and high internal cash generation; well-established access to a
range of financial markets and assured sources of alternate liquidity.
Issuers rated "Prime-2" (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Standard & Poor's Ratings Group
A-1 - This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics will be
denoted with a plus (+) sign designation.
A-2 - Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as high as for
issues designated A-1.
g:\funds\sbwf\1998\secdocs\sai98.doc 34
g:\funds\sbwf\1997\secdocs\sai.doc A-3
Part C of
Form N-1A
Information required to be included in Part C is set forth under the
appropriate item, so numbered in Part C of this Post-Effective
Amendment to
the Registration Statement.
PART C Other Information
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Included in Part A
Financial Highlights
Included in Part B
The Registrant's Annual Report for the fiscal year ended
October 31, 1997 and Report of the Independent Accountants
is incorporated by reference to the filing of such reports pursuant to
Rule 30b2-1 under the Investment Company Act of 1940 as filed
with the Securities and Exchange Commission on January 9, 1998
Accession No.0000091155-98-000018
(b) Exhibits
(1)(a) Articles of Incorporation (1)
(b) Articles Supplementary to Articles of Incorporation for
International Equity Portfolio (2)
(c) Articles of Amendment to the Articles of Incorporation
for the Fund dated November 10, 1992 (3)
(d) Articles Supplementary to Articles of Incorporation for
the Fund dated December 8, 1992 (3)
(e) Articles Supplementary to Articles of Incorporation for
Pacific Portfolio and European Portfolio(10)
(f) Articles Supplementary to Articles of Incorporation for
International Balanced Portfolio (11)
(g) Form of Articles Supplementary to Articles of
Incorporation for Emerging Markets Portfolio(12)
(h) Articles of Amendment to the Articles of Incorporation
for the Fund dated June 4, 1991(13)
(i) Articles Supplementary to Articles of Incorporation for
the Fund dated July 13, 1994 (13)
(j) Articles of Amendment to Articles of Incorporation for
the Fund dated November 3, 1994(13)
(k) Articles of Amendment to Articles of Incorporation for
the Fund dated November 3, 1994(13)
(l) Articles Supplementary to Articles of Incorporation for
the Fund dated November 3, 1994(13)
(m) Articles Supplementary to Articles of Incorporation for
Emerging Markets Portfolio dated November 10, 1994(13)
(2) Bylaws (4)
(3) None
(4) Form of Stock Certificates for the International
Equity Portfolio, the Global Government Bond
Portfolio, the Pacific Portfolio and the European
Portfolio (9)
(5) Form of Management Agreement
(a) --Global Government Bond Portfolio (16)
(b) --International Equity Portfolio (16)
(c) --Pacific Portfolio (16)
(d) --European Portfolio (16)
(e) --International Balanced Portfolio (16)
(f) --Emerging Markets Portfolio (16)
(g) Form of Subadvisory Agreements(16)
(6) (i) Form of Distribution Agreement (16)
(ii) Form of Selling Group Agreement (6)
(7) Not applicable
(8) (i) Form of Custodian Agreement (15)
(ii) Form of Transfer Agency Agreement (16)
(9) Not applicable
(10) Opinion and Consent of Counsel (6)
(11) (i) Auditor's Report (See the Annual Report to Shareholders
which is incorporated by reference in the Statement of
Additional Information)
(ii) Auditors' Consent (*)
(12) Not applicable
(13) Form of Subscription Agreement (4)
(14) IRA Agreement (6)
(15) Amended Plan of Distribution Pursuant to Rule 12b-1
(a) Global Government Bond Portfolio (16)
(b) International Equity Portfolio (16)
(c) Pacific Portfolio (16)
(d) European Portfolio (16)
(e) International Balanced Portfolio (16)
(f) Emerging Markets Portfolio(16)
(16) Schedule of Performance Quotations (8)
(17) Financial Data Schedule (*)
(18) Rule 18f-3 Plan (14)
(1) Incorporated by reference to to the Fund's Registration
Statement on Form N-1A filed on March 26, 1991.
(2) Incorporated by reference to Post-Effective Amendment
No. 2 to the Fund's Registration Statement on Form N-1A filed
on September 24, 1991.
(3) Incorporated by reference to Post-Effective Amendment
No. 6 to the Fund's Registration Statement on Form N-1A filed
on December 21, 1992.
(4) Incorporated by reference to Pre-Effective Amendment
No. 1 to the Fund's Registration Statement on Form N-1A filed
on May 27, 1991.
(5) Intentionally left blank.
(6) Incorporated by reference to Pre-Effective Amendment
No. 2 to the Fund's Registration Statement on Form N-1A filed
on June 14, 1991.
(7) Intentionally left blank.
(8) Incorporated by reference to Post-Effective Amendment
No. 3 to the Fund's Registration Statement on Form N-1A filed
on January 17, 1992.
(9) Incorporated by reference to Post-Effective Amendment
No. 8 to the Fund's Registration Statement on Form N-1A filed
on November 5, 1993.
(10) Incorporated by reference to Post-Effective Amendment
No. 9 to the Fund's Registration Statement on Form N-1A filed
on January 4, 1994.
(11) Incorporated by reference to Post-Effective Amendment
No. 12 to the Fund's Registration Statement on Form N-1A filed
on July 27, 1994.
(12) Incorporated by reference to Post-Effective Amendment
No. 14 to the Fund's Registration Statement on Form N-1A filed
on October 31, 1994.
(13) Incorporated by reference to Post-Effective Amendment
No. 15 to the Fund's Registration Statement on Form N-1A filed
on February 28, 1995.
(14) Incorporated by reference to Post-Effective Amendment
No. 17 to the Fund's Registration Statement on Form N-1A filed
on February 28, 1996.
(15) Incorporated by reference to Post-Effective Amendment
No. 18 to the Fund's Registration Statement on Form N-1A filed
on December 27, 1996.
(16) Incorporated by reference to Post-Effective Amendment
No. 19 to the Fund's Registration Statement on Form N-1A filed
on February 21, 1997.
* Filed herewith.
Item 25. Persons Controlled by or under Common
Control with Registrant
None.
Item 26. Number of Holders of Securities
Number of Record holders
Title of Class On February 6, 1998
Global Government Bond Portfolio 8,569
International Equity Portfolio 76,359
Pacific Portfolio 1,031
European Portfolio 5,323
International Balanced Portfolio 1,857
Emerging Markets Portfolio 4,987
Item 27. Indemnification
Reference is made to Article IX, of Registrant's Articles
of Incorporation for a complete statement of its terms.
Registrant is a named assured on a joint insured bond pursuant
to Rule 17g-1 of the Investment Company Act of 1940. Other
assureds include Mutual Management Corp.
(Registrant's Adviser) and affiliated investment companies.
Item 28. Business and other Connections of Investment Adviser
See the material under the caption "Management of the Fund" included
in Part A (Prospectus) of this Registration Statement and the material
appearing under the caption "Management Agreement" included in Part
B (Statement of Additional Information) of this Registration Statement.
Information as to the Directors and Officers of Mutual Management
Corp.
is included in its Form ADV (File No. 801-8314), filed
with the Commission, which is incorporated herein by reference thereto.
Item 29. Principal Underwriters
(a) Smith Barney Inc. ("Smith Barney ") acts as principal underwriter for
Consulting Group Capital Markets Funds
Global Horizons Investment Series (Cayman Islands)
Greenwich Street California Municipal Fund Inc.
Greenwich Street Municipal Fund Inc.
Greenwich Street Series Fund
High Income Opportunity Fund Inc.
The Italy Fund Inc.
Managed High Income Portfolio Inc.
Managed Municipals Portfolio II Inc.
Managed Municipals Portfolio Inc.
Municipal High Income Fund Inc.
Puerto Rico Daily Liquidity Fund Inc.
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Concert Allocation Series Inc.
Smith Barney Equity Funds
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.
Smith Barney Income Funds
Smith Barney Institutional Cash Management Fund, Inc.
Smith Barney Intermediate Municipal Fund, Inc.
Smith Barney Investment Funds Inc.
Smith Barney Investment Trust
Smith Barney Managed Governments Fund Inc.
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Money Funds, Inc.
Smith Barney Muni Funds
Smith Barney Municipal Fund, Inc.
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Natural Resources Fund Inc.
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund Inc.
Smith Barney Principal Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Telecommunications Trust
Smith Barney Variable Account Funds
Smith Barney World Funds, Inc.
Smith Barney Worldwide Special Fund N.V. (Netherlands Antilles)
Travelers Series Fund Inc.
The USA High Yield Fund N.V.(Netherlands Antilles)
Worldwide Securities Limited (Bermuda)
Zenix Income Fund Inc. and various series of unit investment trusts.
(b) The information required by this Item 29 with respect to each
director and officer of Smith Barney is incorporated by reference to
Schedule
A of Form BD filed by Smith Barney pursuant to the Securities Exchange
Act of
1934 (SEC File No. 8-8177)
(c) Not applicable
Item 30. Location of Accounts and Records
The Chase Manhattan Bank of New York,
Chase Metrotech Center, Brooklyn, New York 11245,
and First Data Investor Services Group, Inc.,
Exchange Place Boston, Massachusetts 02109, will
maintain the custodian and the shareholder servicing agent
records, respectively, required by Section 31(a).
All other records required by Section 31 (a) are maintained
at the offices of the Registrant at 388 Greenwich Street, New
York, New York 10013 (and preserved for the period
specified by Rule 31a-2).
Item 31. Management Services
Not applicable
Item 32. Undertakings
(a) Not applicable
(b) Not applicable
(c) Registrant undertakes to furnish each person to whom
a prospectus is delivered with a copy of Registrant's latest annual report
to shareholders, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485 (b) under the
Securities Act
of 1933 and has duly caused this Post-Effective Amendment to its
Registration
Statement to be signed on its behalf by the undersigned, and where
applicable,
the true and lawful attorney-in-fact, thereto duly authorized, in the City of
New York and State of New York on the 25th day of February,
1998.
SMITH BARNEY WORLD FUNDS, INC.
BY /s/ Heath B. McLendon
Heath B. McLendon,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below
by the
following persons in the capacities and on the date indicated.
Signatures Title Date
/s/ Heath B. McLendon Director, and
(Heath B. McLendon) Chief Executive Officer
2/25/98
Victor Atkins* Director
(Victor Atkins)
Robert Frankel* Director
(Robert Frankel)
Rainer Greeven* Director
(Rainer Greeven)
Susan M. Heilbron * Director
(Susan M. Heibron)
Bruce D. Sargent* Director
(Bruce D. Sargent)
James M. Shuart* Director
(James M. Shuart)
/s/ Lewis E. Daidone Treasurer (Principal Financial
R>2/25/98
(Lewis E. Daidone) Officer)and Principal Accounting
Officer
*By:/s/ Christina T. Sydor
2/25/98
(Christina T. Sydor)
Pursuant to Power of Attorney
EXHIBIT INDEX
Exhibit No. Exhibit Page Number
11(ii) Auditor's Consent
17 Financial Data Schedule
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Smith Barney World Funds, Inc.:
We consent to the use of our report dated December
18, 1997 for Global Government Bond Portfolio,
International Equity Portfolio, Pacific Portfolio,
European Portfolio, International Balanced Portfolio
and Emerging Markets Portfolio of Smith Barney World
Funds, Inc. incorporated herein by reference and to
the references to our Firm under the headings
"Financial Highlights" in the Prospectus and
"Independent Auditors" in the Statement of
Additional Information.
KPMG
Peat Marwick LLP
New York, New York
February 25, 1998
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<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,329,530
<SHARES-COMMON-STOCK> 1,482,729
<SHARES-COMMON-PRIOR> 692,413
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<INTEREST-INCOME> 120,118
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<EXPENSES-NET> 982,388
<NET-INVESTMENT-INCOME> (284,810)
<REALIZED-GAINS-CURRENT> (945,031)
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<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
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<NET-CHANGE-IN-ASSETS> 10,284,309
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 5,529
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> SMITH BARNEY WORLD FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> SMITH BARNEY WORLD FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<RESTATED>
<CIK> 0000873637
<NAME> SMITH BARNEY WORLD FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<CIK> 0000873637
<NAME> SMITH BARNEY WORLD FUNDS
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<NAME> SMITH BARNEY WORLD FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> SMITH BARNEY WORLD FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> SMITH BARNEY WORLD FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> SMITH BARNEY WORLD FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> SMITH BARNEY WORLD FUNDS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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