As filed with Securities and Exchange Commission on December 17, 1999
Securities Act Registration No. 33-_____
Investment Company Act No.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 x
Pre-Effective Amendment No._____
Post-Effective Amendment No.___
__________________
Smith Barney World Funds, Inc. - International Equity Portfolio
(a Maryland Corporation)
(Exact Name of Registrant as Specified in Charter)
388 Greenwich Street
New York, New York 10013
(Address of Principal Executive Offices)
(212) 816-6474
(Registrant's Telephone Number, including Area Code)
Christina T. Sydor, Secretary
Smith Barney World Funds, Inc. - International Equity Portfolio
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
_____________________
Copies to:
John E. Baumgardner, Jr., Esq.
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
_______________
Approximate Date of Proposed Public Offering:
As soon as possible after the effective date of this Registration
Statement.
Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the
Registration Statement shall become effective on such date as the
commission, acting pursuant to said Section 8(a), may determine.
TITLE OF SECURITIES BEING REGISTERED:
Shares of Beneficial Interest ($.001 par value) of the
Smith Barney World Funds, Inc. - International Equity Portfolio
___________________
The Registrant has registered an indefinite amount of securities
under the
Securities Act of 1933 pursuant to Section 24(f) under the Investment
Company
Act of 1940, as amended; accordingly, no fee is payable herewith because
of
reliance upon Section 24(f).
PART A
INFORMATION REQUIRED IN THE PROXY STATEMENT/PROSPECTUS
A SPECIAL NOTICE TO SHAREHOLDERS OF
SMITH BARNEY WORLD FUNDS - INTERNATIONAL BALANCED PORTFOLIO
Your Vote is Important
Dear Shareholder:
The Board of Directors of Smith Barney World Funds, Inc. has recently
reviewed and unanimously endorsed a proposal for a reorganization of the
International Balanced Portfolio (the "Balanced Portfolio") of Smith Barney
World Funds which it judges to be in the best interests of Balanced Portfolio's
shareholders.
Under the terms of the proposal, the International Equity Portfolio of Smith
Barney World Funds ("Equity Portfolio") would acquire all or substantially all
of the assets and liabilities of the Balanced Portfolio. With your approval,
the Balanced Portfolio will be liquidated and you will become a shareholder of
the Equity Portfolio. You will receive shares of the Equity Portfolio with an
aggregate value equivalent to the aggregate net asset value of your investment
in the Balanced Portfolio at the time of the transaction.
Here are some facts about the merger and the Equity Portfolio that will be
useful to you as you vote for this transaction:
. There will be no cost to you to become a shareholder of the Equity Portfolio.
. In the opinion of counsel, this transaction will be free from federal income
taxes to you, the Balanced Portfolio and the Equity Portfolio.
. You will be able to redeem your shares of the Equity Portfolio for cash
without any redemption fees or required holding period.
. Shares of the Equity Portfolio are priced on each day the fund is open for
business and you may redeem all or a part of your shares at the then-current
net asset value per share.
. As a shareholder of the Equity Portfolio, you will have the ability to
exchange your shares of the fund for shares of the same class of other funds
within that fund complex.
. The same portfolio managers who currently manage the Balanced Portfolio also
manage the Equity Portfolio.
<PAGE>
SPECIAL MEETING OF SHAREHOLDERS: YOUR VOTE IS
IMPORTANT
To consider this transaction, we have called a Special Meeting of
Shareholders to be held on April 7, 2000. We strongly invite your participation
by asking you to review, complete and return your proxy promptly.
Detailed information about the proposed transaction is described in the
enclosed proxy statement. On behalf of the Board of Directors, I thank you for
your participation as a share-holder and urge you to please exercise your right
to vote by completing, dating and signing the enclosed proxy card. A self-
addressed, postage-paid envelope has been enclosed for your convenience.
If you have any questions regarding the proposed transaction, please feel
free to call your Smith Barney Financial Consultant who will be pleased to
assist you.
IT IS VERY IMPORTANT THAT YOUR VOTING INSTRUCTIONS BE RECEIVED PROMPTLY.
Sincerely,
Heath B. McLendon
Chairman of the Board
February 21, 2000
<PAGE>
SMITH BARNEY WORLD FUNDS - INTERNATIONAL BALANCED PORTFOLIO
388 Greenwich Street
New York, New York 10013
___________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on April 7, 2000
Notice is hereby given that a Special Meeting of Shareholders (the "Meeting")
of the International Balanced Portfolio of Smith Barney World Funds ("Acquired
Fund") will be held at 388 Greenwich Street, 26th Floor, New York, New York on
April 7, 2000, commencing at 4:00 p.m. for the following purposes:
1. To approve or disapprove the Plan of Reorganization dated as of February
21, 2000 providing for (i) the acquisition of all or substantially all of
the assets of the Acquired Fund by Smith Barney World Funds, Inc. -
International Equity Portfolio ("Acquiring Fund") in exchange for shares
of the Acquiring Fund and the assumption by the Acquiring Fund of
scheduled liabilities of the Acquired Fund, (ii) the distribution of such
shares of the Acquiring Fund to shareholders of the Acquired Fund in
liquidation of the Acquired Fund and (iii) the subsequent dissolution of
the Acquired Fund.
2. To transact such other business as may properly come before the Meeting or
any adjournment or adjournments thereof.
The Board of Directors of the Acquired Fund has fixed the close of
business on January 31, 2000 as the record date for the determination of
shareholders of the Acquired Fund entitled to notice of and to vote at the
Meeting and any adjournment or adjournments thereof.
Your vote is important regardless of the size of your holdings in the
Acquired Fund. Whether or not you plan to attend the meeting, we ask that you
please complete and sign the enclosed proxy card and return it promptly in the
enclosed envelope that needs no postage if mailed in the continental United
States. Instructions for the proper execution of proxies are set forth on the
inside cover.
By Order of the Board of Directors
Christina T. Sydor, Esq.
Secretary
February 21, 2000
YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY WILL HELP TO AVOID
THE EXPENSE OF FURTHER SOLICITATION.
<PAGE>
INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of assistance to
you and avoid the time and expense to the Fund involved in validating your vote
if you fail to sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the party signing
should conform exactly to the name shown in the registration on the proxy
card.
3. All Other Accounts: The capacity of the individual signing the proxy card
should be indicated unless it is reflected in the form of registration. For
example:
Registration Valid Signatures
- ------------ ----------------
Corporate Accounts
(1) ABC Corp......................... ABC Corp.
(2) ABC Corp......................... John Doe, Treasurer
(3) ABC Corp.........................
c/o John Doe, Treasurer.......... John Doe
(4) ABC Corp. Profit Sharing Plan.... John Doe, Trustee
Trust Accountants
(1) ABC Trust........................ Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee
u/t/d 12/28/78................... Jane B. Doe
Custodian or Estate Accounts
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr. UGMA.... John B. Smith
(2) Estate of John B. Smith.......... John B. Smith, Jr., Executor
<PAGE>
PROSPECTUS/PROXY STATEMENT DATED FEBRUARY 21, 2000
Acquisition of the Assets of
INTERNATIONAL BALANCED PORTFOLIO
a separate investment portfolio of
SMITH BARNEY WORLD FUNDS
388 Greenwich Street
New York, New York 10013
(800) ___-____
By and in Exchange for Shares of
INTERNATIONAL EQUITY PORTFOLIO
a separate investment portfolio of
SMITH BARNEY WORLD FUNDS
388 Greenwich Street
New York, New York 10013
(800) ___-____
This Prospectus/Proxy Statement is being furnished to shareholders of the
International Balanced Portfolio (the "Acquired Fund") of Smith Barney World
Funds in connection with a proposed plan of reorganization to be submitted to
shareholders of the Acquired Fund for consideration at a Special Meeting of
Shareholders to be held on April 7, 2000 at 4:00 p.m. (the "Meeting"), at the
offices of Salomon Smith Barney Inc. ("Salomon Smith Barney") located at 388
Greenwich Street, 26th Floor, New York, New York 10013, or any adjournment or
adjournments thereof.
The plan provides for all or substantially all of the assets of the Acquired
Fund to be acquired by the International Equity Portfolio (the "Acquiring Fund")
of Smith Barney World Funds in exchange for shares of the Acquiring Fund and the
assumption by the Acquiring Fund of scheduled liabilities of the Acquired Fund
(hereinafter referred to as the "Reorganization"). (The Acquiring Fund and the
Acquired Fund are sometimes referred to hereinafter as the "Funds" and
individually as a "Fund.") Shares of the Acquiring Fund would be distributed to
shareholders of the Acquired Fund in liquidation of the Acquired Fund and
thereafter the Acquired Fund would be terminated. As a result of the proposed
Reorganization, each shareholder of the Acquired Fund will receive that number
of shares of the Acquiring Fund having an aggregate value equal to the aggregate
net asset value of such shareholder's shares of the Acquired Fund immediately
prior to the Reorganization. Holders of Class A shares of the Acquired Fund
will receive Class A shares of the Acquiring Fund, and no sales charge will be
imposed on the Class A shares of the Acquiring Fund received by the Acquired
Fund Class A shareholders. Holders of Class B, Class L or Class Y shares of the
Acquired Fund will receive Class B, Class L or Class Y shares, respectively, of
the Acquiring Fund. No contingent deferred sales charge ("CDSC") will be
imposed on Class B or Class L shares of the Acquiring Fund upon consummation of
the Reorganization.
However, any CDSC which is applicable to a shareholder's investment will
continue to apply, and in calculating the applicable CDSC payable upon the
subsequent redemption of Class B or Class L shares of the Acquiring Fund, the
period during which an Acquired Fund shareholder held Class B or Class L shares
of the Acquired Fund will be counted. This transaction is structured to be tax-
free for federal income tax purposes to shareholders and to both the Acquiring
Fund and the Acquired Fund.
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
1
<PAGE>
The Acquiring Fund is a separate investment portfolio of Smith Barney World
Funds, an open-end, diversified management investment company, whose investment
objective is to seek total return on its assets from growth of capital and
income. The Acquired Fund is a separate investment portfolio of Smith Barney
World Funds, an open-end, non-diversified management investment company, whose
investment objective 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.
SSB Citi Fund Management LLC, 388 Greenwich Street, New York, New York 10013
(the "Manager"), serves as investment manager to both the Acquiring Fund and the
Acquired Fund. The Manager is a wholly owned subsidiary of Salomon Smith Barney
Holdings, Inc. which, in turn, is a wholly owned subsidiary of Citigroup Inc.
The investment policies of the Acquiring Fund are generally similar to those of
the Acquired Fund. Certain differences in the investment policies of the
Acquiring Fund and the Acquired Fund, however, are described under "Investment
Objectives and Policies" in this Prospectus/Proxy Statement.
This Prospectus/Proxy Statement, which should be retained for future reference,
sets forth concisely the information about the Acquiring Fund that a prospective
investor should know before investing. Certain relevant documents listed below,
which have been filed with the Securities and Exchange Commission ("SEC"), are
incorporated in whole or in part by reference. A Statement of Additional
Information dated February 21, 2000, relating to this Prospectus/Proxy Statement
and the Reorganization, has been filed with the SEC and is incorporated by
reference into this Prospectus/Proxy Statement. A copy of such Statement of
Additional Information is available upon request and without charge by writing
to the Acquiring Fund at the address listed on the cover page of this
Prospectus/Proxy Statement or by contacting a Salomon Smith Barney Financial
Consultant. The Statement of Additional Information is not a Prospectus and
should be read in conjunction with the Prospectus.
1. The Prospectus of Smith Barney World Funds Inc. - International Equity
Portfolio dated February 28, 1999 is incorporated in its entirety by
reference and a copy accompanies this Proxy Statement/Prospectus.
2. The Prospectus of Smith Barney World Funds - International Balanced
Portfolio dated February 28, 1999 is incorporated in its entirety by
reference and a copy accompanies this Proxy Statement/Prospectus.
3. The Annual Report of Smith Barney World Funds - International Equity
Portfolio dated October 31, 1999, is incorporated in its entirety by
reference and a copy accompanies this Proxy Statement/Prospectus.
Also accompanying this Prospectus/Proxy Statement as Exhibit A is a copy of the
Plan of Reorganization (the "Plan") for the proposed transaction. Any term not
defined herein shall have the meaning assigned to it in the accompanying
prospectus of the Acquiring Fund.
2
<PAGE>
TABLE OF CONTENTS
PAGE
----
ADDITIONAL MATERIALS.............................. xx
FEE TABLES........................................ xx
SUMMARY........................................... xx
PRINCIPAL RISK FACTORS............................ xx
INFORMATION ABOUT THE REORGANIZATION.............. xx
INFORMATION ABOUT THE ACQUIRING FUND.............. xx
INFORMATION ABOUT THE ACQUIRED FUND............... xx
VOTING INFORMATION................................ xx
OTHER BUSINESS.................................... xx
EXHIBIT A: PLAN OF REORGANIZATION................ A-1
ADDITIONAL MATERIALS
The following additional materials, which have been incorporated by reference
into the Statement of Additional Information dated February 21, 2000 relating to
this Prospectus/Proxy Statement and the Reorganization, will be sent (without
charge) to all shareholders requesting a copy of such Statement of Additional
Information.
1. Statement of Additional Information of Smith Barney World Funds -
International Equity Portfolio dated February 28, 1999.
2. Annual Report of Smith Barney World Funds - International Balanced Portfolio
for the fiscal year ended October 31, 1999.
3
<PAGE>
FEE TABLES
Following are tables showing the current costs and expenses of the Acquired Fund
and the Acquiring Fund and the pro forma costs and expenses expected to be
incurred by the Acquiring Fund after giving effect to the Reorganization, each
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption.
CLASS A SHARES
Acquired Acquiring
Fund Fund
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses:
Maximum sales charge imposed on
purchases (as a percentage of
offering price)...................... 5.00% 5.00%*
Maximum CDSC (as a percentage of
original cost or redemption
proceeds, whichever is lower)........ None** None**
Annual Operating Expenses:
(as a percentage of average net
assets)
Management fees....................... 0.85% 0.85%
12b- 1 fees........................... 0.25 0.25
Other expenses***..................... 0.69 0.18
---- ----
Total Operating Expenses.............. 1.79% 1.28%
==== ====
_________________
* The sales charge imposed on purchases will be waived with regard to the
Acquiring Fund's exchange of its shares for the Acquired Fund's assets; you will
not pay any sales charge in connection with your receipt of the Acquiring Fund's
Class A shares pursuant to the reorganization.
** You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial sales charge), but if you redeem those shares within 12
months of their purchase, you will pay a deferred sales charge of 1.00%.
However, if you receive Class A shares pursuant to the Reorganization, you may
redeem those shares at any time and you will not have to pay any deferred sales
charge.
*** "Other expenses" for shares of the Acquired Fund and the Class A shares of
the Acquiring Fund are based on expenses for the fiscal year ended October 31,
1998.
4
<PAGE>
CLASS B SHARES
Acquired Acquiring
Fund Fund
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses:
Maximum sales charge imposed on
purchases (as a percentage of
offering price)...................... None None
Maximum CDSC (as a percentage of
original cost or redemption
proceeds, whichever is lower)........ 5.00%* 5.00%*
Annual Operating Expenses:
(as a percentage of average net
assets)
Management fees........................ 0.85% 0.85%
12b- 1 fees............................ 1.00% 1.00%
Other expenses**....................... 0.67% 0.24%
------ ------
Total Operating Expenses.............. 2.52% 2.09%
====== ======
_________________
* If you receive Class B shares pursuant to the Reorganization, you may redeem
those shares at any time and you will not have to pay any deferred sales charge.
** "Other expenses" for Class B shares of the Acquired Fund and the Acquiring
Fund are based on expenses for the fiscal year ended October 31, 1998.
5
<PAGE>
CLASS L SHARES*
Acquired Acquiring
Fund Fund
- -------------------------------------------------------------------------
Shareholder Transaction Expenses:
Maximum sales charge imposed on
purchases (as a percentage of
offering price)...................... 1.00% 1.00%
Maximum CDSC (as a percentage of
original cost or redemption
proceeds, whichever is lower)........ 1.00%** 1.00%**
Annual Operating Expenses:
(as a percentage of average net
assets)
Management fees....................... 0.85% 0.85%
12b- 1 fees........................... 1.00% 1.00%
Other expenses***..................... 0.73% 0.22%
----- -----
Total Operating Expenses.............. 2.58% 2.07%
===== =====
_________________
* Class L shares do not have a conversion feature and, therefore, are subject
to an ongoing distribution fee. As a result, long-term shareholders of Class L
shares may pay more than the economic equivalent of the maximum front-end sales
charge permitted by the National Association of Securities Dealers, Inc.
** If you receive Class L shares pursuant to the Reorganization, you may redeem
those shares at any time and you will not have to pay any deferred sales charge.
*** "Other expenses" for Class L shares of the Acquired Fund and the Acquiring
Fund are based on expenses for the fiscal year ended October 31, 1998.
6
<PAGE>
CLASS Y SHARES
Acquired Acquiring
Fund Fund
- -------------------------------------------------------------------------
Shareholder Transaction Expenses:
Maximum sales charge imposed on
purchases (as a percentage of
offering price)....................... None None
Maximum CDSC (as a percentage of
original cost or redemption
proceeds, whichever is lower)......... None None
Annual Operating Expenses:
(as a percentage of average net
assets)
Management fees....................... 0.85% 0.85%
12b- 1 fees........................... None None
Other expenses**...................... 0.69% 0.07%
---- ----
Total Operating Expenses.............. 1.54% 0.92%
==== ====
_________________
* "Other expenses" for Class Y shares of the Acquired Fund have been estimated
based on expenses incurred by Class A shares because no Class Y shares were
outstanding for the year ended October 31, 1998 and "Other expenses" for the
Acquiring Fund are based on expenses for the fiscal year ended October 31, 1998.
7
<PAGE>
Example
This example helps you compare the costs of investing in the Acquiring Fund with
the costs of investing in other mutual funds. Your actual costs may be higher
or lower. The example assumes:
. You invest $10,000 in the fund for the period shown.
. You redeem all of your shares at the end of each period.
. Your investment has a 5% return each year.
. You reinvest all distributions and dividends without a sales charge.
. The fund's operating expenses remain the same.
Number of years you own your shares:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years*
- --------------------------------------------------------------------------------------------------
Class A
<S> <C> <C> <C> <C>
Acquired Fund........................... $673 $1035 $1421 $2500
Acquiring Fund.......................... 624 886 1167 1968
Class B
Acquired Fund........................... $755 $1085 $1440 $2669
Acquiring Fund.......................... 712 955 1224 2227
Class L
Acquired Fund........................... $459 $ 894 $1457 $2986
Acquiring Fund.......................... 408 742 1202 2476
Class Y
Acquired Fund $157 $ 486 $ 839 $1834
Acquiring Fund 94 293 509 1131
</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.
This example should not be considered representations of past or future
expenses and actual expenses may be greater or less than those shown.
8
<PAGE>
SUMMARY
This summary is qualified in its entirety by reference to the additional
information contained elsewhere in this Prospectus/Proxy Statement, the Plan of
Reorganization, a copy of which is attached to this Prospectus/Proxy Statement
as Exhibit A, the accompanying Prospectus of the Acquiring Fund dated February
28, 1999, the Prospectus of the Acquired Fund dated February 28, 1999 and the
Statement of Additional Information of the Smith Barney World Funds dated
February 28, 1999.
Proposed Reorganization. The Plan provides for the transfer of all or
substantially all of the assets of the Acquired Fund to the Acquiring Fund in
exchange for shares of the Acquiring Fund and the assumption by the Acquiring
Fund of scheduled liabilities of the Acquired Fund. The Plan also calls for the
distribution of shares of the Acquiring Fund to the Acquired Fund's shareholders
in liquidation of the Acquired Fund. (The foregoing proposed transaction is
referred to in this Prospectus/Proxy Statement as the "Reorganization.") As a
result of the Reorganization, each shareholder of the Acquired Fund will become
the owner of that number of full and fractional shares of the Acquiring Fund
having an aggregate value equal to the aggregate net asset value of the
shareholder's shares of the Acquired Fund as of the close of business on the
date that the Acquired Fund's assets are exchanged for shares of the Acquiring
Fund. (Shareholders of Class A, Class B, Class L or Class Y shares of the
Acquired Fund will receive Class A, Class B, Class L or Class Y shares,
respectively, of the Acquiring Fund.) See "Information About the Reorganization
- - Plan of Reorganization."
For the reasons set forth below under "Reasons for the Reorganization," the
Board of Directors of Smith Barney World Funds, including the Directors of Smith
Barney World Funds who are not "interested persons" (the "Independent
Directors"), as that term is defined in the Investment Company Act of 1940, as
amended (the "1940 Act"), have concluded that the Reorganization would be in the
best interests of the shareholders of the Acquired Fund and that the interests
of the Acquired Fund's existing shareholders will not be diluted as a result of
the transaction contemplated by the Reorganization and therefore has submitted
the Plan for approval by the Acquired Fund's shareholders. The Board of
Directors of the Acquiring Fund has reached similar conclusions with respect to
the Acquiring Fund and has also approved the Reorganization in respect of the
Acquiring Fund.
Approval of the Reorganization will require the affirmative vote of a majority,
as defined in the 1940 Act, of the outstanding shares of the Acquired Fund,
which is the lesser of: (i) 67% of the voting securities of the Acquired Fund
present at the Meeting, if the holders of more than 50% of the outstanding
voting securities of the Acquired Fund are present or represented by proxy; or
(ii) more than 50% of the outstanding voting securities of the Acquired Fund.
For purposes of voting with respect to the Reorganization, the Class A, Class B,
Class L and Class Y shares of the Acquired Fund will vote together as a single
class. See "Voting Information."
Tax Consequences. Prior to completion of the Reorganization, the Funds will
have received an opinion of counsel that, upon the Reorganization and the
transfer of the assets of the Acquired Fund, no gain or loss will be recognized
by the Acquired Fund or its shareholders for federal income tax purposes. The
holding period and aggregate tax basis of the Acquiring Fund shares received by
an Acquired Fund shareholder will be the same as the holding period and
aggregate tax basis of the shares of the Acquired Fund previously held by such
shareholder. In addition, the holding period and tax basis of the assets of the
Acquired Fund in the hands of the Acquiring Fund as a result of the
Reorganization will be the same as in the hands of the Acquired Fund immediately
prior to the Reorganization.
Investment Objectives and Policies. The Acquiring Fund and the Acquired Fund
have generally similar investment objectives, policies and restrictions. The
Acquiring Fund is an open-end, diversified management investment company whose
investment objective is total return on its assets from growth of capital and
income. The Acquired Fund is a portfolio of Smith Barney World Funds, an open-
end, non-diversified
9
<PAGE>
management investment company, whose investment objective 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.
For a discussion of the differences between the investment policies of the
Acquiring Fund and the Acquired Fund, see "Comparison of Investment Objectives
and Policies."
However, despite the similar investment objectives, there are some differences
between the investment policies that the two funds pursue to fulfill their
investment objectives. The primary differences between the funds' investment
policies relate to the fact that the Acquiring Fund invests primarily in equity
securities of foreign companies, while the Acquired Fund also invests in the
debt securities of foreign issuers, consisting primarily of foreign government
obligations, but also including corporate bonds. The manager of the Acquired
Fund selects investments for either their capital appreciation or income
potential, attempting to achieve a balance between equity and debt securities so
that neither normally comprises more than 70%, or less than 30% of its assets.
The manager may vary its allocation, depending on the manager's assessment of
current economic and market conditions.
The final material difference between the investment policies of the funds stems
from the fact that the Acquired Fund is a non-diversified investment company and
the Acquiring Fund is a diversified investment company. In order to be
classified as a diversified investment company, the Acquiring Fund may not, with
respect to 75% of its assets, invest more than 5% of its total assets in the
securities of one issuer (except U.S. Government securities) or own more than
10% of the outstanding voting securities of any one issuer. As a non-
diversified fund, the Acquired Fund is not subject to these restrictions.
However, both funds intend to conduct their operations so as to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which will relieve the funds of any liability for
federal income tax to the extent their earnings are distributed to shareholders.
To qualify as a regulated investment company, both funds will, among other
things, limit their investments so that, at the close of each quarter of their
taxable year (1) not more than 25% of the market value of the funds' total
assets will be invested in the securities of a single issuer and (2) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value of either funds' total assets will be invested in the securities of
a single issuer.
Purchase and Redemption Procedures. The purchase and redemption procedures
available to shareholders of the Acquiring Fund are identical to those of the
Acquired Fund. Purchase of shares of the Acquiring Fund and the Acquired Fund
may be made through a Salomon Smith Barney, Inc. ("SalomonSmithBarney")
Financial Consultant or a broker that clears securities transactions through
Salomon Smith Barney on a fully disclosed basis (a "Dealer Representative").
Class A shares of both the Acquiring Fund and the Acquired Fund are sold subject
to a maximum initial sales charge of 5.00% of the public offering price. Class
A shares of either Fund may be purchased at a reduced sales charge or at net
asset value, determined by aggregating the dollar amount of a new purchase and
the total asset value of all Class A shares of Funds offered by Salomon Smith
Barney held by such person that are exchangeable with Class A shares of either
Fund and applying the (reduced) sales charge applicable to such aggregate.
Purchases of Class A shares of both Funds, which when combined with current
holdings of Class A shares offered with a sales charge equal or exceed $500,000
in the aggregate, 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. Class
B shares of both Funds may be purchased without an initial sales charge but are
subject to a CDSC of 5.00% payable upon certain redemptions. The charge is
reduced over time and there is no CDSC after six years.
Class L shares of both Funds are sold with an initial sales charge of 1.00% and
are subject to a CDSC if shares are redeemed within one year of purchase. Class
L shares are also subject to higher ongoing expenses than Class A shares. Class
Y shares of both Funds are sold without an initial sales charge or CDSC. Class Y
shares of the Acquiring Fund are available only to investors meeting an initial
investment minimum of $5,000,000. Class Y shares of the Acquired Fund are
available only to investors meeting an initial investment minimum of
$15,000,000. As of January 31, 2000 (the "Record Date"), no Class Y shares of
the Acquired Fund were outstanding. Further, the Acquiring Fund is authorized to
issue a fifth class of shares, Class Z
10
<PAGE>
shares, exclusively for sale to tax-exempt employee benefit and retirement plans
of Smith Barney and to certain unit investment trusts sponsored by Smith Barney
or any of its affiliates. As of the date hereof, the Acquiring Fund has not sold
any Class Z shares. The Acquired Fund does not offer Class Z shares.
Class A shares of both the Acquiring and the Acquired Fund may be redeemed at
their respective net asset values per share next determined without charge,
except as set forth in the preceding paragraph. Class B shares of both Funds
may be redeemed at their net asset value per share, subject to a maximum CDSC of
5.00% of the lower of original cost or redemption proceeds, declining by 0.50%
the first year after purchase and by 1.00% each year thereafter to zero. Class
L shares of both Funds may be redeemed at their net asset value per share,
subject to a CDSC of 1.00% if such shares are redeemed during the first 12
months following their purchase. Shares of both Funds held by Salomon Smith
Barney as custodian must be redeemed by submitting a written request to a
Salomon Smith Barney Financial Consultant. All other shares may be redeemed
through a Salomon Smith Barney Financial Consultant, Dealer Representative or by
forwarding a written request for redemption to Smith Barney World Funds,
Inc./[name of fund]; Class A, B, L or Y (please specify); c/o First Data
Investor Services Group, Inc., P.O. Box 5128, Westborough, MA 01581-5128. See
"Redeeming Shares" in the accompanying Prospectus of the Acquiring Fund.
Distribution Arrangements. To compensate Salomon Smith Barney for the service
it provides and for the expenses it bears, both the Acquiring Fund and the
Acquired Fund have adopted a plan of distribution pursuant to Rule 12b-1 under
the 1940 Act (the "12b-1 Plan"). Under the 12b-1 Plan, each fund pays Salomon
Smith Barney a service fee, accrued daily and paid monthly, calculated at the
annual rate of 0.25% of the value of the funds' average daily net assets
attributable to the Class A shares. The service fee is primarily used to pay
Salomon Smith Barney Financial Consultants for servicing shareholder accounts.
In addition, each fund pays Salomon Smith Barney a distribution fee accrued
daily and paid monthly calculated at the annual rate of 1.00% of the funds'
average daily net assets with respect to Class B shares and Class L shares. The
distribution fee is used 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 Salomon 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 Salomon Smith Barney
associated with the sale of fund shares, including lease, utility,
communications and sales promotion expenses. For each of the other funds, the
Class B and Class L distribution fee is calculated at the annual rate of 0.75%
of the value of such fund's average net assets attributable to the shares of the
respective Class.
Payments under each 12b-1 Plan are not tied exclusively to the distribution and
shareholder services expenses actually incurred by Salomon Smith Barney and the
payments may exceed distribution expenses actually incurred. The Board of
Directors will evaluate the appropriateness of each 12b-1 Plan and its payment
terms on a continuing basis and in so doing will consider all relevant factors,
including expenses borne by Salomon Smith Barney, amounts received under the
12b-1 Plan and proceeds of the deferred sales charges.
Exchange Privileges. The exchange privileges available to shareholders of the
Acquiring Fund are identical to those available to shareholders of the Acquired
Fund. Shareholders of both the Acquired Fund and the Acquiring Fund may
exchange at net asset value all or a portion of their shares for shares of the
same class in certain other funds of the Smith Barney Mutual Funds. Any
exchange will be a taxable event for which a shareholder may have to recognize a
gain or a loss under federal income tax provisions. No initial sales charge is
imposed on the shares being acquired in an exchange, and no CDSC is imposed on
the shares being disposed of in the exchange. A sales charge differential,
however, may apply to exchanges of Class A shares with other Smith Barney Mutual
Funds. For purposes of computing the CDSC that may be payable upon a
disposition, the Class B and Class L shares acquired in the exchange will be
deemed to have been purchased on the same date as the Class B and Class L shares
that were exchanged therefor. Class B shares of the Funds that are exchanged
for Class B shares of other Smith Barney Mutual Funds imposing a higher CDSC
11
<PAGE>
will be subject to the higher applicable CDSC. See "Exchanging Shares" in the
accompanying Prospectus of the Acquiring Fund.
Dividends. The Acquiring Fund generally makes capital gain distributions and
pays dividends, if any, once a year, typically in December. The Acquiring Fund
may pay additional distributions and dividends at other times if necessary for
it to avoid a federal tax. The Acquired Fund generally declares and pays
dividends quarterly and makes capital gain distributions, if any, once a year,
typically in December. The Acquired Fund may pay additional distributions and
dividends at other times if necessary for it to avoid a federal tax. With
respect to both funds, unless a shareholder otherwise instructs, dividends and
capital gains distributions will be reinvested automatically in additional
shares of the same class at net asset value, subject to no sales charge or CDSC.
The distribution option currently in effect for a shareholder of the Acquired
Fund will remain in effect after the Reorganization. After the Reorganization,
however, the former Acquired Fund shareholders may change their distribution
option at any time by contacting a Salomon Smith Barney Financial Consultant.
See "Dividends, Distributions and Taxes" in the accompanying Prospectus of the
Acquiring Fund.
Shareholder Voting Rights. The Acquiring Fund and the Acquired Fund are both
registered with the SEC as open-end management investment companies. The
Acquiring Fund and the Acquired Fund are both separate series of Smith Barney
World Funds, a Maryland corporation having a Board of Directors. Shareholders
of both funds have identical voting rights. Neither fund holds a meeting of
shareholders annually, and there is normally no meeting of shareholders held 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 in each fund then in office will call a shareholders'
meeting for the election of Directors.
Shareholders of the Acquired Fund may, however, redeem their shares at net asset
value (subject to any applicable CDSC) prior to the date of the Reorganization.
For purposes of voting with respect to the Reorganization, the Class A, Class B
and Class L shares of the Acquired Fund will vote together as a single class.
See "Information on Shareholders' Rights - Voting Rights."
PRINCIPAL RISK FACTORS
Due to the similarities of investment objectives and policies of the Acquiring
Fund and the Acquired Fund, the investment risks are substantially similar.
Such risks are generally those typically associated with investing in foreign
securities. The following is a summary of the principal risk factors associated
with investing in shares of the Acquiring Fund and a comparison with those
applicable to the Acquired Fund. This summary is qualified in its entirety by
the accompanying Prospectus of the Acquiring Fund.
Investors could lose money on their investment in the Acquiring Fund, or the
Acquiring Fund may not perform as well as other investments, if:
. Foreign securities prices decline
. Adverse governmental action or political, economic or market instability
affects a foreign country or region.
. The currency in which a security is priced declines in value relative to the
U.S. dollar
. The manager's judgment about the attractiveness, value or potential
appreciation of a particular security proves to be incorrect.
Many foreign countries in which the fund invests have markets that are less
liquid and more volatile than markets in the U.S. In some foreign countries,
less information is available about foreign issuers and markets because of less
rigorous accounting and regulatory standards than in the U.S. Currency
fluctuations could erase investment gains or add to investment losses. The risk
of investing in foreign securities is greater in the case of emerging markets.
12
<PAGE>
In Europe, Economic and Monetary Union ("EMU") and the introduction of a single
currency began on January 1, 1999. There are significant political and economic
risks associated with EMU, which may increase the volatility of the fund's
European investments and present valuation problems.
Currency Transactions. The Acquiring Fund may enter into transactions to but or
sell currencies at a future date, which may be a few days or a number of months.
The fund may enter into these forward currency contracts to:
. Settle transactions in securities quoted in foreign currencies
. Attempt to protect against the economic impact of adverse changes in the
value of the U.S. dollar.
The fund may not fully benefit from or may lose money on forward currency
transactions if changes in currency rates do not occur as anticipated or do not
correspond accurately to changes in the value of the fund's holdings.
In comparing these risks with the risks of the Acquired Fund, the risks are
almost identical. The one material difference is that investors in the Acquired
Fund are also subject to the risks of investing in debt securities, including
the possibility that debt securities may lose value because of an increase in
market interest rates, a decline in an issuer's credit rating or financial
condition or a default.
13
<PAGE>
INFORMATION ABOUT THE REORGANIZATION
Plan of Reorganization. The following summary of the Plan is qualified in its
entirety by reference to the Plan (Exhibit A hereto). The Plan provides that he
Acquiring Fund will acquire all or substantially all of the assets of the
Acquired Fund in exchange for Class A, Class B, Class L and Class Y shares of
the Acquiring Fund and the assumption by the Acquiring Fund of scheduled
liabilities of the Acquired Fund on April 14, 2000 or such later date as may be
agreed upon by the parties (the "Closing Date").
Prior to the Closing Date, the Acquired Fund will endeavor to discharge all of
its known liabilities and obligations. The Acquiring Fund will not assume any
liabilities or obligations other than those reflected on an unaudited statement
of assets and liabilities of the Acquired Fund prepared as of the close of
regular trading on the NYSE, currently 4:00 p.m., New York City time, on the
Closing Date. The number of full and fractional shares of Class A, B, L and Y
shares to be issued to the Acquired Fund shareholders will be determined on the
basis of the Acquiring Fund's Class A, B, L and Y shares and the Acquired Fund's
Class A, B, L and Y shares relative net asset value. The net asset value per
share will be determined by dividing assets, less liabilities, by the total
number of such outstanding shares.
The Acquired Fund and the Acquiring Fund will utilize the procedures set forth
in the Prospectus of the Acquiring Fund to determine the value of their
respective portfolio securities and to determine the aggregate value of each
fund's portfolio. The method of valuation will be consistent with the
requirements set forth in the Prospectus of the Acquiring Fund, Rule 22c-1 under
the 1940 Act and the interpretations of such rule by the SEC's Division of
Investment Management.
At or prior to the Closing Date, the Acquired Fund will, and the Acquiring Fund
may, declare a dividend or dividends which, together with all previous such
dividends, will have the effect of distributing to their respective shareholders
all taxable income for the taxable period ending on or prior to the Closing Date
(computed without regard to any deduction for dividends paid). In addition, the
Acquired Fund's dividend will include its net capital gains realized in the
taxable year ending on or prior to the Closing Date (after reductions for any
capital loss carryforward).
On the Closing Date or as soon thereafter as conveniently practicable, the
Acquired Fund will liquidate and distribute pro rata to shareholders of record
as of the close of business on the Closing Date the full and fractional shares
of the Acquiring Fund received by the Acquired Fund. Such liquidation and
distribution will be accomplished by the establishment of accounts in the names
of the Acquired Fund's shareholders on the share records of the Acquiring Fund's
transfer agent. Each account will represent the respective pro rata number of
full and fractional shares of the Acquiring Fund due to each of the Acquired
Fund's shareholders. After such distribution and the winding up of its affairs,
the Acquired Fund will be dissolved.
The consummation of the Reorganization is subject to the conditions set forth in
the Plan. Notwithstanding approval of the Acquired Fund's shareholders, the
Plan may be terminated at any time at or prior to the Closing Date (i) by mutual
agreement of the Acquired Fund and the Acquiring Fund, (ii) by the Acquired
Fund, in the event that the Acquiring Fund shall, or the Acquiring Fund, in the
event that the Acquired Fund shall materially breach any representation,
warranty or agreement contained in the Plan to be performed at or prior to the
Closing Date; or (iii) by the Acquired Fund, or by the Acquiring Fund if a
condition to the Plan expressed to be precedent to the obligations of the
terminating party has not been net and it reasonable appears that it will not be
met.
Approval of the Plan will require the affirmative vote of a majority, as defined
in the 1940 Act, of the outstanding shares of the Acquired Fund, which is the
lesser of: (i) 67% of the voting securities of the Acquired Fund present at the
Meeting, if the holders of more than 50% of the outstanding voting securities of
the Acquired Fund are present or represented by proxy; or (ii) more than 50% of
the outstanding voting
14
<PAGE>
securities of the Acquired Fund. If the Reorganization is not approved by
shareholders of the Acquired Fund, the Board of Directors of Smith Barney World
Funds will consider courses of action available to it, including re-submitting
the Reorganization proposal to shareholders.
Description of the Acquiring Fund's Shares. Pursuant to the Reorganization and
in accordance with the Plan, each shareholder of Class A, Class B, Class L and
Class Y shares of the Acquired Fund will become a shareholder of Class A, Class
B, Class L and Class Y shares, respectively, of the Acquiring Fund. Each share
of the Acquiring Fund represents a proportional interest in the Acquiring Fund's
investment portfolio. The Class A shares and the Class L shares of the
Acquiring Fund are normally purchased subject to a 5.00% and 1.00% initial sales
charge, respectively. However, no sales charge will be paid on shares received
pursuant to this Reorganization. Also, no fee will be charged upon redemption
of shares of the Acquiring Fund received pursuant to this Reorganization. For a
complete description of the Acquiring Fund's shares, please see "Choosing a
class of shares to buy"; "Comparing the fund's classes"; "Sales charges"; "More
about deferred sales charges"; "Buying shares"; "Exchanging shares"; "Redeeming
shares"; and "Other things to know about share transactions," in the Acquiring
Fund's Prospectus which was mailed herewith.
Reasons for the Reorganization. The Board of Directors of the Smith Barney
World Funds has determined that it is advantageous to combine the Acquired Fund
with the Acquiring Fund. The Funds have generally similar investment objectives
and policies and have the same investment adviser, distributor and transfer
agent. In reaching this conclusion, the Board considered a number of factors as
described below.
Among the factors considered by the Board of Directors is the fact that the
Acquired Fund does not have sufficient assets to justify maintaining this fund
as a stand-alone fund (i.e. this fund has never exceeded $20.6 million in
assets). The Acquired Fund, which has been in existence for approximately five
years, has not grown and in light of the history of the fund, there is no
foreseeable potential for future growth. The Manager subsidized this fund by
absorbing expenses, including waiving the management fee, in several years since
the inception of the fund. Without these subsidies, the Acquired Fund would
have had a substantially higher expense ratio and substantially lower
performance.
Both the Acquired Fund and the Acquiring Fund are managed by the same investment
adviser and have the same portfolio managers, i.e., the individuals primarily
responsible for each fund's day-to-day investment decisions. In particular, the
Board was presented with information to the effect that, with two different
funds, Salomon Smith Barney was confronted with operational and shareholder
services issues, including (i) dilution of the firm's money management and
research expertise due to the splitting of attention between the two highly
similar funds; and (ii) investor confusion associated with offering similar
funds. The Board also considered that no sales charges would be imposed in
effecting the Reorganization and the advantages of eliminating duplication
inherent in marketing two funds with similar investment objectives.
Information regarding operating expenses of the Acquired Fund and the Acquiring
Fund reflecting expenses for the fiscal year ended October 31, 1998, is included
under the caption "Fee Tables" in this Prospectus/Proxy Statement. Based upon
these levels of expenses, assuming the same level of assets of the combined fund
after the Reorganization as on April 14, 2000, it is estimated that Class A,
Class B, Class L and Class Y shareholders of the Acquired Fund should experience
a 0.51%, 0.43%, 0.51% and 0.62% decrease, respectively, in total operating
expenses, resulting from a decrease in other operating expenses.
The Board also considered, among other things, the terms and conditions of the
Reorganization and the comparative investment performance of the Funds. In
addition, the Board was advised that the Reorganization would be effected as a
tax-free reorganization.
In light of the foregoing, the Board of Directors of the Smith Barney World
Funds, including the Independent Directors, has determined that it is in the
best interests of the Acquired Fund and its shareholders to combine with the
Acquiring Fund. The Board of Trustees has also determined that a combination of
the Acquired
15
<PAGE>
Fund and the Acquiring Fund would not result in a dilution of the
interests of the Acquired Fund's shareholders and that the Reorganization would
be effected as a tax-free reorganization. Accordingly, the Board of Directors,
including a majority of the independent Directors, has determined that the
Reorganization is in the best interests of the Acquiring Fund's shareholders and
that the interests of the Acquiring Fund's shareholders would not be diluted as
a result of the Reorganization.
Federal Income Tax Consequences. The exchange of assets for shares of the
Acquiring Fund is intended to qualify for federal income tax purposes as a tax-
free reorganization under Section 368(a) of the Code. As a condition to the
closing of the Reorganization, the Acquiring Fund and the Acquired Fund will
receive an opinion from Sullivan & Cromwell, counsel to the Acquiring Fund, to
the effect that, on the basis of the existing provisions of the Code, U.S.
Treasury regulations issued thereunder, current administrative rules,
pronouncements and court decisions, for federal income tax purposes, upon
consummation of the Reorganization:
(1) the transfer of all or substantially all of the Acquired Fund's assets in
exchange for the Acquiring Fund's shares and the assumption by the Acquiring
Fund of scheduled liabilities of the Acquired Fund will constitute a
"reorganization" within the meaning of Section 368(a)(1)(C) of the Code, and the
Acquiring Fund and the Acquired Fund are each a "party to a reorganization"
within the meaning of Section 368(b) of the Code;
(2) no gain or loss will be recognized by the Acquiring Fund upon the receipt
of the assets of the Acquired Fund in exchange for the Acquiring Fund's shares
and the assumption of scheduled liabilities of the Acquired Fund;
(3) no gain or loss will be recognized by the Acquired Fund upon the transfer
of the Acquired Fund's assets to the Acquiring Fund in exchange for the
Acquiring Fund's shares and the assumption of scheduled liabilities of the
Acquired Fund or upon the distribution (whether actual or constructive) of the
Acquiring Fund's shares to the Acquired Fund's shareholders;
(4) no gain or loss will be recognized by shareholders of the Acquired Fund
upon the exchange of their shares of the Acquired Fund for shares of the
Acquiring Fund;
(5) the aggregate tax basis for shares of the Acquiring Fund received by each
shareholder of the Acquired Fund pursuant to the Reorganization will be the same
as the aggregate tax basis of shares of the Acquired Fund surrendered therefor,
and the holding period of shares of the Acquiring Fund to be received by each
shareholder of the Acquired Fund will include the period during which shares of
the Acquired Fund exchanged therefor were held by such shareholder (provided
shares of the Acquired Fund were held as capital assets on the date of the
Reorganization); and
(6) the tax basis to the Acquiring Fund of the Acquired Fund's assets
acquired by the Acquiring Fund will be the same as the tax basis of such assets
to the Acquired Fund immediately prior to the Reorganization, and the holding
period of the assets of the Acquired Fund in the hands of the Acquiring Fund
will include the period during which those assets were held by the Acquired
Fund.
Shareholders of the Acquired Fund should consult their tax advisors regarding
the effect, if any, of the proposed Reorganization in light of their individual
circumstances. Since the foregoing discussion only relates to the federal
income tax consequences of the Reorganization, shareholders of the Acquired Fund
should also consult their tax advisors as to state and local tax consequences,
if any, of the Reorganization.
16
<PAGE>
Capitalization. The following table shows the capitalization of the Acquiring
Fund and the Acquired Fund as of _____________, 2000, and on a pro forma basis
as of that date, giving effect to the proposed acquisition of assets at net
asset value.
<TABLE>
<CAPTION>
Acquiring Fund Acquired Fund
(Unaudited) (Unaudited) Pro Forma for
---------------- ----------------- Reorganization
(Unaudited)
---------------
(In thousands, except per share values)
<S> <C> <C> <C>
Class A Shares
Net assets $ $ $
Net asset value per share........
Shares outstanding...............
Class B Shares
Net assets....................... $ $ $
Net asset value per share........
Shares outstanding...............
Class L Shares
Net assets....................... $ $ $
Net asset value per share........
Shares outstanding...............
Class Y Shares
Net assets....................... $0 $0 $0
Net asset value per share........ 0 0 0
Shares outstanding............... 0 0 0
Class Z Shares
Net assets....................... N/A $0 $0
Net asset value per share........ N/A 0 0
Shares outstanding............... N/A 0 0
</TABLE>
As of the Record Date, there were _______________ outstanding Class A shares,
____________ outstanding Class B shares, ________ outstanding Class L shares and
no outstanding Class Y shares of the Acquired Fund, and _____________________
outstanding Class A shares, _______________ outstanding Class B shares,
_________________ outstanding Class L shares and no outstanding Class Y shares
or Class Z shares of the Acquiring Fund. As of the Record Date, the officers
and Directors of the Acquired Fund beneficially owned as a group less than 1% of
the outstanding shares of each class of the Acquired Fund. To the best
knowledge of the Directors of the Acquired Fund, as of the Record Date, no
shareholder or "group" (as that term is used in Section 13(d) of the Securities
Exchange Act of 1934 (the "Exchange Act")), except as set forth in the table
below, owned beneficially or of record more than 5% of the outstanding shares of
a class of the Acquired Fund. As of the Record Date, the officers and Directors
of the Acquiring Fund beneficially owned as a group less than 1% of the
outstanding shares of each class of the Acquiring Fund. Except as set forth in
the table below, to the best knowledge of the Directors of the Acquiring Fund,
as of the Record Date, no shareholder or "group" (as that term is used in
Section 13(d) of the Exchange Act) owned beneficially or of record more than 5%
of the outstanding shares of a class of the Acquiring Fund. As of November 30,
1999, the net asset value of the Acquired Fund equaled less than 1% of the
Acquiring Fund's net asset value; thus, pursuant to item 14(a)(2) of form N-14,
proforma financial statements have not been prepared.
17
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Class Owned
of Record
or Beneficially
----------------------
Upon
Consummation
Fund As of the of the
Name and Address and Class Record Date Reorganization
- ---------------- --------- ----------- ---------------
<S> <C> <C> <C>
John J. Smith Acquiring Fund *
388 Greenwich Street Class A
New York, NY 10013
_________________
*Less than 1.00%
</TABLE>
18
<PAGE>
INFORMATION ABOUT THE ACQUIRING FUND
The Prospectus and Annual Report of the Acquiring Fund have been delivered with
this prospectus/proxy statement and are incorporated herein by reference.
Information regarding Fund Goal and Strategies, Investment Objective, Risks,
Performance and Expenses, Fee Table, More on the Fund's Investments, Management
and Financial Highlights Information of the Acquiring Fund may be found under
such headings in the prospectus of the Acquiring Fund. For information
regarding Management's Discussion of Fund Performance of the Acquiring Fund,
please refer to the Acquiring Fund's annual report that accompanies this
prospectus/proxy statement.
INFORMATION ABOUT THE ACQUIRED FUND
Information about the Acquired Fund is incorporated herein by reference from the
current prospectus of the Acquired Fund. The Acquired Fund's prospectus, dated
February 28, 1999, is available upon request (without charge) by calling or
writing the Acquired Fund at the telephone number of address listed on the cover
page of this prospectus/proxy statement. Copies of the Acquired Fund's
shareholder reports, prospectus and statement of additional information can be
reviewed and copied at the Commission's Public Reference Room in Washington,
D.C. In addition, information on the operation of the Public Reference Room may
be obtained by calling the Commission at 1-202-942-8090. Reports and other
information about the Acquired Fund are available on the EDGAR Database on the
Commission's Internet site at http://www.sec.gov. Copies of this information
------------------
may be obtained for a duplicating fee by electronic request at the following E-
mail address: [email protected], or by writing the Commission's Public
------------------
Reference Section, Washington, D.C. 20549-0102.
VOTING INFORMATION
This Prospectus/Proxy Statement is furnished in connection with a solicitation
of proxies by the Board of Directors of the Acquired Fund to be used at a
Special Meeting of Shareholders of the Acquired Fund to be held at 4:00 p.m. on
April 7, 2000 at 388 Greenwich Street, New York, NY 10013, and at any
adjournment or adjournments thereof. This Prospectus/Proxy Statement, along
with a Notice of the Meeting and a proxy card, is first being mailed to
shareholders of the Acquired Fund on or about February 21, 2000. Only
shareholders of record as of the close of business on the Record Date will be
entitled to notice of, and to vote at, the Meeting or any adjournment thereof.
The holders of a majority of the shares of the Acquired Fund outstanding at the
close of business on the Record Date present in person or represented by proxy
will constitute a quorum for the Meeting. For purposes of determining a quorum
for transacting business at the Meeting, abstentions and broker "non-votes"
(that is, proxies from brokers or nominees indicating that such persons have not
received instructions from the beneficial owner or other persons entitled to
vote shares on a particular matter with respect to which the brokers or nominees
do not have discretionary power) will be treated as shares that are present but
which have not been voted. For this reason, abstentions and broker non-votes
will have the effect of a "no" vote for purposes of obtaining approval of the
Plan. If the enclosed form of proxy is properly executed and returned in time
to be voted at the Meeting, the proxies named therein will vote the shares
represented by the proxy in accordance with the instructions marked thereon.
Unmarked proxies will be voted FOR approval of the proposed Reorganization and
FOR approval of any matters deemed appropriate. A proxy may be revoked at any
time on or before the Meeting by written notice to the Secretary of the Acquired
Fund, Christina T. Sydor, Esq., 388 Greenwich Street, New York, New York, 10013.
Unless revoked, all valid proxies will be voted in accordance with the
specifications thereon or, in the absence of such specifications, FOR approval
of the Plan and the Reorganization contemplated thereby.
Approval of the Plan will require the affirmative vote of a majority of the
outstanding shares of the Acquired Fund. Shareholders of the Acquired Fund are
entitled to one vote for each share. Fractional shares are entitled to
proportional voting rights.
19
<PAGE>
Proxy solicitations will be made primarily by mail, but proxy solicitations also
may be made by telephone, the internet or personal interviews conducted by
officers and employees of SalomonSmithBarney and its affiliates and/or by First
Data Investor Services Group, Inc. ("First Data"), the Acquiring Fund's transfer
agent. If the Acquired Fund records votes by telephone or the internet, it will
use procedures designed to authenticate shareholders' identities to allow
shareholders to authorize the voting of their shares in accordance with their
instructions, and to confirm that their instructions have been properly
recorded. Although a shareholder's vote may be taken by telephone or the
internet, each shareholder will receive a copy of this Prospectus/Proxy
Statement and may vote by mail using the enclosed proxy card. The aggregate
cost of solicitation of the shareholders of the Acquired Fund is expected to be
approximately $ ______. Expenses of the Reorganization, including the costs of
proxy solicitation and the preparation of enclosures to the Prospectus/Proxy
Statement, reimbursement of expenses of forwarding solicitation material to
beneficial owners of shares of the Acquired Fund and expenses incurred in
connection with the preparation of this Prospectus/Proxy Statement will be borne
by the Acquiring Fund and the Acquired Fund in proportion to their assets.
In the event that a quorum necessary for a shareholders meeting is not present
or sufficient votes to approve the Reorganization are not received by April 7,
2000, the persons named as proxies may propose one or more adjournments of the
Meeting to permit further solicitation of proxies. In determining whether to
adjourn the Meeting, the following factors may be considered: the percentage of
votes actually cast, the percentage of negative votes actually cast, the nature
of any further solicitation and the information to be provided to shareholders
with respect to the reasons for the solicitation. Any such adjournment will
require an affirmative vote by the holders of a majority of the shares present
in person or by proxy and entitled to vote at the Meeting. The persons named as
proxies will vote upon a decision to adjourn the Meeting.
The votes of the shareholders of the Acquiring Fund are not being solicited by
this Prospectus/Proxy Statement.
OTHER BUSINESS
The Directors of the Smith Barney World Funds do not intend to present any
other business at the Meeting. If, however, any other matters are properly
brought before the Meeting, the persons named in the accompanying form of proxy
will vote thereon in accordance with their judgment.
The Board of Directors of the Smith Barney World Funds - International Balanced
Fund, including the Independent Directors, unanimously recommends approval of
the Plan, and any unmarked proxies without instructions to the contrary will be
voted in favor of the Plan.
20
<PAGE>
EXHIBIT A
PLAN OF REORGANIZATION
THIS PLAN OF REORGANIZATION (the "Plan") is made as of this 21st day of
February, 2000, by and between Smith Barney World Funds, Inc. - International
Equity Portfolio, a Maryland corporation with its principal place of business at
388 Greenwich Street, New York, New York 10013 (the "Acquiring Fund"), and Smith
Barney World Funds, Inc. - International Balanced Portfolio, a Maryland
corporation, with its principal place of business at 388 Greenwich Street, New
York, New York 10013 (the "Acquired Fund").
This Plan is intended to be and is adopted as a plan of reorganization and
liquidation within the meaning of Section 368(a)(1)(C) of the United States
Internal Revenue Code of 1986, as amended (the "Code"). The reorganization (the
"Reorganization") will consist of the transfer of all or substantially all of
the assets of the Acquired Fund in exchange for Class A, Class B, Class L and
Class Y shares of common stock of the Acquiring Fund (collectively, the
"Acquiring Fund Shares" and each, an "Acquiring Fund Share") and the assumption
by the Acquiring Fund of scheduled liabilities of the Acquired Fund and the
distribution, after the Closing Date herein referred to, of Acquiring Fund
Shares to the shareholders of the Acquired Fund in liquidation of the Acquired
Fund and dissolution of the Acquired Fund, all upon the terms and conditions
hereinafter set forth in this Plan.
WHEREAS, the Acquiring Fund and the Acquired Fund are registered investment
companies of the management type and the Acquired Fund owns securities that
generally are assets of the character in which the Acquiring Fund is permitted
to invest;
WHEREAS, the Acquiring Fund is authorized to issue shares of common stock;
WHEREAS, the Board of Directors of the Acquired Fund has determined that the
exchange of all or substantially all of the assets and scheduled liabilities of
the Acquired Fund for Acquiring Fund Shares and the assumption of such
liabilities by the Acquiring Fund is in the best interests of the Acquired
Fund's shareholders and that the interests of the existing shareholders of the
Acquired Fund would not be diluted as a result of this transaction;
WHEREAS, the Board of Directors of the Acquiring Fund has determined that the
exchange of all or substantially all the assets and scheduled liabilities of the
Acquired Fund for Acquiring Fund Shares and the assumption of such liabilities
by the Acquiring Fund is in the best interests of the Acquiring Fund's
shareholders and that the interests of the existing shareholders of the
Acquiring Fund would not be diluted as a result of this transaction.
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR ACQUIRING FUND SHARES
AND ASSUMPTION OF SCHEDULED LIABILITIES OF THE ACQUIRED FUND AND LIQUIDATION
AND DISSOLUTION OF THE ACQUIRED FUND
1.1. Subject to the terms and conditions herein set forth and on the basis of
the representations and warranties contained herein, the Acquired Fund agrees to
transfer the Acquired Fund's assets as set forth in paragraph 1.2 to the
Acquiring Fund, and the Acquiring Fund agrees in exchange therefor: (i) to
deliver to the Acquired Fund the number of Class A Acquiring Fund Shares,
including fractional Class A Acquiring Fund Shares, determined by dividing the
value of the Acquired Fund's net assets attributable to its Class A shares,
computed in the manner and as of the time and date set forth in paragraph 2.1,
by the net asset value of one Class A Acquiring Fund Share, computed in the
manner and as of the time and date set forth in
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paragraph 2.2; (ii) to deliver to the Acquired Fund the number of Class B
Acquiring Fund Shares, including fractional Class B Acquiring Fund Shares,
determined by dividing the value of the Acquired Fund's net assets attributable
to its Class B shares, computed in the manner and as of the time and date set
forth in paragraph 2.1, by the net asset value of one Class B Acquiring Fund
Shares, computed in the manner and as of the time and date set forth in
paragraph 2.2; (iii) to deliver to the Acquired Fund the number of Class L
Acquiring Fund Shares, including fractional Class L Acquiring Fund Shares,
determined by dividing the value of the Acquired Fund's net assets attributable
to its Class L shares, computed in the manner and as of the time and date set
forth in paragraph 2.1, by, the net asset value of one Class L Acquiring Fund
Share, computed in the manner and as of the time and date set forth in paragraph
2.2; (iv) to deliver to the Acquired Fund the number of Class Y Acquiring Fund
Shares, including fractional Class Y Acquiring Fund Shares, determined by
dividing the value of the Acquired Fund's net assets attributable to its Class Y
shares, computed in the manner and as of the time and date set forth in
paragraph 2.1, by, the net asset value of one Class Y Acquiring Fund Share,
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (v) to assume scheduled liabilities of the Acquired Fund, as set forth in
paragraph 1.3. Such transactions shall take place at the closing provided for in
paragraph 3.1 (the "Closing").
1.2. (a) The assets of the Acquired Fund to be acquired by the Acquiring Fund
shall consist of all or substantially all property, including, without
limitation, all cash, securities and dividends or interest receivables which are
owned by the Acquired Fund and any deferred or prepaid expenses shown as an
asset on the books of the Acquired Fund on the closing date provided in
paragraph 3.1 (the "Closing Date").
(b) The Acquired Fund has provided the Acquiring Fund with a list of the
Acquired Fund's assets as of the date of execution of this Plan. The Acquired
Fund reserves the right to sell any securities but will not, without the prior
approval of the Acquiring Fund, acquire any additional securities other than
securities of the type in which the Acquiring Fund is permitted to invest. The
Acquiring Fund will, within a reasonable time prior to the Closing Date, furnish
the Acquired Fund with a statement of the Acquiring Fund's investment
objectives, policies and restrictions and a list of the securities, if any, on
the Acquired Fund's list referred to in the first sentence of this paragraph
which do not conform to the Acquiring Fund's investment objectives, policies and
restrictions. In the event that the Acquired Fund holds any investments which
the Acquiring Fund may not hold, the Acquired Fund will dispose of such
securities prior to the Closing Date. In addition, if it is determined that the
portfolios of the Acquired Fund and the Acquiring Fund, when aggregated, would
contain investments exceeding certain percentage limitations imposed upon the
Acquiring Fund with respect to such investments, the Acquired Fund, if requested
by the Acquiring Fund, will dispose of and/or reinvest a sufficient amount of
such investments as may be necessary to avoid violating such limitations as of
the Closing Date.
1.3. The Acquired Fund will endeavor to discharge all the Acquired Fund's
known liabilities and obligations prior to the Closing Date. The Acquiring Fund
shall assume all liabilities, expenses, costs, charges and reserves reflected on
an unaudited Statement of Assets and Liabilities of the Acquired Fund prepared
by SSB Citi Fund Management LLC (the "Manager"), as adviser of the Acquired
Fund, as of the Valuation Date (as defined in paragraph 2.1), in accordance with
generally accepted accounting principles consistently applied from the prior
audited period. The Acquiring Fund shall assume only those liabilities of the
Acquired Fund reflected in that unaudited Statement of Assets and Liabilities
and shall not assume any other liabilities, whether absolute or contingent, not
reflected thereon.
1.4. As provided in paragraph 3.3, as soon after the Closing Date as is
conveniently practicable (the "Liquidation Date"), the Acquired Fund will
liquidate and distribute pro rata to the Acquired Fund's shareholders of record
determined as of the close of business on the Closing Date (the "Acquired Fund
Shareholders"), the Acquiring Fund Shares it receives pursuant to paragraph 1.1.
Shareholders of Class A, Class B, Class L and Class Y of the Acquired Fund shall
receive Class A, Class B, Class L and Class Y shares, respectively, of the
Acquiring Fund. Such liquidation and distribution will be accomplished by the
transfer of the Acquiring Fund Shares then credited to the account of the
Acquired Fund on the books of the
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Acquiring Fund to open accounts on the share records of the Acquiring Fund in
the name of the Acquired Fund Shareholders and representing the respective pro
rata number of the Acquiring Fund Shares due such shareholders. All issued and
outstanding shares of the Acquired Fund will simultaneously be canceled on the
books of the Acquired Fund, although any outstanding share certificates
representing interests in the Acquired Fund will represent a number of Acquiring
Fund Shares after the Closing Date as determined in accordance with paragraph
1.1. The Acquiring Fund shall not issue certificates representing the Acquiring
Fund Shares in connection with such exchange.
1.5. Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund's transfer agent. Acquiring Fund Shares will be issued in the
manner described in the Acquiring Fund's current prospectus and statement of
additional information.
1.6. Any transfer taxes payable upon issuance of the Acquiring Fund Shares in
a name other than the registered holder of the Acquired Fund Shares on the books
of the Acquired Fund as of that time shall, as a condition of such issuance and
transfer, be paid by the person to whom such Acquiring Fund Shares are to be
issued and transferred.
1.7. Any reporting responsibility of the Acquired Fund is and shall remain
the responsibility of the Acquired Fund up to and including the Closing Date and
such later dates on which the Acquired Fund is terminated.
1.8. The Acquired Fund shall, following the Closing Date and the making of
all distributions pursuant to paragraph 1.4, be terminated under the laws of the
State of Maryland and in accordance with its governing documents.
2. VALUATION
2.1. The value of the Acquired Fund's assets to be acquired by the Acquiring
Fund hereunder shall be the value of such assets computed as of the close of
regular trading on the New York Stock Exchange, Inc. (the "NYSE") on the Closing
Date (such time and date being hereinafter called the "Valuation Date"), using
the valuation procedures set forth in the Acquiring Fund's then current
prospectus or statement of additional information.
2.2. The net asset value of Acquiring Fund Shares shall be the net asset
value per share computed as of the close of regular trading on the NYSE on the
Valuation Date, using the valuation procedures set forth in the Acquiring Fund's
then current prospectus or statement of additional information.
2.3. All computations of value shall be made by the Manager in accordance
with its regular practice as pricing agent for the Acquired Fund and the
Acquiring Fund, respectively.
3. CLOSING AND CLOSING DATE
3.1. The Closing Date shall be April 14, 2000, or such later date as the
parties may agree to in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of the close of business on the Closing
Date unless otherwise provided. The Closing shall be held as of 5:00 p.m. at
the offices of Salomon Smith Barney Inc., 388 Greenwich Street, New York, New
York 10013, or at such other time and/or place as the parties may agree.
3.2. In the event that on the Valuation Date (a) the NYSE or another primary
trading market for portfolio securities of the Acquiring Fund or the Acquired
Fund shall be closed to trading or trading thereon shall be restricted or (b)
trading or the reporting of trading on the NYSE or elsewhere shall be disrupted
so that accurate appraisal of the value of the net assets of the Acquiring Fund
or the Acquired Fund is
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impracticable, the Closing Date shall be postponed until the first business day
after the day when trading shall have been fully resumed and reporting shall
have been restored.
3.3. The Acquired Fund shall deliver at the Closing a list of the names and
addresses of the Acquired Fund's Shareholders and the number and percentage
ownership of outstanding shares owned by each such shareholder immediately prior
to the Closing, certified on behalf of the Acquired Fund by the Chairman of the
Board or the President of the Acquired Fund. The Acquiring Fund shall issue and
deliver a confirmation evidencing the Acquiring Fund Shares to be credited to
the Acquired Fund's account on the Closing Date to the Secretary of the Acquired
Fund, or provide evidence satisfactory to the Acquired Fund that such Acquiring
Fund Shares have been credited to the Acquired Fund's account on the books of
the Acquiring Fund. At the Closing, each party shall deliver to the other such
bills of sale, checks, assignments, share certificates, if any, receipts or
other documents as such other party or its counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1. The Acquired Fund represents and warrants to the Acquiring Fund as
follows:
(a) The Acquired Fund is a corporation which is duly organized and
validly existing in good standing under the laws of the State of Maryland;
(b) The Acquired Fund is a registered investment company classified as a
management company of the open-end type, and its registration with the
Securities and Exchange Commission (the "Commission") as an investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), is in
full force and effect;
(c) The Acquired Fund is not, and the execution, delivery and performance
of this Plan will not result, in a material violation of its Articles of
Incorporation or By-laws or of any agreement, indenture, instrument, contract,
lease or other undertaking to which the Acquired Fund is a party or by which it
is bound;
(d) The Acquired Fund has no material contracts or other commitments
(other than this Plan) which will be terminated with liability to the Acquired
Fund prior to the Closing Date;
(e) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or to the Acquired
Fund's knowledge threatened against the Acquired Fund or any of the Acquired
Fund's properties or assets (other than that previously disclosed to the other
party to the Plan) which, if adversely determined, would materially and
adversely affect its financial condition or the conduct of its business. Te
Acquired Fund knows of no facts which might form the basis for the institution
of such proceedings and is not party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which materially and
adversely affects the Acquired Fund's business or the ability of the Acquired
Fund to consummate the transactions herein contemplated;
(f) The Statements of Assets and Liabilities of the Acquired Fund for
each of the four fiscal years ended October 31, 1999, and for the period August
25, 1994 (commencement of operations) to October 31, 1994, have been audited by
KPMG LLP, independent accountants, and are in accordance with generally accepted
accounting principles consistently applied, and such statements (copies of which
have been furnished to the Acquiring Fund) fairly reflect the financial
condition of the Acquired Fund as of such dates, and there are no known
contingent liabilities of the Acquired Fund as of such dates not disclosed
therein;
(g) The Acquired Fund will file its final federal and other tax returns
for the period ending on the Closing Date in accordance with the Code. At the
Closing Date, all federal and other tax returns and reports of the Acquired Fund
required by law then to have been filed prior to the Closing Date shall have
been filed,
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and all federal and other taxes shown as due on such returns shall have been
paid so far as due, or provision shall have been made for the payment thereof
and, to the best of the Acquired Fund's knowledge, no such return is currently
under audit and no assessment has been asserted with respect to such returns;
(h) For the most recent fiscal year of its operation, the Acquired Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company;
(i) All issued and outstanding shares of the Acquired Fund are, and at
the Closing Date will be, duly and validly issued and outstanding, fully paid
and nonassessable. All of the issued and outstanding shares of the Acquired
Fund will, at the time of Closing, be held by the persons and in the amounts set
forth in the records of the transfer agent as provided in paragraph 3.3. The
Acquired Fund does not have outstanding any options, warrants or other rights to
subscribe for or purchase any shares of the Acquired Fund, nor is there
outstanding any security convertible into any shares of the Acquired Fund (other
than Class B shares of the Acquired Fund which, under certain circumstances, are
convertible into Class A shares of the Acquired Fund);
(j) At the Closing Date, the Acquired Fund will have good and marketable
title to its assets to be transferred to the Acquiring Fund pursuant to
paragraph 1.2 and full right, power and authority to sell, assign, transfer and
deliver such assets hereunder and, upon delivery and payment for such assets,
the Acquiring Fund will acquire good and marketable title thereto, subject to no
restrictions on the full transfer thereof, including such restrictions as might
arise under the Securities Act of 1933, as amended (the "1933 Act"), other than
as disclosed to the Acquiring Fund;
(k) The execution, delivery and performance of this Plan has been duly
authorized by all necessary action on the part of the Acquired Funds' Board of
Directors, and subject to the approval of the Acquired Fund's shareholders, this
Plan, assuming due authorization, execution and delivery by the Acquiring Fund,
will constitute a valid and binding obligation of the Acquired Fund, enforceable
in accordance with its terms, subject as to enforcement, to bankruptcy,
insolvency, reorganization, moratorium and other laws relating to or affecting
creditors' rights and to general equity principles;
(l) The information to be furnished by the Acquired Fund for use in no-
action letters, applications for exemptive orders, registration statements,
proxy materials and other documents which may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations thereunder applicable thereto; and
(m) The proxy statement of the Acquired Fund (the "Proxy Statement") to
be included in the Registration Statement referred to in paragraph 5.7 (other
than information therein that relates to the Acquiring Fund) will, on the
effective date of the Registration Statement and on the Closing Date, not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which such statements were made, not
misleading.
4.2. The Acquiring Fund represents and warrants to the Acquired Fund as
follows:
(a) The Acquiring Fund is a corporation duly organized, validly existing
and in good standing under the laws of the State of Maryland;
(b) The Acquiring Fund is a registered investment company classified as a
management company of the open-end type and its registration with the Commission
as an investment company under the 1940 Act is in full force and effect;
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(c) The current prospectus and statement of additional information of the
Acquiring Fund conform in all material respects to the applicable requirements
of the 1933 Act and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not materially misleading;
(d) At the Closing Date, the Acquiring Fund will have good and marketable
title to the Acquiring Fund's assets;
(e) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation of its
Articles of Incorporation or By-laws or of any agreement, indenture, instrument,
contract, lease or other undertaking with respect to the Acquiring Fund to which
the Acquiring Fund is a party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or threatened against
the Acquiring Fund or any of the Acquiring Fund's properties or assets. The
Acquiring Fund knows of no facts which might form the basis for the institution
of such proceedings and the Acquiring Fund is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental body
which materially and adversely affects the Acquiring Fund's business or ability
to consummate the transactions contemplated herein;
(g) The Statement of Assets and Liabilities of the Acquiring Fund for the
six fiscal years ended October 31, 1999 have been audited by KPMG LLP,
independent accountants, and are in accordance with generally accepted
accounting principles consistently applied, and such statements (copies of which
have been furnished to the Acquired Fund) fairly reflect the financial condition
of the Acquiring Fund as of such dates, and there are no known contingent
liabilities of the Acquiring Fund as of such dates not disclosed therein;
(h) At the Closing Date, all federal and other tax returns and reports of
the Acquiring Fund required by law then to have been filed by such date shall
have been filed, and all federal and other taxes shown as due on said returns
and reports shall have been paid so far as due, or provision shall have been
made for the payment thereof and, to the best of the Acquiring Fund's knowledge,
no such return is currently under audit and no assessment has been asserted with
respect to such returns;
(i) For the most recent fiscal year of its operation, the Acquiring Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and the Acquiring Fund intends to do
so in the future;
(j) At the date hereof, all issued and outstanding shares of the
Acquiring Fund are, and at the Closing Date will be, duly and validly issued and
outstanding, fully paid and non-assessable. The Acquiring Fund does not have
outstanding any options, warrants or other rights to subscribe for or purchase
any shares of the Acquiring Fund, nor is there outstanding any security
convertible into shares of the Acquiring Fund (other than Class B shares of the
Acquiring Fund which, under certain circumstances, are convertible into Class A
shares of the Acquiring Fund);
(k) The execution, delivery and performance of this Plan has been duly
authorized by all necessary action, if any, on the part of the Acquiring Fund's
Board of Directors, and this Plan, assuming due authorization, execution and
delivery by the Acquired Fund, constitutes a valid and binding obligation of the
Acquiring Fund, enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and other
laws relating to or affecting creditors' rights and to general equity
principles;
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(l) The Acquiring Fund Shares to be issued and delivered to the Acquired
Fund, for the account of the Acquired Fund Shareholders, pursuant to the terms
of this Plan, will at the Closing Date have been duly authorized and, when so
issued and delivered, will be duly and validly issued Acquiring Fund Shares, and
will be fully paid and non-assessable with no personal liability attaching to
the ownership thereof;
(m) The information to be furnished by the Acquiring Fund for use in no-
action letters, applications for exemptive orders, registration statements,
proxy materials and other documents which may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations applicable thereto;
(n) The Proxy Statement to be included in the Registration Statement
(only insofar as it relates to the Acquiring Fund) will, on the effective date
of the Registration Statement and on the Closing Date, not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading; and
(o) The Acquiring Fund agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act and such of
the state Blue Sky or securities laws as it may deem appropriate in order to
continue the Acquiring Fund's operations after the Closing Date.
5. COVENANTS OF THE ACQUIRED FUND AND THE ACQUIRING FUND
5.l. The Acquiring Fund and the Acquired Fund each will operate its business
in the ordinary course between the date hereof and the Closing Date. It is
understood that such ordinary course of business will include the declaration
and payment of customary dividends and distributions and any other dividends and
distribution deemed advisable, in each case payable either in cash or in
additional shares.
5.2. The Acquired Fund will call a meeting of its shareholders to consider
and act upon this Plan and to take all other action necessary to obtain approval
of the transactions contemplated herein.
5.3. The Acquired Fund covenants that the Acquiring Fund Shares to be issued
hereunder are not being acquired for the purpose of making any distribution
thereof other than in accordance with the terms of this Plan.
5.4. The Acquired Fund will assist the Acquiring Fund in obtaining such
information as the Acquiring Fund reasonably requests concerning the beneficial
ownership of the Acquired Fund's shares.
5.5. Subject to the provisions of this Plan, the Acquiring Fund and the
Acquired Fund, each will take, or cause to be taken, all action, and do or cause
to be done, all things reasonably necessary, proper or advisable to consummate
and make effective the transactions contemplated by this Plan.
5.6. As promptly as practicable, but in any case within sixty days after the
Closing Date, the Acquired Fund shall furnish the Acquiring Fund, in such form
as is reasonably satisfactory to the Acquiring Fund, a statement of the earnings
and profits of the Acquired Fund for federal income tax purposes which will be
carried over to the Acquiring Fund as a result of Section 381 of the Code and
which will be certified by the Chairman of the Board or President and the
Treasurer of the Acquired Fund.
5.7. The Acquired Fund will provide the Acquiring Fund with information
reasonably necessary for the preparation of a prospectus (the "Prospectus")
which will include the Proxy Statement, referred to in paragraph 4.1(m), all to
be included in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934 (the " 1934
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<PAGE>
Act") and the 1940 Act in connection with the meeting of the Acquired Fund's
shareholders to consider approval of this Plan and the transactions contemplated
herein.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund to consummate the transactions provided
for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all of the obligations to be performed by them hereunder on or
before the Closing Date and, in addition thereto, the following further
conditions:
6. 1. All representations and warranties of the Acquiring Fund contained in
this Plan shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Plan, as of the Closing Date with the same force and effect as if made on
and as of the Closing Date;
6.2. The Acquiring Fund shall have delivered to the Acquired Fund a
certificate executed in its name by its Chairman of the Board, President or Vice
President and its Treasurer or Assistant Treasurer, in a form reasonably
satisfactory to the Acquired Fund and dated as of the Closing Date, to the
effect that the representations and warranties of the Acquiring Fund made in
this Agreement are true and correct in all material respects at and as of the
Closing Date, except as they may be affected by the transactions contemplated by
this Plan; and
6.3. The Acquired Fund shall have received on the Closing Date a favorable
opinion from Sullivan & Cromwell, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to Christina T. Sydor, Esq.,
Secretary of the Acquired Fund, covering the following points:
That (a) the Acquiring Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland; (b) the Acquiring Fund is
an open-end management investment company registered under the 1940 Act; (c)
this Plan, the Reorganization provided for hereunder and the execution of
this Plan have been duly authorized and approved by all requisite action of
the Acquiring Fund, and this Plan has been duly executed and delivered by the
Acquiring Fund and, assuming due authorization by the Acquired Fund, is a
valid and binding obligation of the Acquiring Fund, enforceable in accordance
with its terms against the assets of the Acquiring Fund, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights and to general equity principles; and (d) the Acquiring Fund Shares to
be issued to the Acquired Fund for distribution to its shareholders pursuant
to this Plan have been, to the extent of the number of Acquiring Fund Shares
of the particular class authorized to be issued by the Acquiring Fund in its
Articles of Incorporation and then unissued, duly authorized and, subject to
the receipt by the Acquiring Fund of consideration equal to the respective
net asset values thereof (but in no event less than the par value thereof),
such Acquiring Fund Shares, when issued in accordance with this Plan, will be
validly issued and fully paid and non-assessable.
Such opinion may state that it is solely for the benefit of the Acquiring
Fund, its Directors and its officers. Such counsel may rely, as to matters
governed by the laws of the State of Maryland, on an opinion of Maryland
counsel.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions provided
for herein shall be subject, at its election, to the performance by the Acquired
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date and, in addition thereto, the following conditions:
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7.1. All representations and warranties of the Acquired Fund contained in
this Plan shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Plan, as of the Closing Date with the same force and effect as if made on
and as of the Closing Date;
7.2. The Acquired Fund shall have delivered to the Acquiring Fund a statement
of the Acquired Fund's assets and liabilities, together with a list of the
Acquired Fund's portfolio securities showing the tax basis of such securities by
lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer or Assistant Treasurer of the Acquired Fund;
7.3. The Acquired Fund shall have delivered to the Acquiring Fund on the
Closing Date a certificate executed in its name by its Chairman of the Board,
President or Vice President and its Treasurer or Assistant Treasurer, in form
and substance satisfactory to the Acquiring Fund and dated as of the Closing
Date, to the effect that the representations and warranties of Smith Barney Muni
Funds and the Acquired Fund made in this Plan are true and correct in all
material respects at and as of the Closing Date, except as they may be affected
by the transactions contemplated by this Plan; and
7.4. The Acquiring Fund shall have received on the Closing Date a favorable
opinion of Sullivan & Cromwell, counsel to the Acquired Fund, in a form
satisfactory to Christina T. Sydor, Esq., Secretary of the Acquiring Fund,
covering the following points:
That (a) the Acquired Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland; (b) the Acquired Fund is an
open-end management investment company registered under the 1940 Act; and (c)
this Plan, the Reorganization provided for hereunder and the execution of
this Plan have been duly authorized and approved by all requisite action of
the Acquired Fund, and this Plan has been duly executed and delivered by the
Acquired Fund and, assuming due authorization, execution and delivery by the
Acquiring Fund, is a valid and binding obligation of the Acquired Fund
enforceable in accordance with its terms against the assets of the Acquired
Fund, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
Such opinion may state that it is solely for the benefit of the Acquiring
Fund, its Directors and its officers. Such counsel may rely, as to matters
governed by the laws of the State of Maryland, on an opinion of Maryland
counsel.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND AND THE
ACQUIRING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Acquiring Fund or the Acquired Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Plan:
8.1. This Plan and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Acquired Fund in accordance with the provisions of its Articles of Incorporation
and By-laws and certified copies of the votes evidencing such approval shall
have been delivered to the Acquiring Fund. Notwithstanding anything herein to
the contrary, neither the Acquiring Fund nor the Acquired Fund may waive the
conditions set forth in this paragraph 8. 1;
8.2. On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with this
Plan or the transactions contemplated herein;
57
<PAGE>
8.3. All consents of other parties and all other consents, orders and permits
of federal, state and local regulatory authorities (including those of the
Commission and of state Blue Sky and securities authorities, including "no-
action" positions of and exemptive orders from such federal and state
authorities) (and including the filing of Articles of Transfer with the Maryland
Department of Assessment and Taxation) deemed necessary by the Acquiring Fund or
the Acquired Fund to permit consummation, in all material respects, of the
transactions contemplated hereby shall have been obtained, except where failure
to obtain any such consent, order or permit would not involve a risk of a
material adverse effect on the assets or properties of the Acquiring Fund or the
Acquired Fund, provided that either party hereto may for itself waive any of
such conditions;
8.4. The Registration Statement shall have become effective under the 1933
Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act;
8.5. The Acquired Fund shall have declared and paid a dividend or dividends
on the outstanding shares of the Acquired Fund which, together with all previous
such dividends, shall have the effect of distributing to the shareholders of the
Acquired Fund all of the investment company taxable income of the Acquired Fund
for all taxable years ending on or prior to the Closing Date. The dividend
declared and paid by the Acquired Fund shall also include all of such fund's net
capital gain realized in all taxable years ending on or prior to the Closing
Date (after reduction for any capital loss carry forward);
8.6. The parties shall have received a favorable opinion of Sullivan &
Cromwell, addressed to the Acquiring Fund and the Acquired Fund and satisfactory
to Christina T. Sydor, Esq., as Secretary of each of the Funds, substantially to
the effect that for federal income tax purposes:
(a) the transfer of all or substantially all of the Acquired Fund's assets in
exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of
scheduled liabilities of the Acquired Fund will constitute a "reorganization"
within the meaning of Section 368(a)(1)(C) of the Code, and the Acquiring Fund
and the Acquired Fund are each a "party to a reorganization" within the meaning
of Section 368(b) of the Code; (b) no gain or loss will be recognized by the
Acquiring Fund upon the receipt of the assets of the Acquired Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
scheduled liabilities of the Acquired Fund; (c) no gain or loss will be
recognized by the Acquired Fund upon the transfer of the Acquired Fund's assets
to the Acquiring Fund in exchange for Acquiring Fund Shares and the assumption
by the Acquiring Fund of scheduled liabilities of the Acquired Fund or upon the
distribution (whether actual or constructive) of Acquiring Fund Shares to
Acquired Fund's shareholders; (d) no gain or loss will be recognized by
shareholders of the Acquired Fund upon the exchange of their Acquired Fund
shares for the Acquiring Fund Shares; (e) the aggregate tax basis for Acquiring
Fund Shares received by each of the Acquired Fund's shareholders pursuant to the
Reorganization will be the same as the aggregate tax basis of the Acquired Fund
shares held by such shareholder immediately prior to the Reorganization, and the
holding period of Acquiring Fund Shares to be received by each Acquired Fund
shareholder will include the period during which the Acquired Fund shares
exchanged therefor were held by such shareholder (provided that the Acquired
Fund shares were held as capital assets on the date of the Reorganization); and
(f) the tax basis to the Acquiring Fund of the Acquired Fund's assets acquired
by the Acquiring Fund will be the same as the tax basis of such assets to the
Acquired Fund immediately prior to the Reorganization, and the holding period of
the assets of the Acquired Fund in the hands of the Acquiring Fund will include
the period during which those assets were held by the Acquired Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund
the Acquired Fund may waive the conditions set forth in this paragraph 8.6.
58
<PAGE>
9. BROKERAGE FEES AND EXPENSES
9. 1. The Acquiring Fund represents and warrants to the Acquired Fund, and
the Acquired Fund represents and warrants to the Acquiring Fund, that there are
no brokers or finders entitled to receive any payments in connection with the
transactions provided for herein.
9.2. (a) Except as may be otherwise provided herein, Salomon Smith Barney
Inc. shall be liable for the expenses incurred in connection with entering into
and carrying out the provisions of this Plan, including the expenses of: (i)
counsel and independent accountants associated with the Reorganization; (ii)
printing and mailing the Prospectus/Proxy Statement and soliciting proxies in
connection with the meeting of shareholders of the Acquired Fund referred to in
paragraph 5.2 hereof, (iii) any special pricing fees associated with the
valuation of the Acquired Fund's or the Acquiring Fund's portfolio on the
Closing Date; (iv) expenses associated with preparing this Plan and preparing
and filing the Registration Statement under the 1933 Act covering the Acquiring
Fund Shares to be issued in the Reorganization; (v) registration or
qualification fees and expenses of preparing and filing such forms, if any,
necessary under applicable state securities laws to qualify the Acquiring Fund
Shares to be issued in connection with the Reorganization. The Acquired Fund
shall be liable for: (x) all fees and expenses related to the liquidation and
termination of the Acquired Fund; and (y) fees and expenses of the Acquired
Fund's custodian and transfer agent incurred in connection with the
Reorganization. The Acquiring Fund shall be liable for any fees and expenses of
the Acquiring Fund's custodian and transfer agent incurred in connection with
the Reorganization.
(b) Consistent with the provisions of paragraph 1.3, the Acquired Fund, prior
to the Closing, shall pay for or include in the unaudited Statement of Assets
and Liabilities prepared pursuant to paragraph 1.3, all of its known and
reasonably estimated expenses associated with the transactions contemplated by
this Plan.
10. ENTIRE PLAN; SURVIVAL OF WARRANTIES
10.1. The parties hereto agree that no party has made any representation,
warranty or covenant not set forth herein and that this Plan constitutes the
entire agreement between the parties.
10.2. The representations, warranties and covenants contained in this Plan or
in any document delivered pursuant hereto or in connection herewith shall
survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
11.1. This Plan may be terminated at any time prior to the Closing Date by:
(i) the mutual agreement of the Acquired Fund and the Acquiring Fund; (ii) the
Acquired Fund in the event that the Acquiring Fund shall, or the Acquiring Fund
in the event that the Acquired Fund shall, materially breach any representation,
warranty or agreement contained herein to be performed at or prior to the
Closing Date; or (iii) the Acquired Fund or by the Acquiring Fund, if a
condition herein expressed to be precedent to the obligations of the terminating
party has not been met and it reasonably appears that it will not or cannot be
met.
11.2. In the event of any such termination, there shall be no liability for
damages on the part of either the Acquired Fund or the Acquiring Fund or their
respective Directors or officers to the other party, but each shall bear the
expenses incurred by it incidental to the preparation and carrying out of this
Plan as provided in paragraph 9.
59
<PAGE>
12. AMENDMENTS; WAIVERS
12.1. This Plan may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of the
Acquiring Fund; provided, however, that following the meeting of the Acquired
Fund shareholders called by the Acquired Fund pursuant to paragraph 5.2 of this
Plan, no such amendment may have the effect of changing the provisions for
determining the number of Acquiring Fund Shares to be issued to the Acquired
Fund's shareholders under this Plan to the detriment of such shareholders
without their further approval.
12.2. At any time prior to the Closing Date either party hereto may by
written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions (other than those contained
in paragraph 8.1 of this Plan) made for its benefit contained herein.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by hand
delivery, fax or certified mail addressed to Smith Barney World Funds -
International Balanced Portfolio, 7 World Trade Center, 45th Floor, New York,
New York 10048, Attention: Heath B. McLendon; or to Smith Barney World Funds -
International Equity Portfolio, 7 World Trade Center, 45th Floor, New York, New
York 10048, Attention: Heath B. McLendon.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT: LIMITATION OF LIABILITY
14.l. The article and paragraph headings contained in this Plan are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Plan.
14.2. This Plan may be executed in any number of counterparts, each or which
shall be deemed an original.
14.3. This Plan shall be governed by and construed in accordance with the
laws of the State of New York.
14.4. This Plan shall bind and inure to the benefit of the parties hereto and
their respective successors and assigns, but no assignment or transfer hereof or
of any rights or obligations hereunder shall be made by any party without the
written consent of the other party. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person, firm,
corporation or other entity, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this Plan.
14.5. It is expressly agreed that the obligations of the Acquired Fund shall
not be binding upon any Directors, shareholders, nominees, officers, agents or
employees personally, but bind only the property of the Acquired Fund. The
execution and delivery of this Plan have been authorized by the Directors of the
Acquired Fund and this Plan has been executed by authorized officers of the
Acquired Fund, acting as such, and neither such authorization by such Directors
nor such execution and delivery by such officers shall be deemed to have been
made by any of them individually or to impose any liability on any of them
personally, but shall bind only the property of the Acquired Fund.
60
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Plan to be
executed by its Chairman of the Board, President or Vice President and attested
by its Secretary or Assistant Secretary.
Attest:
SMITH BARNEY WORLD FUNDS, INC.
On behalf of INTERNATIONAL
BALANCE PORTFOLIO
/s/ Christina T. Sydor By: /s/Heath B. McLendon
---------------------- ------------------------------
Name: Christina T. Sydor Name: Heath B. McLendon
Title: Secretary Title: Chairman of the Board/President
Attest:
SMITH BARNEY WORLD FUNDS, INC.
On behalf of INTERNATIONAL EQUITY PORTFOLIO
/s/ Christina T. Sydor By: /s/ Heath B. McLendon
-------------------------------- -------------------------------
Name: Christina T. Sydor Name: Heath B. McLendon
Title: Secretary Title: Chairman of the Board
PART B
INFORMATION REQUIRED IN THE STATEMENT OF ADDITIONAL INFORMATION
February 21, 2000
STATEMENT OF ADDITIONAL INFORMATION
SMITH BARNEY WORLD FUNDS, INC.
388 Greenwich Street
New York, New York 10013
Smith Barney World Funds, Inc. (the "Company") offers a choice of six open-end
management investment companies (each a "fund"):
The Global Government Bond Portfolio seeks as high a level of
current income and capital appreciation as is consistent with
its policy of investing primarily in high quality bonds of the
United States and foreign governments.
The International Equity Portfolio seeks total return on its
assets from growth of capital and income. The fund seeks to
achieve this objective by investing primarily in a diversified
portfolio of equity securities of established foreign issuers.
The Pacific Portfolio seeks long-term capital appreciation by
investing primarily in a diversified portfolio of equity
securities of companies in the Asia Pacific Region.
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 by
investing primarily in securities of established non-U. S.
issuers.
The Emerging Markets Portfolio seeks long-term capital
appreciation on its assets by investing primarily in securities
of emerging country issuers.
In all cases, there can be no assurance that a fund will achieve its investment
objective.
Each 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 and Class
L shares) and/or (ii) on a deferred basis (Class B and Class L shares). A
fourth class of shares (the Class Y shares) are 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 funds. A fifth class of shares of the International Equity Portfolio
(the Class Z shares) are offered only to tax-exempt retirement plans of Salomon
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 fund.
Therefore, it should be read in conjunction with each Prospectus dated February
21, 2000 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 Company or your Salomon Smith Barney Financial Consultant.
TABLE OF CONTENTS
P
a
g
e
Directors, Advisory Director and Officers
3
Investment Policies
5
Investment Practices
11
Risk Factors
22
Investment Restrictions
27
Additional Tax Information
30
IRA and Other Prototype Retirement Plans
34
Performance Information
35
Determination of Net Asset Value
38
Purchase, Redemption and Exchange of Shares
39
Dividends and Distributions
47
Investment Management Agreement and Other Services
47
Custodian
53
Independent Auditors
53
Voting
53
Other Information about the Company
55
Financial Statements
57
Appendix - Ratings of Debt Obligations
A-1
DIRECTORS, ADVISORY DIRECTOR AND OFFICERS
Overall responsibility for management and supervision of each fund rests with
the Company's Board of Directors. The directors approve all significant
agreements between the Company and the companies that furnish services to the
Company and the funds, including agreements with the Company's distributor,
investment adviser, custodian and transfer agent. The day-to-day operations of
each fund are delegated to that fund's manager. The directors and officers of
the Company are listed below.
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 Salomon Smith Barney; 77.
ABRAHAM E. COHEN, Director
Consultant to MeesPierson, Inc., a Dutch investment bank; Consultant to and
Board Member, Chugai Pharmaceutical Co. Ltd.; Director of Agouron
Pharmaceuticals, Inc., Akzo Nobel NV, Vasomedical, Inc., Teva Pharmaceutical
Ind., Ltd., Neurobiological Technologies Inc., Vion Pharmaceuticals, Inc.,
BlueStone Capital Partners, LP. and The Population Council, an international
public interest organization. Director of two investment companies associated
with Salomon Smith Barney; 62.
ROBERT A. FRANKEL, Director
Managing Partner of Robert A. Frankel Managing Consultants, 102 Grand Street,
Croton-on-Hudson, NY. Director of nine investment companies associated with
Salomon Smith Barney. Former Vice President of The Readers Digest Association,
Inc.; 71.
RAINER GREEVEN, Director
Partner of the law firm of Greeven & Ercklentz; 630 Fifth Avenue, New York, NY.
Director of two investment companies associated with Salomon Smith Barney; 63.
SUSAN M. HEILBRON, Director
Attorney; Lacey & Heilbron, 3 East 54th Street, New York, NY. Director of two
investment companies associated with Salomon Smith Barney; 54.
*HEATH B. McLENDON, Chairman of the Board, President and Chief Executive
Officer
Managing Director of Salomon Smith Barney Inc. ("Salomon Smith Barney");
President of SSBC Fund Management Inc. ("SSBC" or the "Manager") and Travelers
Investment Adviser, Inc. ("TIA"); Chairman or Co-Chairman of the Board of 59
investment companies associated with Salomon Smith Barney and former Chairman
of the Board of Smith Barney Strategy Advisers Inc; 65
*MAURITS E. EDERSHEIM, Chairman of the Company 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); 80
*LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Salomon Smith Barney, Senior Vice President and Treasurer
(Chief Financial Officer) of the Smith Barney Mutual funds; Director and Senior
Vice President of SSBC and TIA: 41
*JAMES B. CONHEADY, Vice President and Investment Officer
Managing Director of Salomon Smith Barney; 63.
*JEFFREY RUSSELL, Vice President and Investment Officer
Managing Director of Salomon Smith Barney; 41.
*REIN VAN DER DOES, Vice President and Investment Officer
Managing Director of Salomon Smith Barney; 59.
*SCOTT KALB, Vice President and Investment Officer
Managing Director of Salomon Smith Barney; 42
*SIMON R. HILDRETH, Vice President and Investment Officer
Senior Vice President of Salomon Smith Barney, Managing Director of Smith
Barney Global Capital Management, Inc. Formerly Director of Mercury Asset
Management Ltd; 44.
*DENIS P. MANGAN, Vice President and Investment Officer
Vice President of Smith Barney Global Capital Management, Inc. Formerly Vice
President of J.P. Morgan and Citibank; 45.
*DAVID S. ISHIBASHI, Vice President and Investment Officer
Vice President of Salomon Smith Barney; Formerly Head of Japanese equities desk
at SG Warburg; 43.
*IRVING DAVID, Controller
Director of Salomon Smith Barney. Formerly Assistant Treasurer of First
Investment Management Company; 38.
*CHRISTINA T. SYDOR, Secretary
Secretary ; Managing Director of Salomon Smith Barney. General Counsel and
Secretary of SSBC and TIA; 48.
* 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 Company officer or director.
On February 10, 1999 the directors and officers owned, in the aggregate, less
than 1% of the outstanding shares of each of the funds.
The following table shows the compensation paid by the Company to each director
during the Company's last fiscal year. None of the officers of the Company
received any compensation from the Company for such period. The Company does
not pay retirement benefits to its directors and officers. Officers and
interested directors of the Company are compensated by Salomon Smith Barney.
COMPENSATION TABLE
Name of Person
Aggregate Compensation from
the Company
Compensation from Company
and Complex Paid to
Directors
Number of Funds for
Which Director Serves
Within Fund Complex
Victor Atkins
$10,411.00
$29,500.00
2
A. E. Cohen1
4,676.00
20,100.00
2
Robert A.
Frankel
10,450.56
72,250.00
9
Ranier Greeven
9,908.00
27,800.00
2
Susan M.
Heilbron
9,908.00
27,800.00
2
Heath B.
McLendon
0
0
59
Bruce D.
Sargent2
0
0
3
James M. Shuart3
7,664.00
20,800.00
2
1 Effective March 30, 1998, Mr. Cohen became a member of the Company's Board of
Directors.
2 Effective October 8, 1998, Mr. Sargent resigned from the Company's Board of
Directors.
3 Effective July 28, 1998, Mr. Shuart resigned from the Company's Board of
Directors.
INVESTMENT POLICIES tc "INVESTMENT POLICIES"
Each fund's investment objectives 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''). However, each fund's investment
policies are non-fundamental, and thus may be changed by the Board of
Directors, provided such change is not prohibited by the fund's fundamental
investment restrictions (described under INVESTMENT RESTRICTIONS) or applicable
law, and any such change will first be disclosed in the then current
prospectus. Refer to the "INVESTMENT PRACTICES" and "RISK FACTORS" for further
information on the funds' investments.
Under unusual economic or market conditions as determined by the Manager, for
defensive purposes each fund may depart from its principal investment
strategies and temporarily invest all or a major portion of its assets in all
types of money market and short-term debt securities (including U.S. money
market securities). To the extent a fund's assets are invested for temporary
defensive purposes, they will not be invested in a manner designed to achieve
that fund's investment objective.
Global Government Bond Portfolio
Under normal market conditions, the Global Government Bond 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
fund 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"), or if unrated, are of comparable
quality in the determination of the Manager.
Consistent with its investment objective, under normal circumstances the fund
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 fund 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 Manager to be of
comparable quality. For certain risks associated with investments in foreign
issues, see "RISK FACTORS."
The fund 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 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 fund also will invest in securities denominated in the
currencies of such countries or in multinational currency units. Under normal
market conditions the fund invests at least 65% of its assets in issues of not
less than three different countries; issues of any one country (other than the
United States) will represent no more than 45% of the fund's total assets.
Allocation of the fund's investments will depend upon the relative
attractiveness of the global markets and particular issuers. Concentration of
the fund's assets in one or a few countries or currencies will subject the fund
to greater risks than if the fund's assets were not geographically
concentrated.
In seeking to achieve its investment objective of current income, the Manager
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 Manager allocates the fund's assets among
securities of countries and in currency denominations where opportunities for
meeting the fund's investment objective are expected to be the most attractive.
The 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 Manager generally evaluates currencies on the basis of fundamental economic
criteria (e.g., relative inflation and interest rates 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. These
include 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.
Countries may be added to or deleted 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 Manager does not
intend to invest more than 10% of the fund's assets in the government
securities of less developed countries and will not invest more than 5% of the
fund'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.
International Equity Portfolio
Under normal market conditions, the International Equity Portfolio invests at
least 80% 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 obtain such securities and may
invest up to 20% of the fund's assets in bonds, notes and other debt securities
(consisting of securities issued in the Eurocurrency markets or obligations of
the United States or foreign governments and their political sub-divisions) or
established non-United States issuers.
In seeking to achieve its objective, the fund 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.
Except as otherwise provided, the fund will invest at least 80% 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., the Czech
Republic, Hungary, Poland, 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 fund's investments will depend upon the
relative attractiveness of the international markets and particular issuers.
Concentration of the fund's assets in one or a few countries or currencies will
subject the fund to greater risks than if the fund's assets were not
geographically concentrated.
It is expected that fund 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 fund'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.
Pacific Portfolio
The Pacific Portfolio invests primarily in equity securities, including
American Depository Receipts ("ADRs"), of companies in the Asia Pacific Region.
The Asia Pacific Region currently includes 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 change this list at its discretion. The
Manager considers a company to be in the Asia Pacific Region if its securities
trade on exchanges in the Asia Pacific Region, it generates at least half of
its revenue from the Asia Pacific Region or it is organized under the laws of
an Asia Pacific Region country.
The fund will normally invest at least 80% of its total assets in equity
securities of companies in the Asia Pacific Region, consisting of the
securities listed above. For the purposes of the foregoing limitation equity
securities include exchange traded and over-the-counter common stocks,
preferred shares, debt securities convertible into equity securities,
depository receipts and warrants and rights relating to equity securities. The
fund may also invest up to 20% of its total assets in debt securities and other
types of investments. The fund 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 fund has no
predetermined policy on the allocation of funds for investment among such
countries or securities and allocation of the fund's investments will depend
upon the relative attractiveness of the Asia Pacific markets and particular
issuers. Concentration of the fund's assets in one or a few of the countries in
the Asia Pacific Region and Asia Pacific currencies will subject the fund to
greater risks than if the fund's assets were not geographically concentrated.
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. The
fund 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 fund may invest will generally be rated
at the time of purchase at least Baa by Moody's or BBB by 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 principal than is the case
with higher rated securities.
To the extent that the fund'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.
European Portfolio
The European 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 former Soviet Union). It is a fundamental policy of the fund to invest,
under normal circumstances, at least 65% of its total assets in a diversified
portfolio of equity securities of issuers domiciled in the Primary Investment
Area of the fund. The fund will generally invest its assets broadly among
countries and will normally have represented in the portfolio business
activities in not less than three countries in the Primary Investment Area.
Allocation of the fund's investments will depend upon the relative
attractiveness of the markets and particular issuers. Concentration of the
fund's assets in one or a few countries will subject the fund to greater risks
than if the fund's assets were not geographically concentrated.
In addition, the fund 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 ADRs and European Depository Receipts
("EDRs"), securities issued by companies domiciled outside the Primary
Investment Area of the fund, including, but not limited to, U.S. and foreign
government securities, and U.S. and non-U.S. money market securities. Money
market securities will generally be held by the fund for temporary defensive
purposes. With respect to certain countries, investments by the fund presently
may only be made by acquiring shares of other investment companies with local
governmental authority to invest in those countries. It is not expected that
the income yield of the fund will be significant.
The fund may also hold cash in U.S. dollars to meet redemption requests and
other expenses and cash in other currencies to meet settlement requirements for
foreign securities. The fund may engage in currency exchange transactions with
up to 100% of its assets in order to protect against uncertainty in the level
of future exchange rates between a particular foreign currency and the U.S.
dollar or between foreign currencies in which the fund's securities are or may
be denominated. The fund may conduct its currency 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 fund's transactions in forward foreign currency exchange
contracts will be limited to hedging involving either specific transactions or
aggregate fund positions.
The fund 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 normally 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 fund 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 for Economic Cooperation and
Development or would have AAA ratings.
As a fundamental policy, the fund 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 fund has borrowed in
excess of 5% of the value of its total assets, the fund will not make further
investments. The fund 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 fund will invest no
more than 10% of the value of its net assets in warrants valued at the lower of
cost or market. The fund does not currently intend to engage in transactions in
options or futures contracts but may do so in the future if determined to be in
the fund's best interests by the fund's Board of Directors.
International Balanced Portfolio
Under normal market conditions, the International Balanced Portfolio will
invest its assets in an international portfolio of equity securities
(consisting of exchange traded and over-the-counter common stocks, preferred
shares, debt securities convertible into equity securities, depository receipts
and warrants and rights relating to equity 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
fund attempts to achieve a balance between equity and debt securities.
However, the proportion of equity and debt held by the fund at any one time
will depend on the Manager's views on current market and economic conditions.
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
fund's assets will be invested in either equity or debt securities; however,
there is no limitation on the percent or amount of the fund'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.
The fund 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 fund 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 (e.g., Chile, Mexico and Venezuela), the Middle East,
Africa, Asia, Australia, New Zealand and Canada. Allocation of the fund's
investments will depend upon the relative attractiveness of the international
markets and particular issuers. Concentration of the fund's assets in one or a
few countries or currencies will subject the fund to greater risks than if the
fund's assets were not geographically concentrated. Up to 25% of the total
assets of the fund may be invested in securities of emerging market countries.
It is expected that equity securities purchased by the fund 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 fund 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.
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 anticipated volatility and liquidity of the particular
debt instruments, maturity, and the tax implications to the fund. The debt
securities in which the fund expects to invest will generally range in maturity
from two to ten years. Debt securities of developed foreign countries may 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 Manager
to be of comparable quality. If the rating drops below investment grade
subsequent to purchase, the Manager will not necessarily sell the security, but
will consider such an event in determining whether the fund 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.
The relative performance of foreign currencies is an important factor in the
fund's performance. The Manager may manage the fund'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 fund 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 fund 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 fund will use options and
futures contracts relating to foreign currencies to allow the Manager to hedge
fund 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 fund's assets that may be committed to currency management
strategies.
Emerging Markets Portfolio
The Emerging Markets 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 fund 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
fund's assets will be invested in equity securities.
For purposes of its investment objective, the fund considers as "emerging" 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 fund 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. Allocation of the fund's investments will depend upon the relative
attractiveness of the emerging markets and particular issuers. Concentration of
the fund's assets in one or a few countries or currencies will subject the fund
to greater risks than if the fund's assets were not geographically
concentrated.
Under normal circumstances, the fund may invest up to 30% of its assets in debt
securities. These may include 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 fund will not seek to benefit from anticipated
short-term fluctuations in currency exchange rates. The fund may, from time to
time, invest in debt securities with relatively high yields (as compared to
other debt securities meeting the fund's investment criteria), notwithstanding
that the fund may not anticipate that such securities will experience
substantial capital appreciation. Such income can be used, however, to offset
the operating expenses of the fund.
The fund 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 international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic 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 governmental 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.
Up to 10% of the fund's assets may be invested in debt securities of emerging
markets that are 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.
The fund may invest in the securities of foreign issuers in the form of ADRs,
EDRs, GDRs or other securities convertible into securities of foreign issuers.
The fund may invest in unsponsored ADRs. The issuers of unsponsored ADRs are
not obligated to disclose 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 fund may invest in U.S. over-the-counter
securities of issuers whose business interests are in emerging countries.
INVESTMENT PRACTICES
Each of the following investment practices is subject to the limitations set
forth under "Investment Restrictions."
EQUITY SECURITIES
Common Stocks (all funds except the Global Government Bond Portfolio). Each
fund except the Global Government Bond Portfolio may purchase common stocks.
Common stocks are shares of a corporation or other entity that entitle the
holder to a pro rata share of the profits of the corporation, if any, without
preference over any other shareholder or class of shareholders, including
holders of the entity's preferred stock and other senior equity. Common stock
usually carries with it the right to vote and frequently an exclusive right to
do so.
Preferred Stocks and Convertible Securities (all funds). Each fund may invest
in convertible debt and preferred stocks. Convertible debt securities and
preferred stock entitle the holder to acquire the issuer's stock by exchange or
purchase for a predetermined rate. Convertible securities are subject both to
the credit and interest rate risks associated with fixed income securities and
to the stock market risk associated with equity securities.
Warrants (all funds except the Global Government Bond Portfolio). Each fund
except the Global Government Bond Portfolio may purchase warrants. Warrants
acquired by a fund entitle it to buy common stock from the issuer at a
specified price and time. Warrants are subject to the same market risks as
stocks, but may be more volatile in price. A fund's investment in warrants
will not entitle it to receive dividends or exercise voting rights and will
become worthless if the warrants cannot be profitably exercised before the
expiration dates.
REITs (all funds). Each fund may invest in shares of real estate investment
trusts (REITs), which are pooled investment vehicles that invest in real estate
or real estate loans or interests. Investing in REITs involves risks similar
to those associated with investing in equity securities of small capitalization
companies. REITs are dependent upon management skills, are not diversified,
and are subject to risks of project financing, default by borrowers, self-
liquidation, and the possibility of failing to qualify for the exemption from
taxation on distributed amounts under the Internal Revenue Code of 1986, as
amended (the "Code").
Illiquid and Restricted Securities (all funds). Each fund 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'')), with contractual or other
restrictions on resale and other instruments that are not readily marketable.
ADRs, EDRs and GDRs (all funds except the Global Government Bond Portfolio).
Each fund except the Global Government Bond Portfolio fund may also purchase
ADRs, EDRs and 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. A fund
may invest in ADRs through both sponsored and unsponsored arrangements.
FIXED INCOME SECURITIES
To the extent that each fund may invest in fixed income securities, it may
invest in the securities described below, unless otherwise noted.
Corporate Debt Obligations. Each fund may invest in corporate debt obligations
and zero coupon securities issued by financial institutions and corporations.
Corporate debt obligations are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations and may also be subject
to price volatility due to such factors as market interest rates, market
perception of the creditworthiness of the issuer and general market liquidity.
Zero coupon securities are securities sold at a discount to par value and on
which interest payments are not made during the life of the security.
U.S. Government Securities. The U.S. Government securities in which the funds
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. Treasury; 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 purchase 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.
Sovereign Debt Obligations. A fund 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. A fund 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 fund in the event of fraud or
misrepresentation. 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
fund 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 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. A fund 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. A fund 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. A fund 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 a fund a higher level of investment income
distributable to shareholders on a current basis than if the fund purchased
securities bearing current market rates of interest. If securities purchased
by a fund at a premium are called or sold prior to maturity, the fund will
recognize a capital loss to the extent the call or sale price is less than the
purchase price. Additionally, a fund will recognize a capital loss if it holds
such securities to maturity.
Yankee Bonds. A fund 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.
Loan Participations and Assignments. A fund may invest a portion of its assets
in loan participations ("Participations"). By purchasing a Participation, a
fund 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 fund having a contractual
relationship only with the lender and not with the borrower. The fund 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 fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
loan, nor any rights of set-off against the borrower, and the fund may not
directly benefit from any collateral supporting the loan in which it has
purchased the Participation. As a result, the fund 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 fund may be
treated as a general creditor of the lender and may not benefit from any
set-off between the lender and the borrower. A fund will acquire
Participations only if the lender interpositioned between the fund and the
borrower is determined by management to be creditworthy.
A fund also may invest in assignments of portions of loans from third parties
("Assignments"). When it purchases Assignments from lenders, the fund 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 fund as the
purchaser of an Assignment may differ from, and be more limited than, those
held by the assigning lender. A fund may have difficulty disposing of
Assignments and Participations. The liquidity of such securities is limited,
and the fund 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 fund's
ability to dispose of particular Assignments or Participations when necessary
to meet the fund'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 fund to assign a value to those securities or purposes
of valuing the fund's portfolio and calculating its net asset value.
Structured Notes. Emerging Markets 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 sometimes 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, however, that in such cases the fund would not be involved
in the swap; the issuer of the note would remain obligated even if its
counterparty defaulted.
Short-Term Investments. In certain circumstances the funds may invest without
limitation in all types of short-term money market instruments, including U.S.
Government securities; certificates of deposit, time deposits and bankers'
acceptances issued by domestic banks (including their branches located outside
the United States and subsidiaries located in Canada), domestic branches of
foreign banks, savings and loan associations and similar institutions; high
grade commercial paper; and repurchase agreements. To the extent a fund is
investing in short-term investments as a temporary defensive posture, the
applicable fund's investment objective may not be achieved.
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 funds,
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 fund, therefore, may not invest in a
master demand note, if as a result more than 15% of the value of the fund's
total assets would be invested in such notes and other illiquid securities.
Commercial Bank Obligations. For the purposes of each fund'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 foreign
securities in general, investments in the obligations of foreign branches of
U.S. banks and of foreign banks may subject a fund to investment risks that are
different in some respects from those of investments in obligations of domestic
issuers. Although a fund 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 fund. 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
foreign branches.
DERIVATIVE CONTRACTS
Options, Futures and Currencies (All funds). Each fund 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 fund. These hedging techniques are described in detail
below. Neither International Balanced Portfolio nor Emerging Markets Portfolio
will hedge more than 25% of its total assets by selling futures, buying puts,
and writing calls under normal conditions. In addition, neither of these funds
will buy futures or write puts whose underlying value exceeds 25% of its total
assets, or will buy calls with a value exceeding 5% of its total assets.
Writing Covered Call Options (All funds). Each fund 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 Manager, 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 fund.
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 Company believe that
writing of covered call options is less risky than writing uncovered or "naked"
options, which the funds 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
fund's investment objective. When writing a covered call option, the fund, 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 fund
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 fund has written expires, the
fund 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 fund
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 fund's custodian.
The premium the fund receives for writing a call option is deemed to constitute
the market value of an option. The premium the fund 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 fund for writing covered call options will be recorded
as a liability in the fund'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." 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 fund to
write another call option on the underlying security or currency with either a
different exercise price, expiration date or both. If the fund 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 fund will be able to effect such
closing transactions at a favorable price. If the fund 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 at market risk with
respect to the security or currency.
Each fund 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 fund, 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 fund 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 fund 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 fund.
See "ADDITIONAL TAX INFORMATION" for a discussion of federal income tax
treatment of covered call options.
Purchasing Put Options (All funds). Each fund may purchase put options. As
the holder of a put option, the fund has the right to sell the underlying
security or currency at the exercise price at any time during the option
period. The fund may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire.
Each fund may purchase a put option on an underlying security or currency (a
"protective put") owned by the fund 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
fund, 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 may reduce any capital gain or, in the
case of currency, ordinary income otherwise available for distribution when the
security or currency is eventually sold.
Each fund may also purchase put options at a time when the fund does not own
the underlying security or currency. By purchasing put options on a security
or currency it does not own, the fund 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 fund 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 fund when purchasing a put option will be recorded as an
asset in the fund's statement of assets and liabilities. This asset will be
adjusted daily to the option's current market value, as calculated by the fund.
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 (All funds). Each fund may purchase call options. As
the holder of a call option, a fund has the right to purchase the underlying
security or currency at the exercise price at any time during the option
period. The fund 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 fund for the purpose of acquiring the underlying security or currency
for its portfolio. Utilized in this fashion, the purchase of call options
enables the fund 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 fund
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 fund 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 fund 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 fund's current return.
Interest Rate and Currency Futures Contracts (All funds). Each fund 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
fund. A fund's hedging may include holding Futures as an offset against
anticipated changes in interest or currency exchange rates. A fund 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 fund's exposure to interest rate and currency exchange
rate fluctuations, the fund 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 fund realizes a gain; if it is
more, the fund realizes a loss. Conversely, if the offsetting sale price is
more than the original purchase price, the fund realizes a gain; if it is less,
the fund realizes a loss. The transaction costs must also be included in these
calculations. There can be no assurance, however, that the fund will be able
to enter into an offsetting transaction with respect to a particular Futures
Contract at a particular time. If the fund is not able to enter into an
offsetting transaction, the fund will continue to be required to maintain the
margin deposits of the underlying financial instrument or currency on the
relevant delivery date. The Company 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 fund.
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 fund'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 fund owns, or Futures
Contracts will be purchased to protect a fund 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 fund with a broker in order to initiate Futures trading and to
maintain the fund's open positions in Futures Contracts. A margin deposit made
when the Futures Contract is entered into ("initial margin") is intended to
assure the fund'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 fund. In computing daily net asset values, the fund will mark to
market the current value of its open Futures Contracts. Each fund expects to
earn interest income on its margin deposits.
See "ADDITIONAL TAX INFORMATION" for a discussion of federal tax treatment of
Futures Contracts.
Options on Futures Contracts (All funds). 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 fund 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 fund or to reduce or
eliminate the hedge position then currently held by the fund, the fund 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 funds 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 fund 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
fund'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, Options on Currency and Currency Swaps (All funds).
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 fund 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
fund engages in forward currency transactions in anticipation of, or to protect
itself against, fluctuations in exchange rates. A fund 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 fund 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 fund 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 fund
may not always be able to enter into foreign currency forward contracts at
attractive prices and this will limit the fund's ability to use such contract
to hedge or cross-hedge its assets. Also, with regard to a fund'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 fund's cross-hedges
and the movements in the exchange rates of the foreign currencies in which the
fund'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 fund, however, may enter into forward
contracts with deposit requirements or commissions.
A put option gives a fund, 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 fund, as purchaser, the right (but not
the obligation) to purchase a specified amount of currency at the exercise
price until its expiration. A fund 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 fund 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 fund anticipates purchasing
securities.
Each fund'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 fund 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
fund 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 fund 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 fund 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.
A fund may also enter into currency swaps. 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.
Interest Rate Swaps, Caps and Floors (All funds). Among the hedging
transactions into which the funds may enter are interest rate swaps and the
purchase or sale of interest rate caps and floors. Each fund 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 fund anticipates purchasing at a later
date. Each fund intends to use these transactions as a hedge and not as a
speculative investment. Each fund will not sell interest rate caps or floors
that it does not own. Interest rate swaps involve the exchange by a fund 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 fund 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, with the fund 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 Manager and the funds believe such obligations do not constitute senior
securities and, accordingly will not treat them as being subject to their
borrowing restrictions. The net amount of the excess, if any, of a fund's
obligations over its entitlements 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 1940 Act. The funds 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 fund 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 funds may invest in any such options and contracts as may
be developed to the extent consistent with their investment objectives and
regulatory requirements applicable to investment companies.
OTHER PRACTICES
Repurchase Agreements (All funds). Each fund may enter into repurchase
agreements. International Equity Portfolio, Pacific Portfolio, International
Balanced Portfolio and Emerging Markets Portfolio each may invest in repurchase
agreements up to 25% of its total assets. A repurchase agreement is a contract
under which a fund 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 fund to resell such security at a fixed time and price (representing
the fund's cost plus interest). It is each fund'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 fund
which are collateralized primarily by the securities subject to repurchase. A
fund bears a risk of loss in the event that the other party to a repurchase
agreement defaults on its obligations and the fund is delayed in or prevented
from exercising its rights to dispose of the collateral securities. Pursuant
to policies established by the Board of Directors, the Manager monitors the
creditworthiness of all issuers with which each fund enters into repurchase
agreements.
Reverse Repurchase Agreements (All funds). Each fund does not currently intend
to commit more than 5% of its net assets to reverse repurchase agreements. Each
fund may enter into reverse repurchase agreements with broker/dealers and other
financial institutions. Such agreements involve the sale of fund securities
with an agreement to repurchase the securities at an agreed-upon price, date
and interest payment, are considered to be borrowings by a fund 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 Company 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 fund 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 Company intends to use the reverse repurchase
technique only when the Manager believes it will be advantageous to the fund.
The use of reverse repurchase agreements may exaggerate any interim increase or
decrease in the value of the participating fund's assets. The Company's
custodian bank will maintain a separate account for the fund with securities
having a value equal to or greater than such commitments.
Borrowing (All funds). Each fund may borrow up to 33% (except that Emerging
Markets Portfolio may borrow only up to 25% and European Portfolio may borrow
only up to 10%) of the value of its total assets from banks for temporary or
emergency purposes, such as to meet the fund's redemptions.
Leverage (International Balanced, International Equity and Pacific).
International Equity Portfolio, International Balanced Portfolio and Pacific
Portfolio each may borrow from banks, on a secured or unsecured basis, up to
33% of the value of its total assets and use the proceeds to make additional
investments. Income and appreciation from such investments will improve a
fund's performance if they exceed the associated borrowing costs, but will
impair a fund's performance if they are less than the borrowing costs. This
speculative factor is known as "leverage."
Leverage creates an opportunity for increased returns to shareholders of a fund
but, at the same time, creates special risk considerations. For example,
leverage may exaggerate changes in the net asset value of the fund's shares and
in the fund's yield. Although the principal or stated value of such borrowings
will be fixed, the fund assets may change in value during the time the
borrowing is outstanding. Leverage will create interest expenses for the fund
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 the fund will have to pay in respect thereof, the fund'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 fund 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
fund.
Securities Lending (All funds). Global Government Bond Portfolio, European
Portfolio, International Balanced Portfolio and Emerging Markets Portfolio each
may lend securities in amounts up to one-third of total assets. International
Equity Portfolio and Pacific Portfolio each may lend securities in amounts up
to 15% of total assets. Each fund 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
fund 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 Company 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 fund. 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 fund's
investment in the securities loaned. Apart from lending its securities and
acquiring debt securities of a type customarily purchased by financial
institutions, no fund will make loans to other persons.
When-Issued and Delayed Delivery Securities (All funds). The funds each 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 a fund 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 fund at
the time of entering into the transaction. The Chase Manhattan Bank, the
Company's custodian (the "Custodian") will maintain, in a segregated account of
the applicable fund, cash, debt securities of any grade or equity securities,
having a value equal to or greater than the fund's purchase commitments,
provided such securities have been determined by the Manager to be liquid and
unencumbered, and are market 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 a fund enters into the commitment
and no interest accrues to the fund 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.
Short Sales. (All funds) Each fund may sell securities "short against the
box." While a short sale is the sale of a security the fund does not own, it is
"against the box" if at all times when the short position is open, the fund
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. The ability to use short sales to defer recognition
of gains was substantially limited by certain "constructive sale" tax
provisions enacted in 1997.
* * * * * * * *
The Articles of Incorporation of the Company permit the Board of Directors to
establish additional funds of the Company from time to time. The investment
objectives, policies and restrictions applicable to additional funds would be
established by the Board of Directors at the time such funds were established
and may differ from those set forth in the Prospectus and this Statement of
Additional Information.
RISK FACTORS tc "RISK FACTORS"
General. Investors should realize that risk of loss is inherent in the
ownership of any securities and that each fund's net asset value will
fluctuate, reflecting fluctuations in the market value of its portfolio
positions.
Non-diversification and Geographic Concentration. Funds that are
"non-diversified" are permitted to invest a greater proportion of their assets
in the securities of a smaller number of issuers, and thus may be subject to
greater credit and liquidity risks with respect to their individual portfolios
than a fund that is more broadly diversified. In addition, concentration of a
fund's assets in one or a few countries or currencies will subject the fund to
greater risks than if the fund's assets were not geographically concentrated.
Fixed Income Securities. Investments in fixed income securities may subject
the funds to risks, including the following:
Interest Rate Risk. When interest rates decline, the market value of fixed
income securities tends to increase. Conversely, when interest rates increase,
the market value of fixed income securities tends to decline. The volatility
of a security's market value will differ depending upon the security's
duration, the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed income securities are subject
to the risk that the issuer of the security could default on its obligations,
causing a fund to sustain losses on such investments. A default could impact
both interest and principal payments.
Call Risk and Extension Risk. Fixed income securities may be subject to both
call risk and extension risk. Call risk exists when the issuer may exercise
its right to pay principal on an obligation earlier than scheduled, which would
cause cash flows to be returned earlier than expected. This typically results
when interest rates have declined and a fund will suffer from having to
reinvest in lower yielding securities. Extension risk exists when the issuer
may exercise its right to pay principal on an obligation later than scheduled,
which would cause cash flows to be returned later than expected. This
typically results when interest rates have increased, and a fund will suffer
from the inability to invest in higher yield securities.
Below Investment Grade Fixed Income Securities. Securities which are rated BBB
by S&P or Baa by Moody's are generally regarded as having adequate capacity to
pay interest and repay principal, but may have some speculative
characteristics. Securities rated below Baa by Moody's or BBB by S&P may have
speculative characteristics, including the possibility of default or bankruptcy
of the issuers of such securities, market price volatility based upon interest
rate sensitivity, questionable creditworthiness and relative liquidity of the
secondary trading market. Because high yield bonds have been found to be more
sensitive to adverse economic changes or individual corporate developments and
less sensitive to interest rate changes than higher-rated investments, an
economic downturn could disrupt the market for high yield bonds and adversely
affect the value of outstanding bonds and the ability of issuers to repay
principal and interest. In addition, in a declining interest rate market,
issuers of high yield bonds may exercise redemption or call provisions, which
may force a fund, to the extent it owns such securities, to replace those
securities with lower yielding securities. This could result in a decreased
return.
Foreign Securities. Investments in securities of foreign 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
each fund 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 fund 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.
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. Foreign 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
price more volatile than securities of comparable U.S. companies. Transaction
costs on foreign 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. A fund might have greater
difficulty taking appropriate legal action in foreign courts. Dividend and
interest income from foreign securities will generally be subject to
withholding taxes by the country in which the issuer is located and may not be
recoverable by the fund or the investors. Capital gains are also subject to
taxation in some foreign countries.
Currency Risks. The U.S. dollar value of securities denominated in a foreign
currency will vary with changes in currency exchange rates, which can be
volatile. Accordingly, changes in the value of the currency in which a fund's
investments are denominated relative to the U.S. dollar will affect the fund's
net asset value. Exchange rates are generally affected by the forces of supply
and demand in the international currency markets, the relative merits of
investing in different countries and the intervention or failure to intervene
of U.S. or foreign governments and central banks. However, currency exchange
rates may fluctuate based on factors intrinsic to a country's economy. Some
emerging market countries also may have managed currencies, which are not free
floating against the U.S. dollar. In addition, emerging markets are subject to
the risk of restrictions upon the free conversion of their currencies into
other currencies. Any devaluations relative to the U.S. dollar in the
currencies in which a fund's securities are quoted would reduce the fund's net
asset value per share.
Special Risks of countries in the Asia Pacific Region. 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/Emerging Markets Countries. A developing or emerging
markets country generally is considered to be a country that is in the initial
stages of its industrialization cycle. Investing in the equity 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 a fund'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 a fund 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 fund 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.
Many of a fund'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.
Restrictions on Foreign Investment. Some countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as a fund. As illustrations,
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 specific 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
authorized the formation of closed-end investment companies to facilitate
indirect foreign investment in their capital markets. In accordance with the
1940 Act, each fund 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 a fund 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 a fund acquires shares in
closed-end investment companies, shareholders would bear both their
proportionate share of expenses in the fund (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 traded securities. Also, the 1940 Act restricts a fund'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 fund's
investments in certain foreign banks and other financial institutions.
Smaller capital markets, while often growing in trading volume, have
substantially 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 transactions, making it difficult to conduct such transactions.
Further, satisfactory custodial services for investment securities may not be
available in some countries having smaller capital markets, which may result in
the fund incurring additional costs and delays in transporting and custodying
such securities outside such countries. Delays in settlement could result in
temporary periods when assets of a fund are uninvested and no return is earned
thereon. The inability of a fund to make intended security purchases due to
settlement problems could cause the fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to a fund due to subsequent declines in
value of the portfolio security or, if the fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
Generally, there is less government supervision and regulation of exchanges,
brokers and issuers in countries having smaller capital markets than there is
in the United States.
Derivative Instruments. In accordance with its investment policies, each fund
may invest in certain derivative instruments which are securities or contracts
that provide for payments based on or "derived" from the performance of an
underlying asset, index or other economic benchmark. Essentially, a derivative
instrument is a financial arrangement or a contract between two parties (and
not a true security like a stock or a bond). Transactions in derivative
instruments can be, but are not necessarily, riskier than investments in
conventional stocks, bonds and money market instruments. A derivative
instrument is more accurately viewed as a way of reallocating risk among
different parties or substituting one type of risk for another. Every
investment by a fund, including an investment in conventional securities,
reflects an implicit prediction about future changes in the value of that
investment. Every fund investment also involves a risk that the portfolio
manager's expectations will be wrong. Transactions in derivative instruments
often enable a fund to take investment positions that more precisely reflect
the portfolio manager's expectations concerning the future performance of the
various investments available to the fund. Derivative instruments can be a
legitimate and often cost-effective method of accomplishing the same investment
goals as could be achieved through other investment in conventional securities.
Derivative contracts include options, futures contracts, forward contracts,
forward commitment and when-issued securities transactions, forward foreign
currency exchange contracts and interest rate, mortgage and currency swaps.
The following are the principal risks associated with derivative instruments.
Market risk: The instrument will decline in value or that an alternative
investment would have appreciated more, but this is no different from the risk
of investing in conventional securities.
Leverage and associated price volatility: Leverage causes increased volatility
in the price and magnifies the impact of adverse market changes, but this risk
may be consistent with the investment objective of even a conservative fund in
order to achieve an average portfolio volatility that is within the expected
range for that type of fund.
Credit risk: The issuer of the instrument may default on its obligation to pay
interest and principal.
Liquidity and valuation risk: Many derivative instruments are traded in
institutional markets rather than on an exchange. Nevertheless, many
derivative instruments are actively traded and can be priced with as much
accuracy as conventional securities. Derivative instruments that are custom
designed to meet the specialized investment needs of a relatively narrow group
of institutional investors such as the funds are not readily marketable and are
subject to a fund's restrictions on illiquid investments.
Correlation risk: There may be imperfect correlation between the price of the
derivative and the underlying asset. For example, there may be price
disparities between the trading markets for the derivative contract and the
underlying asset.
Each derivative instrument purchased for a fund's portfolio is reviewed and
analyzed by the fund's portfolio manager to assess the risk and reward of each
such instrument in relation the fund's portfolio investment strategy. The
decision to invest in derivative instruments or conventional securities is made
by measuring the respective instrument's ability to provide value to the fund
and its shareholders.
Special Risks of Using Futures Contracts. The prices of Futures Contracts are
volatile and are influenced by, among other things, 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 fund, 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 fund 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 fund assets.
Furthermore, in the case of a Futures Contract purchase, in order to be certain
that each fund has sufficient assets to satisfy its obligations under a Futures
Contract, the fund segregates and commits to back the Futures Contract an
amount of cash and liquid 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.
Economic and Monetary Union (EMU). EMU began on January 1, 1999, when 11
European countries adopted a single currency - the euro. For participating
countries, EMU means sharing a single currency and single official interest
rate and adhering to agreed upon limits on government borrowing. Budgetary
decisions will remain in the hands of each participating country, but will be
subject to each country's commitment to avoid "excessive deficits" and other
more specific budgetary criteria. A European Central Bank will be responsible
for setting the official interest rate to maintain price stability within the
euro zone. EMU is driven by the expectation of a number of economic benefits,
including lower transaction costs, reduced exchange risk, greater competition,
and a broadening and deepening of European financial markets. However, there
are a number of significant risks associated with EMU. Monetary and economic
union on this scale has never been attempted before. There is a significant
degree of uncertainty as to whether participating countries will remain
committed to EMU in the face of changing economic conditions. This uncertainty
may increase the volatility of European markets and may adversely affect the
prices of securities of European issuers in the funds' portfolios.
Year 2000. The investment management services provided to each fund by the
Manager and the services provided to shareholders by Salomon Smith Barney
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 a fund's operations,
including the handling of securities trades, pricing and account services. The
Manager and Salomon Smith Barney have advised each fund 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 funds' 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, Salomon Smith
Barney or any other service provider will be successful, or that interaction
with other non-complying computer systems will not impair funds services at
that time.
INVESTMENT RESTRICTIONS tc "INVESTMENT RESTRICTIONS"
The Company 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 fund affected by the change as defined
in the 1940 Act and Rule 18f-2 thereunder (see "Voting").
Without the approval of a majority of its outstanding voting securities, the
Global Government Bond Portfolio may not:
1. Change its subclassification as an open-end fund.;
2. Change its subclassification as a non-diversified company;
3. Invest more than 25% of its total assets in securities, the
issuers of which conduct their principal business activities in
the same industry. For purposes of this limitation, securities
of the U.S. government (including its agencies and
instrumentalities) and securities of state or municipal
governments and their political subdivisions are not considered
to be issued by members of any industry.
4. Purchase or sell real estate, real estate mortgages, commodities
or commodity contracts, but this restriction shall not prevent
the fund from (a) investing in securities of issuers engaged in
the real estate business or the business of investing in real
estate (including interests in limited partnerships owning or
otherwise engaging in the real estate business or the business
of investing in real estate) and securities which are secured by
real estate or interests therein; (b) holding or selling real
estate received in connection with securities it holds or held;
(c) trading in futures contracts and options on futures
contracts (including options on currencies to the extent
consistent with the fund's' investment objective and policies);
or (d) investing in real estate investment trust securities.
5. Borrow money, except that (a) the fund may borrow from banks for
temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests which might otherwise require the
untimely disposition of securities, and (b) the fund may, to the
extent consistent with its investment policies, enter into
reverse repurchase agreements, forward roll transactions and
similar investment strategies and techniques. To the extent
that it engages in transactions described in (a) and (b), the
fund will be limited so that no more than 33 1/3% of the value
of its total assets (including the amount borrowed), valued at
the lesser of cost or market, less liabilities (not including
the amount borrowed) valued at the time the borrowing is made,
is derived from such transactions.
6. Issue senior securities.
7. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the fund may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio
securities, to the fullest extent permitted under the 1940 Act.
8. Engage in the business of underwriting securities issued by
other persons, except to the extent that the fund may
technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in disposing of portfolio securities.
9. Enter into a Futures Contract or a commodity option other than
for bona fide hedging purposes and, if, as a result thereof,
more than 5% of the fund's total assets (taken at market value
at the time of entering into the contract or commodity option)
would be committed to initial margin on futures contracts and
premiums on commodity options all within the meaning of
Regulation 4.5 of the CFTC.
In addition, the following policies have also been adopted by the Global
Government Bond Portfolio but are not fundamental and accordingly may be
changed by approval of the Board of Directors. The fund may not:
1. Purchase any securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and
sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this restriction,
the deposit or payment by the fund of underlying securities and
other assets in escrow and collateral agreements with respect to
initial or maintenance margin in connection with futures
contracts and related options and options on securities, indexes
or similar items is not considered to be the purchase of a
security on margin.
2. Have more than 15% of its total assets at any time invested in
or subject to puts, calls or combinations thereof.
3. Invest in companies for the purpose of exercising control or
management.
4. Purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets would be invested in securities that
are illiquid.
5. Invest in securities of another investment company except as
permitted by Section 12(d)(1)(a) of the 1940 Act, or as part of
a merger, consolidation, or acquisition.
6. Invest in securities of an issuer if the investment would cause
the fund to own more than 10% of any class of securities of any
one issuer.
7. Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that
the fund may invest in, or sponsor such programs.
8. Invest more than 5% of its total assets in securities of
companies having, together with their predecessors, a record of
less than three years of continuous operation.
Without the approval of a majority of its outstanding voting securities, the
International Equity Portfolio, the Pacific Portfolio, the European Portfolio,
the International Balanced Portfolio and the Emerging Markets Portfolio each
may not:
1. With respect to each of the European Portfolio, the
International Equity Portfolio and the Pacific Portfolio, invest
in a manner that would cause it to fail to be a "diversified
company" under the 1940 Act and the rules, regulations and
orders thereunder.
2. With respect to each of the Emerging Markets Portfolio and the
International Balanced Portfolio, deviate from its
subclassification as a non-diversified company.
3. Invest more than 25% of its total assets in securities, the
issuers of which conduct their principal business activities in
the same industry. For purposes of this limitation, securities
of the U.S. government (including its agencies and
instrumentalities) and securities of state or municipal
governments and their political subdivisions are not considered
to be issued by members of any industry.
4. Purchase or sell real estate, real estate mortgages, commodities
or commodity contracts, but this restriction shall not prevent
the fund from (a) investing in securities of issuers engaged in
the real estate business or the business of investing in real
estate (including interests in limited partnerships owning or
otherwise engaging in the real estate business or the business
of investing in real estate) and securities which are secured by
real estate or interests therein; (b) holding or selling real
estate received in connection with securities it holds or held;
(c) trading in futures contracts and options on futures
contracts (including options on currencies to the extent
consistent with the funds' investment objective and policies);
or (d) investing in real estate investment trust securities.
5. With respect to each of the Emerging Markets Portfolio and the
European Portfolio, borrow money, except that (a) the fund may
borrow from banks for temporary or emergency (not leveraging)
purposes, including the meeting of redemption requests which
might otherwise require the untimely disposition of securities,
and (b) the fund may, to the extent consistent with its
investment policies, enter into reverse repurchase agreements,
forward roll transactions and similar investment strategies and
techniques. To the extent that it engages in transactions
described in (a) and (b), the fund will be limited so that no
more than 33 1/3% of the value of its total assets (including
the amount borrowed), valued at the lesser of cost or market,
less liabilities (not including the amount borrowed) valued at
the time the borrowing is made, is derived from such
transactions.
6. With respect to each of the International Balanced Portfolio,
the International Equity Portfolio and the Pacific Portfolio,
borrow money, except that (a) the Portfolio may borrow from
banks under certain circumstances where the fund's Manager
reasonably believes that (i) the cost of borrowing and related
expenses will be exceeded by the fund's return from investments
of the proceeds of the borrowing in portfolio securities, or
(ii) the meeting of redemption requests might otherwise require
the untimely disposition of securities, in an amount not
exceeding 33 1/3% of the value of the fund's total assets
(including the amount borrowed), valued at the lesser of cost or
market, less liabilities (not including the amount borrowed)
valued at the time the borrowing is made and (b) the fund may,
to the extent consistent with its investment policies, enter
into reverse repurchase agreements, forward roll transactions
and similar investment strategies and techniques.
7. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the fund may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio
securities, to the fullest extent permitted under the 1940 Act.
8. Engage in the business of underwriting securities issued by
other persons, except to the extent that the fund may
technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in disposing of portfolio securities.
9. Issue "senior securities" as defined in the 1940 Act and the
rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
In addition, the following policies have also been adopted by the European
Portfolio, the Emerging Markets Portfolio, the International Balanced
Portfolio, the International Equity Portfolio and the Pacific Portfolio, but
are not fundamental and accordingly may be changed by approval of the Board of
Directors. The funds may not:
1. Purchase any securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and
sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this restriction,
the deposit or payment by the fund of underlying securities and
other assets in escrow and collateral agreements with respect to
initial or maintenance margin in connection with futures
contracts and related options and options on securities, indexes
or similar items is not considered to be the purchase of a
security on margin.
2. Purchase interests in oil, gas and/or mineral exploration or
development programs (including mineral leases), except for
purchases of currencies and futures and options and other
related contracts as described in the Prospectus from time to
time and except for the purchase of marketable securities issued
by companies that have such interests.
3. Purchase securities of any other registered investment company,
except in connection with a merger, consolidation,
reorganization or acquisition of assets; provided, however, that
each of the funds may also purchase shares of other investment
companies pursuant to Section 12(d)(1)(A) of the 1940 Act.
4. Make investments in securities for the purpose of exercising
control over or managing the issuer.
5. Purchase securities of any issuer (including any predecessor)
which has been in operation for less than three years if
immediately after such purchase more than 5% of the value of the
total assets of the fund would be invested in such securities.
6. Purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets would be invested in securities that
are illiquid.
ADDITIONAL TAX INFORMATION tc "ADDITIONAL TAX INFORMATION"
The following is a summary of the material federal tax considerations affecting
a fund of the Company. 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 fund intends to qualify, as it has in prior years, under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), for tax treatment
as a separate regulated investment company so long as such qualification is in
the best interest of its shareholders. In each taxable year that each fund
qualifies, each fund will pay no federal income tax on its net investment
income and net short-term and long-term capital gains that are distributed to
shareholders in compliance with the Code's timing and other requirements.
To so qualify, a fund 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 fund'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 fund'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 fund's
assets is invested in securities of any one issuer (other than U.S. Government
securities or securities of other regulated investment companies) or two or
more issuers controlled by the fund and engaged in the same, similar or related
trades or businesses. The diversification requirements described above may
limit the fund'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 fund'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 fund will not be subject to U.S.
federal income tax on net investment income and net short-term and long-term
capital gains distributed to shareholders if, as is intended, the fund
distributes at least 90% of its net ordinary income and any excess of its net
short-term capital gain over its net long-term capital loss to the fund's
shareholders for each taxable year of the fund.
Each fund, however, will generally be subject to a nondeductible federal 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 fund 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
fund will not be subject to the excise tax.
For federal income tax purposes, dividends declared by each fund 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 fund 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 fund sells the stock or security short or acquires a put or writes a
call thereon or it is otherwise subject to the straddle rules described below.
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 but may in some cases be
subject to the mark-to-market rules described below. If an option written for
a fund lapses or is terminated through a closing transaction the fund 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 and
subject to possible recharacterization for certain listed nonequity options
under the "60/40 rule" described below. If a fund sells stock or securities
pursuant to the exercise of a call option written by it, the fund 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.
Under the Code, gains or losses attributable to foreign currency forward
contracts or certain foreign currency options or futures contracts, or to
fluctuations in exchange rates between the time a fund accrues income or
receivables or expenses or other liabilities denominated in a foreign currency
and the time the fund 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 fund 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
fund may create "straddles" for federal income tax purposes and this may affect
the character and timing of gains or losses realized by the fund on such
contracts or options or on the underlying securities and therefore affect the
fund's distributions.
Certain options, Futures and foreign currency contracts held by a fund 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.
Generally, 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 40% will be treated as short-term capital gain or loss (the "60/40
rule"), regardless of how long the fund has held such options or contracts.
Certain of these gains or losses that relate to some currency-related futures,
options, or forwards will be recharacterized as ordinary income or loss.
Constructive sale rules may also require the recognition of gains (but not
losses) if a fund engages in short sales or certain other transactions.
If a fund purchases shares in certain foreign investment entities, referred to
as "passive foreign investment companies," the fund 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 fund to its shareholders in a manner that satisfies the requirements
described above. If the fund were able and elected to treat a passive foreign
investment company as a "qualified electing fund," in lieu of the treatment
described above, the fund would be required each year to include in income, and
distribute to shareholders in accordance with the distribution requirements
described above, the fund's pro rata share of the ordinary earnings and net
capital gains of the company, whether or not actually received by the fund.
The funds generally should be able to make an alternative election to mark
these investments to market annually, resulting in the recognition of ordinary
income (rather than capital gain) or ordinary loss, subject to limitations on
the ability to use any such loss.
A fund may be required to treat amounts as taxable income or gain, subject to
the distribution requirements referred to above, even though no corresponding
amounts of cash are received concurrently, as a result of (1) mark to market,
constructive sale or other rules applicable to passive foreign investment
companies or partnerships in which the fund invests or to certain options,
futures, forward contracts, or "appreciated financial positions" or (2) the
inability to obtain cash distributions or other amounts due to currency
controls or restrictions on repatriation imposed by a foreign country with
respect to the fund's investments in issuers in such country or (3) tax rules
applicable to debt obligations acquired with "original issue discount,"
including zero-coupon or deferred payment bonds and pay-in-kind debt
obligations, or to market discount if an election is made with respect to such
market discount. The fund may therefore be required to obtain cash to be used
to satisfy these distribution requirements by selling portfolio securities at
times that it might not otherwise be desirable to do so or borrowing the
necessary cash, thereby incurring interest expenses.
Income (including, in some cases, capital gains) received by a fund 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 fund's assets to be
invested in various countries is not known. Such foreign taxes would reduce the
income of the fund distributed to shareholders.
If, at the end of a fund's taxable year, more than 50% of the value of that
fund's total assets consist of stock or securities of foreign corporations, the
fund may make an election pursuant to which qualified foreign income taxes paid
by it will be treated as paid directly by its shareholders. A fund 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 a fund makes such an election, the amount of such qualified
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, provided that certain holding period requirements
are satisfied, or, provided the shareholder itemizes deductions, a deduction
for U.S. federal income tax purposes for such foreign taxes. Tax-exempt
shareholders generally will not be able to use any credit or deduction.
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 fund from its
foreign source ordinary income will be treated as foreign source income. The
fund'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
fund 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 qualified foreign income taxes paid by a fund.
Prior to investing in shares of the fund, investors should consult with their
tax advisors concerning the federal, state and local tax consequences of such
an investment.
Distributions
If the net asset value of shares of a fund is reduced below a shareholder's
cost as a result of distribution by the fund, such distribution will be taxable
even though it represents a return of invested capital.
Dividends from net investment income and distributions of realized short-term
capital gains, whether paid in cash or automatically invested in additional
shares of the fund, are taxable to shareholders as ordinary income. The funds'
dividends will not qualify for the dividends received deduction for
corporations. Dividends and distributions by the funds may also be subject to
state and local taxes. Distributions out of net long-term capital gains (i.e.,
net long-term capital gain in excess of net short-term capital loss) 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.
The Company 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. Distributions to nonresident aliens and foreign entities may also
be subject to other withholding taxes.
Redemption of Shares
Any gain or loss realized on the redemption or exchange of fund 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, provided in each case that the
transaction is properly treated as a sale rather than a dividend for tax
purposes.
However, any loss realized by such a shareholder upon the redemption or
exchange of fund 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 fund 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 fund shares.
In determining gain or loss, a shareholder who redeems or exchanges shares in a
fund within 90 days of the acquisition of such shares will not be entitled to
include in tax basis the sales charges incurred in acquiring such shares to the
extent of any subsequent reduction in sales charges due to any reinvestment
right for investing in the same fund or a different fund, such as pursuant to
the rights discussed in ''Exchange Privilege.''
IRA AND OTHER PROTOTYPE RETIREMENT PLANS tc "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 Company or
Salomon 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 for 1998, 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 above $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.
The rules applicable to so-called "Roth IRAs" differ from those described
above.
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 1998.
Paired Defined Contribution Prototype
Corporations (including Subchapter S corporations) and non-corporate entities
may purchase shares of the Company through the Salomon 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 tc "PERFORMANCE INFORMATION"
From time to time the Company may advertise a fund's total return, average
annual total return and yield in advertisements. The Company may also quote the
funds' total that eliminates the sales charge or the initial investment. In
addition, in other types of sales literature the Company may include a fund's
current dividend return. These figures are based on historical earnings and
are not intended to indicate future performance. The total returns below show
what an investment in the fund would have earned over a specified period of
time (one, five or ten years or since inception) assuming the payment of the
maximum sales load when the investment was first made and that all
distributions and dividends by the fund 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 following chart reflects the financial performance of the funds through the
period ended October 31, 1998 for the one, and five year periods and since
inception:
Total Returns
5 Year
Since
Inception
Since
Name of Fund
Class
1 Year
Average
Annual
5 Year
Cumulative
Average
Annual
Inception
Cumulative
International Equity1
Inception: 11-22-91
A
(4.85)%
3.06%
16.26%
10.00%
159.26%
Inception: 11-7-94
B
(5.66)%
N/A
N/A
2.00%
8.20%
Inception: 1-4-93
L
(2.67)%
3.10%
16.47%
8.58%
61.49%
Inception: 6-16-94
Y
0.45%
N/A
N/A
4.29%
20.18%
Inception: 11-7-94
Z
0.45%
N/A
N/A
3.63%
15.25%
Global Government Bond
Inception: 7-22-91
A
3.19%
6.14%
34.69%
8.15%
76.90%
Inception: 11-18-94
B
3.09%
N/A
N/A
8.67%
38.93%
Inception: 1-4-93
L
5.66%
6.30
35.74%
8.05%
56.98%
Inception: 2-19-93
Y
8.50%
7.17%
41.36%
8.60%
59.99%
International Balanced
Inception: 8-25-94
A
7.24%
N/A
N/A
6.37%
29.51%
Inception: 11-7-94
B
6.96%
N/A
N/A
6.67%
29.33%
Inception: 8-25-94
L
9.82%
N/A
N/A
6.58%
30.55%
Pacific
Inception: 2-7-94
A
(16.08)%
N/A
N/A
(13.21)%
(48.86)%
Inception: 11-7-94
B
(16.43)%
N/A
N/A
(15.77)%
(49.53)%
Inception: 2-11-94
L
(22.62)%
N/A
N/A
(13.18)%
(48.69)%
European
Inception: 2-7-94
A
3.64%
N/A
N/A
10.86%
62.90%
Inception: 11-7-94
B
3.24%
N/A
N/A
13.01%
62.77%
Inception: 2-14-94
L
6.30%
N/A
N/A
11.15%
64.59%
Emerging Markets
Inception: 5-12-95
A
(46.38)%
N/A
N/A
(15.51)%
(44.34)%
Inception: 5-12-95
B
(46.70)%
N/A
N/A
(15.39)%
(44.06)%
Inception: 5-12-95
L
(45.12)%
N/A
N/A
(15.17)%
(43.56)%
1 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 fund 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 fund. Prior to November 22,
1991 the fund had not made an offering of its shares.
*These numbers represent the financial performance for the ten-year period
ended October 31, 1998.
The total returns below show what an investment in the fund would have earned
over a specified period of time (one, five or ten years or since inception)
without assuming the payment of the maximum sales load when the investment was
first made and that all distributions and dividends by the fund were invested
on the reinvestment dates during the period, less all recurring fees. The
following chart reflects the financial performance of the funds through the
period ended October 31, 1998 for the one, and five year periods and since
inception:
Total Returns
5 Year
Since
Inception
Since
Name of Fund
Class
1 Year
Average
Annual
5 Year
Cumulative
Average
Annual
Inception
Cumulative
International Equity1
Inception: 11-22-91
A
0.15%
4.13%
22.40%
10.50%
255.72%
Inception: 11-7-94
B
(0.69)%
N/A
N/A
2.47%
10.20%
Inception: 1-4-93
L
(0.70)%
3.30%
17.63%
8.76%
63.06%
Inception: 6-16-94
Y
0.45%
N/A
N/A
4.29%
20.18%
Inception: 11-7-94
Z
0.45%
N/A
N/A
3.63%
15.25%
Global Government Bond
Inception: 7-22-91
A
8.08%
7.12%
41.05%
8.84%
85.30%
Inception: 11-18-94
B
7.46%
N/A
N/A
9.07%
40.93%
Inception: 1-4-93
L
7.67%
6.51%
37.10%
8.24%
58.57%
Inception: 2-19-93
Y
8.50%
7.17%
41.36%
8.60%
59.99%
International Balanced
Inception: 8-25-94
A
12.87%
N/A
N/A
7.68%
36.31%
Inception: 11-7-94
B
11.96%
N/A
N/A
7.08%
31.33%
Inception: 8-25-94
L
11.90%
N/A
N/A
6.83%
31.86%
Pacific
Inception: 2-7-94
A
(20.45)%
N/A
N/A
(12.27)%
(46.16)%
Inception: 11-7-94
B
(21.09)%
N/A
N/A
(15.34)%
(48.50)%
Inception: 2-11-94
L
(21.07)%
N/A
N/A
(12.99)%
(48.16)%
European
Inception: 2-7-94
A
9.10%
N/A
N/A
12.08%
71.50%
Inception: 11-7-94
B
8.24%
N/A
N/A
13.35%
64.77%
Inception: 2-14-94
L
8.38%
N/A
N/A
11.40%
66.31%
Emerging Markets
Inception: 5-12-95
A
(43.53)%
N/A
N/A
(14.26)%
(41.42)%
Inception: 5-12-95
B
(43.90)%
N/A
N/A
(14.89)%
(42.92)%
Inception: 5-12-95
L
(44.03)%
N/A
N/A
(14.93)%
(43.00)%
1 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 fund 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 fund. Prior to November 22,
1991 the fund had not made an offering of its shares.
*These numbers represent the financial performance for the ten-year period
ended October 31, 1998.
Note that, (i) prior to June 12, 1998, Class L shares were called Class C
shares; (ii) prior to November 7, 1994, Class C shares were called Class B
shares; and (iii) prior to November 7, 1994, Class Y shares of Global
Government Bond Portfolio were called 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 fund 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. For the 30-day period ended October 31, 1998, the
portfolio's Class A share, Class B share, Class L share and Class Y share
yields were 4.36%, 5.15%, 4.70% and 4.80%, respectively.
The Company calculates current dividend return for each fund 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 Company may include the fund's current
dividend return in information furnished to present or prospective shareholders
and in advertisements.
Each fund'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
fund'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 fund's shares and to the
risks associated with the fund'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.
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.
Performance information may be useful in evaluating a fund and for providing a
basis for comparison with other financial alternatives. Since the performance
of the fund changes in response to fluctuations in market conditions, interest
rates and fund expenses, no performance quotation should be considered a
representation as to the fund's performance for any future period.
A fund 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 Lehman Brothers 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), or other
similar indices.
(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) 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. Each fund may also include comparative performance
information in advertising or marketing its shares. Such performance
information may include data from Lipper Analytical Services, Inc.,
Morningstar, Inc. and other financial publications.
DETERMINATION OF NET ASSET VALUE tc "DETERMINATION OF NET ASSET VALUE"
The net asset value per share of each fund normally is determined as of the
close of regular trading on the NYSE on each day that the NYSE is open, by
dividing the value of the fund's net assets attributable to each Class by the
total number of shares of the Class outstanding. If the NYSE closes early, the
fund accelerates the calculation of its net asset value to the actual closing
time. The NYSE is closed for the following holidays: New Year's Day, Martin
Luther King Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
Securities 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 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 amortized cost is fair
value. Premiums received on the sale of call options will be included in the
fund's net assets, and current market value of such options sold by the fund
will be subtracted from the fund's net assets. Any other investments of the
fund, 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 fund 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 fund may not take place contemporaneously with the determination of the
prices of investments held by such fund. 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 fund's net
asset value unless the Manager, under the supervision of the Company's Board of
Directors, determines that the particular event would materially affect net
asset value. As a result, a fund's net asset value may be significantly
affected by such trading on days when a shareholder has no access to that fund.
PURCHASE OF SHARES
Sales Charge Alternatives
The following classes of shares are available for purchase. See the Prospectus
for a discussion of factors to consider in selecting which Class of shares to
purchase.
Class A Shares. Class A shares are sold to investors at the public offering
price, which is the net asset value plus an initial sales charge as follows:
Global Gov't
Bond Portfolio
Offering Price
Amount of
Investment
Sales Charge as % of
Offering Price
Sales Charge as %
of Amount
Invested
Sales Charge as a
%
Of Offering Price
Sales Charge as a %
of Amount Invested
Less than $25,000
4.50%
4.71%
5.00%
5.26%
$ 25,000 - 49,999
4.00
4.17
4.00
4.17
50,000 - 99,999
3.50
3.63
3.50
3.63
100,000 - 249,999
2.50
2.56
3.00
3.09
250,000 - 499,999
1.50
1.52
2.00
2.04
500,000 and over
- -0-
- -0-
*
*
* 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
deferred sales charge of 1.00% on redemptions made within 12 months of
purchase. The deferred sales charge on Class A shares is payable to
Salomon Smith Barney, which compensates Salomon Smith Barney Financial
Consultants and other dealers whose clients make purchases of $500,000
or more. The deferred sales charge is waived in the same circumstances
in which the deferred sales charge applicable to Class B and Class L
shares is waived. See "Deferred Sales Charge Alternatives" and "Waivers
of Deferred Sales Charge."
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 fund made at one time by "any person," which includes an
individual and his or her immediate family, or a trustee or other fiduciary of
a single trust estate or single fiduciary account.
Class B Shares. Class B shares are sold without an initial sales charge but
are subject to a deferred sales charge payable upon certain redemptions. See
"Deferred Sales Charge Provisions" below.
Class L Shares. Class L shares are sold with an initial sales charge of 1.00%
(which is equal to 1.01% of the amount invested) and are subject to a deferred
sales charge payable upon certain redemptions. See "Deferred Sales Charge
Provisions" below. Until June 22, 2001 purchases of Class L shares by
investors who were holders of Class C shares of the fund on June 12, 1998 will
not be subject to the 1% initial sales charge.
Class Y Shares. Class Y shares are sold without an initial sales charge or
deferred sales charge and are available only to investors investing a minimum
of $15,000,000 (except for purchases of Class Y shares (i) of the International
Equity Portfolio, for which the minimum initial investment is $5,000,000 and
(ii) by
Smith Barney Concert Allocation Series Inc., for which there is no minimum
purchase amount).
General
Investors may purchase shares from a Salomon Smith Barney Financial Consultant
or a broker that clears through Salomon Smith Barney ("Dealer Representative").
In addition, certain investors, including qualified retirement plans purchasing
through certain Dealer Representatives, may purchase shares directly from the
fund. When purchasing shares of the fund, investors must specify whether the
purchase is for Class A, Class B, Class L or Class Y shares. Salomon Smith
Barney and Dealer Representatives 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
Investor Services Group, Inc. ("First Data" or "transfer agent") are not
subject to a maintenance fee.
Investors in Class A, Class B and Class L shares may open an account in the
fund by making an initial investment of at least $1,000 for each account, or
$250 for an IRA or a Self-Employed Retirement Plan, in the fund. Investors in
Class Y shares may open an account by making an initial investment of
$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(c) of the Code, the minimum initial investment required for
Class A, Class B and Class L shares and the subsequent investment requirement
for all Classes in the fund is $25. For shareholders purchasing shares of the
fund through the Systematic Investment Plan on a monthly basis, the minimum
initial investment requirement for Class A, Class B and Class L shares and
subsequent investment requirement for all Classes is $25. For shareholders
purchasing shares of the fund through the Systematic Investment Plan on a
quarterly basis, the minimum initial investment required for Class A, Class B
and Class L shares and the subsequent investment requirement for all Classes is
$50. There are no minimum investment requirements for Class A shares for
employees of Citigroup Inc. ("Citigroup") and its subsidiaries, including
Salomon Smith Barney, unitholders who invest distributions from a Unit
Investment Trust ("UIT") sponsored by Salomon Smith Barney, and
Directors/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 a Salomon Smith Barney Financial
Consultant prior to the close of regular trading on the New York Stock Exchange
("NYSE"), on any day the fund calculates its net asset value, are priced
according to the net asset value determined on that day (the ''trade date'').
Orders received by a Dealer Representative prior to the close of regular
trading on the NYSE on any day the fund calculates its net asset value, are
priced according to the net asset value determined on that day, provided the
order is received by the fund or the fund's agent prior to its close of
business. For shares purchased through Salomon Smith Barney or a Dealer
Representative purchasing through Salomon Smith Barney, payment for shares of
the fund 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, Salomon 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 shareholder's
account held with a bank or other financial institution on a monthly or
quarterly basis as indicated by the shareholder, to provide for systematic
additions to the shareholder's fund account. A shareholder who has
insufficient funds to complete the transfer will be charged a fee of up to $25
by Salomon Smith Barney or First Data. The Systematic Investment Plan also
authorizes Salomon Smith Barney to apply cash held in the shareholder's Salomon
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 Salomon Smith Barney Financial
Consultant or a Dealer Representative.
Sales Charge Waivers and Reductions
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 Citigroup and its subsidiaries and any
Citigroup affiliated funds including the Smith Barney Mutual Funds (including
retired Board Members and employees); the immediate families of such persons
(including the surviving spouse of a deceased Board Member or employee); and to
a pension, profit-sharing or other benefit plan for such persons and (ii)
employees of members of the National Association of Securities Dealers, Inc.,
provided such sales are made upon the assurance of the purchaser that the
purchase is made for investment purposes and that the securities will not be
resold except through redemption or repurchase; (b) offers of Class A shares to
any other investment company to effect the combination of such company with the
fund by merger, acquisition of assets or otherwise; (c) purchases of Class A
shares by any client of a newly employed Salomon Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the Financial
Consultant's employment with Salomon 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 fund (or Class A shares of another Smith Barney
Mutual Fund that is offered with a sales charge) and who wish to reinvest their
redemption proceeds in the fund, provided the reinvestment is made within 60
calendar days of the redemption; (e) purchases by accounts managed by
registered investment advisory subsidiaries of Citigroup; (f) direct rollovers
by plan participants of distributions from a 401(k) plan offered to employees
of Citigroup 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 a separate account used to fund certain
unregistered variable annuity contracts; (h) investments of distributions from
a UIT sponsored by Salomon Smith Barney; (i) purchases by investors
participating in a Salomon Smith Barney fee-based arrangement; and (j)
purchases by Section 403(b) or Section 401(a) or (k) accounts associated with
Copeland Retirement Programs. In order to obtain such discounts, the purchaser
must provide sufficient information at the time of purchase to permit
verification that the purchase would qualify for the elimination of the sales
charge.
Right of Accumulation. Class A shares of the fund may be purchased by ''any
person'' (as defined above) at a reduced sales charge or at net asset value
determined by aggregating the dollar amount of the new purchase and the total
net asset value of all Class A shares of the fund and of most other Smith
Barney Mutual Funds that are offered with a sales charge 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.
Letter of Intent - Class A Shares. A Letter of Intent for an amount 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 (i) all Class A shares of the fund and other Smith Barney
Mutual Funds offered with a sales charge acquired during the term of the letter
plus (ii) the value of all Class A shares previously purchased and still owned.
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. The term of the
Letter will commence upon the date the Letter is signed, or at the options of
the investor, up to 90 days before such date. Please contact a Salomon Smith
Barney Financial Consultant or First Data to obtain a Letter of Intent
application.
Letter of Intent - 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
(except purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount). For International Equity
Portfolio, investors must make an initial minimum purchase of $1,000,000 in
Class Y shares of the fund and agree to purchase a total of $5,000,000 of Class
Y of the fund within 6 months of the date of the Letter. For all of the other
funds, investors must make an initial minimum purchase of $5,000,000 in Class Y
shares of the fund and agree to purchase a total of $15,000,000 of Class Y
shares of the fund 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, or $5 million
is not made within 6 months for the International Equity Portfolio, all Class Y
shares purchased to date will be transferred to Class A shares, where they will
be subject to all fees (including a service fee of 0.25%) and expenses
applicable to the fund's Class A shares, which may include a deferred sales
charge of 1.00%. Please contact a Salomon Smith Barney Financial Consultant or
First Data for further information.
Deferred Sales Charge Provisions
''Deferred Sales Charge Shares'' are: (a) Class B shares; (b) Class L shares;
and (c) Class A shares that were purchased without an initial sales charge but
are subject to a deferred sales charge. A deferred sales charge may be imposed
on certain redemptions of these shares.
Any applicable deferred sales charge 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. Deferred Sales Charge Shares that are redeemed
will not be subject to a deferred sales charge to the extent that the value of
such shares represents: (a) capital appreciation of fund assets; (b)
reinvestment of dividends or capital gain distributions; (c) with respect to
Class B shares, shares redeemed more than five years after their purchase; or
(d) with respect to Class L shares and Class A shares that are Deferred Sales
Charge Shares, shares redeemed more than 12 months after their purchase.
Class L shares and Class A shares that are Deferred Sales Charge Shares are
subject to a 1.00% deferred sales charge if redeemed within 12 months of
purchase. In circumstances in which the deferred sales charge 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 Salomon 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 ExecChoiceTM Programs.''
Deferred Sales Charge
Year Payment Was Made Since
Purchase
Global Government Bond
Portfolio
All other Funds
First
4.50%
5.00%
Second
4.00
4.00
Third
3.00
3.00
Fourth
2.00
2.00
Fifth
1.00
1.00
Sixth and thereafter
0.00
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 (Class B shares that were acquired
through the reinvestment of dividends and distributions) 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.
The length of time that Deferred Sales Charge Shares acquired through an
exchange have been held will be calculated from the date that the shares
exchanged were initially acquired in one of the other Smith Barney Mutual
Funds, and fund shares being redeemed will be considered to represent, as
applicable, capital appreciation or dividend and capital gain distribution
reinvestments in such other funds. For Federal income tax purposes, the amount
of the deferred sales charge will reduce the gain or increase the loss, as the
case may be, on the amount realized on redemption. The amount of any deferred
sales charge will be paid to Salomon Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares of the
fund at $10 per share for a cost of $1,000. Subsequently, the investor
acquired 5 additional shares of the fund 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 deferred sales charge 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 Deferred Sales Charge
The deferred sales charge 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 12 months following the death or disability of the
shareholder; (d) redemptions of shares made in connection with qualified
distributions from retirement plans or IRAs upon the attainment of age 591/2;
(e)
involuntary redemptions; and (f) redemptions of shares to effect a combination
of the fund with any investment company by merger, acquisition of assets or
otherwise. In addition, a shareholder who has redeemed shares from other 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
deferred sales charge imposed on the prior redemption.
Deferred sales charge waivers will be granted subject to confirmation (by
Salomon Smith Barney in the case of shareholders who are also Salomon 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 ExecChoiceTM Programs
Investors may be eligible to participate in the Smith Barney 401(k) Program or
the Smith Barney ExecChoiceTM Program. To the extent applicable, the same terms
and conditions, which are outlined below, are offered to all plans
participating (''Participating Plans'') in these programs.
The fund offers to Participating Plans Class A and Class L shares as investment
alternatives under the Smith Barney 401(k) and ExecChoiceTM Programs. Class A
and Class L shares acquired through the Participating Plans are subject to the
same service and/or distribution fees as the Class A and Class L shares
acquired by other investors; however, they are not subject to any initial sales
charge or deferred sales charge. Once a Participating Plan has made an initial
investment in the fund, all of its subsequent investments in the fund must be
in the same Class of shares, except as otherwise described below.
Class A Shares. Class A shares of the fund are offered without any sales
charge or deferred sales charge 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 L Shares. Class L shares of the fund are offered without any sales
charge or deferred sales charge to any Participating Plan that purchases less
than $1,000,000 of Class L 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 the Smith Barney ExecChoiceTM Program, a Participating
Plan's total Class L and Class O 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 L shares for Class A shares of the
fund. For Participating Plans that were originally established through a
Salomon 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 a
Participating Plan's total Class L 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
L and Class O shares for Class A shares of the fund. Such Plans will be
notified in writing within 30 days after the last business day of the calendar
year and, unless the exchange offer has been rejected in writing, the exchange
will occur on or about the last business day of the following March.
Any Participating Plan in the Smith Barney 401(k) or the Smith Barney
ExecChoiceTM Programs, 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 L shares for Class A shares of the
fund, regardless of asset size, at the end of the eighth year after the date
the Participating Plan enrolled in the Smith Barney 401(k) 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 L shares of the fund, but instead may
acquire Class A shares of the fund. Any Class L shares not converted will
continue to be subject to the distribution fee.
Participating Plans wishing to acquire shares of the fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoiceTM Program must purchase
such shares directly from the transfer agent. For further information regarding
these Programs, investors should contact a Salomon Smith Barney Financial
Consultant.
EXCHANGE PRIVILEGE
Shares of each Class of the fund may be exchanged for shares of the same Class
of certain 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 L shares are subject to minimum investment requirements and all shares
are subject to the other requirements of the fund into which exchanges are
made.
Class B Exchanges. If a Class B shareholder wishes to exchange all or a
portion of his or her shares in any of the funds imposing a higher deferred
sales charge than that imposed by the fund, the exchanged Class B shares will
be subject to the higher applicable deferred sales charge. Upon an exchange,
the new Class B shares will be deemed to have been purchased on the same date
as the Class B shares of the fund that have been exchanged.
Class L Exchanges. Upon an exchange, the new Class L shares will be deemed to
have been purchased on the same date as the Class L shares of the fund that
have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the fund
who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without
imposition of any charge.
Additional Information Regarding the Exchange Privilege. Although the exchange
privilege is an important benefit, excessive exchange transactions can be
detrimental to the fund's performance and its shareholders. The manager may
determine that a pattern of frequent exchanges is excessive and contrary to the
best interests of the fund's other shareholders. In this event, the fund may,
at its discretion, decide to limit additional purchases and/or exchanges by the
shareholder. Upon such a determination, the fund will provide notice in writing
or by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15 day period the shareholder will be
required to (a) redeem his or her shares in the fund or (b) remain invested in
the fund or exchange into any of the funds of the Smith Barney Mutual Funds
ordinarily available, which position the shareholder would be expected to
maintain for a significant period of time. All relevant factors will be
considered in determining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
''Redemption of Shares-Telephone Redemptions 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. An exchange involves a taxable redemption of shares,
subject to the tax treatment described in "Additional Tax Information" above,
followed by a purchase of shares of a different fund. Before exchanging
shares, investors should read the current prospectus describing the shares to
be acquired. The fund reserves the right to modify or discontinue exchange
privileges upon 60 days' prior notice to shareholders.
REDEMPTION OF SHARES
The fund is required to redeem the shares of the fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable deferred sales charge. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value next determined.
If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the transfer agent
receives further instructions from Salomon Smith Barney, or if the
shareholder's account is not with Salomon 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 Salomon
Smith Barney brokerage account, these funds will not be invested for the
shareholder's benefit without specific instruction and Salomon 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 Salomon Smith Barney as custodian must be redeemed by submitting
a written request to a Salomon Smith Barney Financial Consultant. Shares other
than those held by Salomon Smith Barney as custodian may be redeemed through an
investor's Financial Consultant, Dealer Representative or by submitting a
written request for redemption to:
Smith Barney World Funds, Inc./[name of fund]
Class A, B, L 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 the transfer agent together with the
redemption request. Any signature appearing on a share certificate, stock power
or written redemption request in excess of $10,000 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 $10,000 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. The transfer agent 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 the transfer agent receives all required
documents in proper form.
Automatic Cash Withdrawal Plan. The fund offers shareholders an automatic cash
withdrawal plan, under which shareholders who own shares with a value of at
least $10,000 may elect to receive cash payments of at least $50 monthly or
quarterly. Retirement plan accounts are eligible for automatic cash withdrawal
plans only where the shareholder is eligible to receive qualified distributions
and has an account value of at least $5,000. The withdrawal plan will be
carried over on exchanges between Classes of a fund. Any applicable deferred
sales charge 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
deferred sales charge at the time the withdrawal plan commences. (With respect
to withdrawal plans in effect prior to November 7, 1994, any applicable
deferred sales charge 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
deferred sales charge.) For further information regarding the automatic cash
withdrawal plan, shareholders should contact a Salomon Smith Barney Financial
Consultant or your Dealer Representative or the transfer agent.
Telephone Redemption and Exchange Program. Shareholders who do not have a
brokerage account may be eligible to redeem and exchange shares by telephone.
To determine if a shareholder is entitled to participate in this program, he or
she should contact the transfer agent 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
the transfer agent 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 a fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes of
shares of a fund may be made by eligible shareholders by calling the transfer
agent at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00
p.m. (Eastern 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 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 the transfer agent at 1-800-451-2010 between 9:00 a.m.
and 5:00 p.m. (Eastern 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.
DIVIDENDS AND DISTRIBUTIONS
Each fund except the Global Government Bond Portfolio and the International
Balanced Portfolio declares and pays income dividends at least annually on its
shares. The Global Government Bond Portfolio declares and pays income dividends
monthly and the International Balanced Portfolio declares and pays income
dividends quarterly. Each fund makes annual distributions of capital gains, if
any, on its 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 initial or deferred
sales charges.
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 Salomon Smith Barney Financial Consultant.
Accounts held directly by the transfer agent should notify the transfer agent
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 L shares of fund may be lower than
the per share dividends on Class A and Class Y shares principally as a result
of the distribution fee applicable with respect to Class B and Class L shares.
The per share dividends on Class A shares of a fund may be lower than the per
share dividends on Class Y shares principally as a result of the service fee
applicable to Class A shares. Distributions of capital gains, if any, will be
in the same amount for Class A, Class B, Class L and Class Y shares.
INVESTMENT MANAGEMENT AND OTHER SERVICES tc "INVESTMENT MANAGEMENT AND OTHER
SERVICES"
Manager
SSBC Fund Management Inc. (formerly, Mutual Management Corp.) (the ''Manager'')
serves as each fund's investment manager. The Manager is a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc. (''Holdings''). Holdings is a
wholly owned subsidiary of Citigroup Inc. The Manager was incorporated on
March 12, 1968 under the laws of Delaware. As of January 31, 1999 the Manager
had aggregate assets under management of in excess of $115 billion. The
Manager, Salomon 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 Company and the funds has been adopted by permission of Salomon Smith
Barney and is subject to the right of Salomon Smith Barney to elect that the
Company stop using the term in any form or combination of its name.
The Manager manages the day-to-day operations of each fund pursuant to a
management agreement entered into by the Company on behalf of the fund under
which the Manager is responsible for furnishing or causing to be furnished to
the fund advice and assistance with respect to the acquisition, holding or
disposal of securities and recommendations with respect to other aspects and
affairs of the fund and furnishes the fund with bookkeeping, accounting and
administrative services, office space and equipment, and the services of the
officers and employees of the Company. By written agreement the Research and
other departments and staff of Salomon Smith Barney furnish the Manager with
information, advice and assistance and are available for consultation on the
fund, thus Salomon Smith Barney may also be considered an investment adviser to
the Company. Salomon Smith Barney's services are paid for by the Manager on
the basis of direct and indirect costs to Salomon Smith Barney of performing
such services; there is no charge to the Company for such services. For the
services provided by the Manager, the management agreement provides that each
fund will pay the Manager an annual fee calculated as a percentage of the
fund's average daily net assets, paid monthly.
The Management Agreement for the Global Government Bond fund provides for an
annual fee calculated at the rate of 0.75% of the fund'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 fund'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 fund's average daily net assets,
paid monthly.
For the fiscal years 1996, 1997 and 1998 the management fees for each fund were
as follows:
Fund
1996
1997
1998
International Equity
$10,047,384
$11,766,569
$11,110,120
Global Government Bond
1,150,340
1,123,627
1,055,789
European
314,805
390,268
530,065
Pacific
82,839
79,628
50,789
International Balanced
274,278
471,084
403,368
Emerging Markets
227,869
380,979
242,829
Each Management Agreement provides that all other expenses not specifically
assumed by the Manager under the Management Agreement on behalf of the fund are
borne by the Company. Expenses payable by the Company 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 Company) 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 Company's shares and the Company
under Federal or state securities laws and maintaining such registrations and
qualifications (including the printing of the Company'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 incidental to the Company's existence and extraordinary
expenses such as litigation and indemnification expenses. Direct expenses are
charged to each fund; general corporate expenses are allocated on the basis of
the relative net assets.
The Manager also acts as investment adviser to numerous other open-end
investment companies. Salomon Smith Barney also advises profit-sharing and
pension accounts. Salomon Smith Barney and its affiliates may in the future
act as investment advisers for other accounts.
Distributor. CFBDS, Inc., located at 20 Milk Street, Boston, Massachusetts
02109-5408, serves as the Company's distributor pursuant to a written agreement
dated October 8, 1998 (the "Distribution Agreement") which was approved by the
Company's Board of Directors, including a majority of the Independent Directors
on July 13, 1998. Prior to the merger of Travelers Group Inc. and Citicorp
Inc. on October 8, 1998, Salomon Smith Barney served as the fund's distributor.
Salomon Smith Barney continues to sell the funds shares as part of the selling
group.
Commissions on Class A Shares. For the 1996 and 1997 fiscal years, the
aggregate dollar amount of commissions on Class A shares, all of which was paid
to Salomon Smith Barney, is as follows:
Class A
Name of Fund
Fiscal Year
Ended 10/31/96
Fiscal Year
Ended 10/31/97
Global Government Bond
$20,000
$11,000
International Equity
1,248,000
633,000
International Balanced
38,000
12,000
Emerging Markets
100,000
94,000
European
19,000
56,000
Pacific
13,000
9,000
For the period November 1, 1997 through October 7, 1998 and for the period
October 8, 1998 through October 31, 1998, the aggregate dollar amounts of
commissions on Class A shares, are as follows:
Class A
Name of Fund
11/01/97 through
10/07/98*
10/08/98 through
10/31/98**
Global Government Bond
$15,000
$1,000
International Equity
467,000
51,000
International Balanced
4,000
0
Emerging Markets
15,000
0
European
213,000
29,000
Pacific
35,000
0
*The entire amount was paid to Salomon Smith Barney.
** The following amounts were paid to Salomon Smith Barney: $900, $45,900, $0,
$0, $26,100 and $0, respectively.
Commissions on Class L Shares. For the period June 12, 1998 through October 7,
1998 and for the period October 8, 1998 through October 31, 1998, the aggregate
dollar amounts of commission on Class L shares are as follows:
Class L
(On June 12, 1998, Class C
shares were renamed Class L
Shares)*
Name of Fund
06/12/98 through
10/07/98*
10/08/98 through
10/31/98**
Global Government Bond
$0
$0
International Equity
25,000
1,000
International Balanced
0
0
Emerging Markets
0
0
European
61,000
1,000
Pacific
0
0
*The entire amount was paid to Salomon Smith Barney.
** The following amounts were paid to Salomon Smith Barney: $0, $900, $0, $0,
$900, and $0, respectively.
Deferred Sales Charges on Class A, B and L Shares For the 1996, 1997 and 1998
fiscal years, the following deferred sales charges were paid to Salomon Smith
Barney on redemptions of the funds' shares:
Class A
Name of Fund
Fiscal Year
Ended 10/31/96
Fiscal Year
Ended 10/31/97
Fiscal Year
Ended 10/31/98
Global Government Bond
$0
$0
$0
International Equity
18,000
$2,000
5,000
International Balanced
0
0
0
Emerging Markets
1,000
0
0
European
0
0
7,000
Pacific
0
0
1,000
Class B
Name of Fund
Fiscal Year
Ended 10/31/96
Fiscal Year
Ended 10/31/97
Fiscal Year
Ended 10/31/98
Global Government Bond
$86,000
$41,000
$16,000
International Equity
390,000
608,000
568,000
International Balanced
21,000
17,000
14,000
Emerging Markets
31,000
61,000
72,000
European
33,000
36,000
259,000
Pacific
6,000
12,000
25,000
Class L
(On June 12, 1998, Class C shares were renamed Class L
Shares)
Name of Fund
Fiscal Year
Ended 10/31/96
Fiscal Year
Ended 10/31/97
Fiscal Year
Ended 10/31/98
Global Government Bond
$0
$0
$0
International Equity
22,000
15,000
11,000
International Balanced
0
0
0
Emerging Markets
22,758
0
1,000
European
0
1,000
8,000
Pacific
0
1,000
0
Distribution Arrangements. To compensate Salomon Smith Barney for the service
it provides and for the expenses it bears, each fund has adopted a plan of
distribution (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. Under the
Plan, each fund pays Salomon Smith Barney a service, accrued daily and paid
monthly, calculated at the annual rate of 0.25% of the value of the fund's
average daily net assets attributable to the Class A, Class B and Class L
shares. The service fee is primarily used to pay Salomon Smith Barney
Financial Consultants for servicing shareholder accounts. In addition, each
fund pays Salomon Smith Barney a distribution fee with respect to Class B and
Class L 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
Salomon 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 Salomon Smith Barney
associated with the sale of fund shares, including lease, utility,
communications and sales promotion expenses. For the Global Government Bond
Portfolio the Class B and Class L distribution fee is calculated at the annual
rate of 0.50% and 0.45% of the value of the fund's average daily net assets
attributable to the shares of the respective Class. For each of the other
funds, the Class B and Class L distribution fee is calculated at the annual
rate of 0.75% of the value of such fund's average net assets attributable to
the shares of the respective Class.
Payments under each Plan are not tied exclusively to the distribution and
shareholder services expenses actually incurred by Salomon Smith Barney and the
payments may exceed distribution expenses actually incurred. The Company's
Board of Directors will evaluate the appropriateness of each Plan and its
payment terms on a continuing basis and in so doing will consider all relevant
factors, including expenses borne by Salomon Smith Barney, amounts received
under the Plan and proceeds of the deferred sales charges.
For the 1996, 1997 and 1998 fiscal years, the following distribution and
service fees were accrued and/or paid to Salomon Smith Barney:
Class A
Name of Fund
Fiscal Year
Ended 10/31/96
Fiscal Year
Ended 10/31/97
Fiscal Year
Ended 10/31/98
Global Government Bond
$285,589
$249,862
222,926
International Equity
1,284,971
1,282,917
1,108,230
International Balanced
41,971
34,906
24,416
Emerging Markets
23,462
37,470
23,548
European
25,498
32,501
53,687
Pacific
12,618
9,943
5,418
Class B
Name of Fund
Fiscal Year
Ended 10/31/96
Fiscal Year
Ended 10/31/97
Fiscal Year
Ended 10/31/98
Global Government Bond
$226,135
$169,569
$127,964
International Equity
1,811,343
2,375,547
2,106,818
International Balanced
44,612
56,286
41,008
Emerging Markets
111,672
189,861
117,539
European
252,229
302,094
350,335
Pacific
28,150
37,798
28,064
Class L
(On June 12, 1998, Class C shares were renamed Class L
Shares)
Name of Fund
Fiscal Year
Ended 10/31/96
Fiscal Year
Ended 10/31/97
Fiscal Year
Ended 10/31/98
Global Government Bond
$27,795
$25,078
$20,234
International Equity
2,370,218
2,261,441
1,771,900
International Balanced
46,666
42,281
31,758
Emerging Markets
22,758
41,594
29,080
European
16,760
27,521
58,524
Pacific
19,009
16,217
10,015
For the fiscal year ended October 31, 1998, Salomon Smith Barney incurred the
following distribution expenses for the funds:
Fund Name
Advertisin
g
Printing
and Mailing
of
Prospectuse
s
Support
Services
Salomon
Smith Barney
Financial
Consultants
Interest
Expense
Total
Emerging
Markets
$18,193
$1,605
$132,640
$223,208
$8,186
$383,832
European
13,117
2,223
128,835
158,867
5,585
308,637
Global
Government
18,183
1,686
268,442
24,418
1,768
314,477
Internationa
l Balanced
4,524
637
48,859
34,929
3,818
92,767
Internationa
l Equity
209,103
30,743
1,219,038
2,154,441
166,907
3,780,232
Pacific
2,320
360
32,874
19,884
1,611
57,049
Salomon 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 Salomon Smith Barney are distribution expenses within the
meaning of the Plans and may be paid from amounts received by Salomon Smith
Barney from the Company under the Plans.
Brokerage and Portfolio Transactions
The Manager is responsible for allocating the Company's brokerage. Orders may
be directed to any broker including, to the extent and in the manner permitted
by applicable law, Salomon Smith Barney. No fund will deal with Salomon Smith
Barney in any transaction in which Salomon Smith Barney acts as principal.
The Company 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 Company 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 Company takes into
consideration the fact that a particular broker may, in addition to execution
capability, provide other services to the Company such as research and
statistical information. These various services may, however, be useful to the
Manager or Salomon Smith Barney in connection with its services rendered to
other advisory clients and not all such services may be used in connection with
the Company. For the fiscal year ended October 31, 1998, the funds did not
direct brokerage transactions to brokers because of research services provided.
The Board of Directors of the Company 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 Salomon 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 all trades directed to
Salomon Smith Barney, the Company has been assured that its orders will be
accorded priority over those received from Salomon Smith Barney for its own
accounts or for any of its directors, officers or employees. The Company will
not deal with Salomon Smith Barney in any transaction in which Salomon Smith
Barney acts as principal.
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 fund. 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.
The Company effects transactions with a view towards attaining each fund'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 fund will bear directly,
and may result in the realization of net capital gains, distributions of which
are taxable to shareholders.
Shown below are the total brokerage fees paid by the Company on behalf of the
International Equity Portfolio, European Portfolio, Pacific Portfolio,
International Balanced Portfolio and the Emerging Markets Portfolio during
1996, 1997 and 1998. Also shown is the portion paid to Salomon 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 1998, the total amount of
commissionable transactions was $ 1,137,153,020 of which $ 85,140,292 (7.00%)
was directed to Salomon Smith Barney and executed by unaffiliated brokers and
$1,052,012,727 (93.00%) of which was directed to other brokers.
Commissions
Total
To Salomon Smith Barney
To Others
1996
$3,971,236
$31,857*
0.80%
$3,939,379
99.20%
1997
3,310,496
52,098*
1.57
3,258,398
98.43
1998
2,626,706
189,693
7.22%
2,437,013
92.78
* Directed to Salomon Smith Barney and executed by unaffiliated brokers.
CUSTODIAN tc "CUSTODIAN"
Portfolio securities and cash owned by the Company are held in the custody of
The Chase Manhattan Bank, Chase Metrotech Center, Brooklyn, New York 11245.
INDEPENDENT AUDITORS tc "INDEPENDENT AUDITORS"
KPMG LLP, 345 Park Avenue, New York, New York 10154, has been selected as the
Company's independent auditors to examine and report on the financial
statements and financial highlights of the Company for its fiscal year ending
October 31, 1999.
VOTING tc "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 Company. At such a meeting, a
director may be removed after the holders of record of at least 75% of the
outstanding shares of the Company have declared that the director be removed
either by declaration in writing or by votes cast in person or by proxy. The
Company will assist shareholders in calling such a meeting as required by the
1940 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 Company (or
the affected fund or class) or (b) 67% or more of such shares present at a
meeting if more than 50% of the outstanding shares of the Company (or the
affected fund 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 fund of the Company as of February __, 2000.
INTERNATIONAL BALANCED PORTFOLIO CLASS L PERCENTAGE OF SHARES
1
PACIFIC PORTFOLIO CLASS A
PERCENTAGE
OF SHARES
1
2
PACIFIC PORTFOLIO CLASS L
PERCENTAGE OF
SHARES
1
GLOBAL GOVERNMENT BOND PORT CLASS A
PERCENTAGE OF SHARES
1
2
GLOBAL GOVERNMENT BOND PORTFOLIO CLASS L PERCENTAGE OF SHARES
1
2
GLOBAL GOVERNMENT BOND PORTFOLIO CLASS Y PERCENTAGE OF SHARES
1
2
GLOBAL GOVERNMENT BOND PORTFOLIO CLASS Y PERCENTAGE OF SHARES
3
INTERNATIONAL EQUITY PORTFOLIO CLASS Y
PERCENTAGE OF SHARES
1
2
3
4
INTERNATIONAL EQUITY PORTFOLIO CLASS Z
PERCENTAGE OF SHARES
1
EMERGING MARKETS PORTFOLIO CLASS Y
PERCENTAGE OF SHARES
OTHER INFORMATION ABOUT THE COMPANY
General. The Company, an open-end investment company, was incorporated in
Maryland on March 22, 1991. The Company 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 funds and may authorize the issuance
of additional series of shares in the future. The assets of each fund are
segregated and separately managed and a shareholder's interest is in the assets
of the fund in which he or she holds shares. Class A, Class B, Class L, Class Y
shares of a fund (and Class Z shares of International Equity Portfolio)
represent interests in the assets of the fund and have identical voting,
dividend, liquidation and other rights on the same terms and conditions except
that expenses related to the distribution of each Class of shares are borne
solely by each Class and each Class of shares has exclusive voting rights with
respect to provisions of the fund's Rule 12b-1 distribution plan which pertain
to a particular Class.
Shareholder Meetings. As described under ''Voting,'' the Company ordinarily
will not hold meetings of shareholders annually; however, shareholders have the
right to call a meeting upon a vote of 10% of the Company's outstanding shares
for the purpose of voting to remove directors, and the Company 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.
Minimum Account Size. The Company reserves the right to involuntarily
liquidate any shareholder's account in the fund if the aggregate net asset
value of the shares held in the fund account is less than $500. (If a
shareholder has more than one account in this fund, each account must satisfy
the minimum account size.) The Company, however, will not redeem shares based
solely on market reductions in net asset value. Before the Company 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.
Transfer Agent. The funds' transfer agent is First Data Investors' Services
Group, Inc. located at Exchange Place, Boston, Massachusetts 02109.
Annual and Semi-Annual Reports. Management's discussion and analysis, and
additional performance information regarding the funds during the fiscal year
ended October 31, 1998 is included in the annual report dated October 31, 1998.
A copy of the annual report may be obtained upon request and without charge
from a Salomon Smith Barney Financial Consultant or by writing or calling the
Company at the address or phone number listed on page one of this statement of
additional information.
The Company sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Company
at the end of the period covered. In an effort to reduce the Company's
printing and mailing costs, the Company 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 Salomon Smith
Barney Financial Consultant or the transfer agent.
FINANCIAL STATEMENTS tc "FINANCIAL STATEMENTS"
The following financial information is hereby incorporated by reference to the
indicated pages of the Company's 1998 Annual Report to Shareholders( filed on
December 30, 1998; Accession number 000009155-98-000736), 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)
Average Annual Total Return
5,11 and16
5, 10 and 17
Line Graph Showing Growth of $10,000
Investment
6,17 and 13
6,11 and18
Statements of Assets and Liabilities
25 and 26
26
Statements of Operations
27
27
Statement of Changes in Net Assets
28 and 29
28 and 29
Notes to Financial Statements
30-38
30-38
Financial Highlights
39-50
39-48
Independent Auditor's Report
51
49
APPENDIX - RATINGS OF DEBT OBLIGATIONS tc "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.
40
A-1
PART C
OTHER INFORMATION
ITEM 15. 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, as amended. Other assureds
include SSB Citi Fund Management LLC (Registrant's Adviser) and
affiliated investment companies.
ITEM 16. EXHIBITS
Unless otherwise noted, all references are to the
Registrant's Registration Statement on Form N-1A (the "Registration
Statement") as filed with the SEC on March 26, 1991 (File Nos. 33-39564
and 811-06290).
(1) (a) Articles of Incorporation (1)
(1) (b) Articles Supplementary to Articles of Incorporation for
International Equity Portfolio (2)
(1) (c) Articles of Amendment to the Articles of Incorporation
for the Fund dated November 10, 1992 (3)
(1) (d) Articles Supplementary to Articles of Incorporation for
the Fund dated December 8, 1992 (3)
(1) (e) Articles Supplementary to Articles of Incorporation for
Pacific Portfolio and European Portfolio(10)
(1) (f) Articles Supplementary to Articles of Incorporation for
International Balanced Portfolio (11)
(1) (g) Form of Articles Supplementary to Articles of
Incorporation for Emerging Markets Portfolio(12)
(1) (h) Articles of Amendment to the Articles of Incorporation
for the Fund dated June 4, 1991(13)
(1) (i) Articles Supplementary to Articles of Incorporation for
the Fund dated July 13, 1994 (13)
(1) (j) Articles of Amendment to Articles of Incorporation for
the Fund dated November 3, 1994(13)
(1) (k) Articles of Amendment to Articles of Incorporation for
the Fund dated November 3, 1994(13)
(1) (l) Articles Supplementary to Articles of Incorporation for
the Fund dated November 3, 1994(13)
(1) (m) Articles Supplementary to Articles of Incorporation for
Emerging Markets Portfolio dated November 10, 1994(13)
(1) (n) Articles of Amendment for the Fund dated June 4, 1998 (18)
(2) (a) Bylaws (4)
(3) Not applicable.
(4) Form of Plan of Reorganization is filed herewith.
(5) Not applicable.
(6) (a) Form of Management Agreement for Global Government Bond
Portfolio (16)
(6) (b) Form of Management Agreement for International Equity
Portfolio (16)
(6) (c) Form of Management Agreement for Pacific Portfolio (16)
(6) (d) Form of Management Agreement for European Portfolio (16)
(6) (e) Form of Management Agreement for International Balanced
Portfolio (16)
(6) (f) Form of Management Agreement for Emerging Markets Portfolio (16)
(6) (g) Form of Subadvisory Agreements(16)
(7) (a) Form of Distribution Agreement (16)
(7) (b) Selling Group Agreement (18)
(7) (c) Form of Distribution Agreement (17)
(8) Not applicable.
(9) Form of Custodian Agreement (15)
(10) (a) Form of Amended Plan of Distribution Pursuant to Rule 12b-
1 (18)
(10) (b) Plan of Distribution Pursuant to Rule 12b-1for Global
Government Bond Portfolio (16)
(10) (c) Plan of Distribution Pursuant to Rule 12b-1for
International Equity Portfolio (16)
(10) (d) Plan of Distribution Pursuant to Rule 12b-1 for Pacific
Portfolio (16)
(10) (e) Plan of Distribution Pursuant to Rule 12b-1 for European
Portfolio (16)
(10) (f) Plan of Distribution Pursuant to Rule 12b-1 for
International Balanced Portfolio (16)
(10) (g) Plan of Distribution Pursuant to Rule 12b-1 for Emerging
Markets Portfolio(16)
(10) (h) Rule 18f-3 Plan (18)
(11) Form of Opinion and Consent of Sullivan & Cromwell to be
filed by amendment.
(12) Form of Tax Opinion and Consent of Sullivan & Cromwell to be
filed by amendment.
(13) (a) Form of Transfer Agency Agreement (16)
(14) (a) Consent of Independent Auditors to be filed by amendment.
(14) (b) Form of Opinion and Consent of Venable, Baetjer and
Howard, LLP, as to matters of Maryland law to be filed by
amendment.
(15) Not applicable.
(16) Not Applicable.
(17) (a) Prospectus of the Registrant, dated February 28, 1999 (18)
(17) (b) Annual Report to Shareholders of the Registrant, dated
October 31, 1999, is incorporated by reference to Form N-
30D, to be filed with the Commission by amendment.
(17) (c) Semi-Annual Report to Shareholders of the Registrant,
dated April 30, 1999, is incorporated by reference to Form
N-30D, as filed on July 20, 1999, with the Commission.
(17) (d) Form of Proxy is filed herewith.
Footnotes:
(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.
(17) Incorporated by reference to Post-Effective Amendment
No. 22 to the Fund's Registration Statement on Form N-1A filed
on December 29, 1998.
(18) Incorporated by reference to Post-Effective Amendment
No. 23 to the Fund's Registration Statement on Form N-1A filed
On February 25, 1999.
ITEM 17. UNDERTAKINGS
(1)The undersigned registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus
which is
a part of this registration statement by any person or party who is
deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act
[17 CFR
230.145c], the reoffering prospectus will contain the information called
for by
the applicable registration form for reofferings by persons who may be
deemed
underwriters, in addition to the information called for by the other
items of
the applicable form.
(2)The undersigned registrant agrees that every prospectus that
is
filed under paragraph (1) above will be filed as a part of an amendment
to the
registration statement and will not be used until the amendment is
effective,
and that, in determining any liability under the 1933 Act, each post-
effective
amendment shall be deemed to be a new registration statement for the
securities
offered therein, and the offering of the securities at that time shall be
deemed
to be the initial bonafide offering of them.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended,
and the Investment Company Act of 1940, as amended, the Registrant has
duly
caused this Registration Statement on Form N-14 to be signed on its
behalf by
the undersigned, thereunto duly authorized, all in the City of New York,
State
of New York on the 17th day of December, 1999.
SMITH BARNEY WORLD FUNDS, INC. -
INTERNATIONAL PORTFOLIO
By: /s/Heath B. McLendon
Heath B. McLendon
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the
following
persons in the capacities and on the dates indicated.
Signature Title
Date
/s/Heath B. McLendon Chairman of the Board, 12/17/99
Heath B. McLendon Chief Executive Officer,
and President
/s/Lewis E. Daidone Senior Vice President 12/17/99
Lewis E. Daidone and Treasurer
*/s/Victor K. Atkins
Victor K. Atkins Director
12/17/99
*/s/Abraham E. Cohen
Abraham E. Cohen Director
12/17/99
*/s/Robert A. Frankel
Robert A. Frankel Director
12/17/99
*/s/Michael Gellert
Michael Gellert Director
12/17/99
*/s/Rainer Greeven
Rainer Greeven Director
12/17/99
*/s/Susan M. Heilbron
Susan M. Heilbron Director
12/17/99
*/s/Maurits E. Edersheim
Maurits E. Edersheim Advisory Director 12/17/99
* By: /s/ Heath B. McLendon
Heath B. McLendon
Pursuant to a Power of Attorney
EXHIBIT INDEX
(4) Form of Plan of Reorganization.
(17)(d) Form of Proxy.
Cover
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
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SMITH BARNEY WORLD FUNDS, INC. -INTERNATIONAL BALANCED PORTFOLIO
PROXY SOLICITED BY THE BOARD OF DIRECTORS
The undersigned holder of shares of Smith Barney World Funds - International
Balanced
Portfolio (the "Balanced Portfolio"), hereby appoints Heath B. McLendon
, Christina T.
Sydor and Barbara J. Allen, attorneys and
proxies for the undersigned with full powers
of substitution and revocation, to represent the
undersigned and to vote on behalf of
the undersigned all shares of the Balanced Portfolio that the
undersigned is entitled to
vote at the Special Meeting of Shareholders of the Balanced
Portfolio to be held at the
offices of the Balanced Portfolio, 388 Greenwich Street, New York,
New York on April 7,
2000 at 4:00pm and any adjournment or adjournments thereof.
The undersigned hereby
acknowledges receipt of the Notice of Special Meeting and Prospectus
/Proxy Statement
dated February 21, 2000 and hereby instructs said attorneys and proxies
to vote said
shares as indicated herein. In their discretion, the proxies are authorized
to vote
upon such other business as may properly come before the Special Meeting.
A majority of
the proxies present and acting at the Special Meeting in person or by
substitute (or, if
only one shall be so present, then that one) shall have and may exercise
all of the
power and authority of said proxies hereunder. The undersigned hereby
revokes any proxy
previously given.
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE
Note: Please sign exactly as your name appears on this
Proxy. If joint owners, EITHER may sign this Proxy.
When signing as attorney, executor, administrator,
trustee, guardian or corporate officer, please give your
full title.
Date:
Signature(s) (Title(s), if
applicable)
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
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Please indicate your vote by an "X" in the appropriate box below.
This proxy, if
properly executed, will be voted in the manner directed by the undersigned
shareholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSAL.
1. To approve the Plan of Reorganization FOR AGAINST ABSTAIN
dated as of February 21, 2000 providing for:(i) the acquisition of all or
substantially all of the assets of Smith Barney World Funds - International
Balanced Portfolio (the " Balanced Portfolio ") by Smith Barney World
Funds, Inc.
- - International Equity Portfolio (the " Equity Portfolio") in exchange
for Class
A, Class B, Class L and Class Y shares of the Equity Portfolio and the
assumption
by the Equity Portfolio of certain scheduled liabilities of the Balanced
Portfolio; (ii) the distribution of such shares of the Equity Portfolio to
shareholders of the Balanced Portfolio in liquidation of the Balanced
Portfolio;
and (iii) the subsequent termination of the Balanced Portfolio.
