Smith Barney
S&P 500 Index Fund
388 Greenwich Street
New York, New York 10013
1-800-451-2010
Statement of Additional
Information
December 30, 1997 as amended June 17, 1998
This Statement of Additional Information (SAI) expands upon and supplements
the information contained in the current Prospectus of Smith Barney S&P 500
Index Fund (the Fund) dated December 30, 1997, as amended or supplemented
from time to time, and should be read in conjunction with the Funds
Prospectus. The Fund is a sub-trust of Smith Barney Investment Trust (the
Trust). The Funds Prospectus may be obtained from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or telephone
number set forth above. This SAI, although not in itself a prospectus, is
incorporated by reference into the Prospectus in its entirety.
CONTENTS
For ease of reference, the same section headings are used in both the
Prospectus and this SAI, except where shown below:
Management of the Fund
........................................................
...............................
1
Investment Objective and Management Policies
...................................................
4
Purchase of Shares
........................................................
........................................
10
Redemption of Shares
........................................................
...................................
10
Distributor
........................................................
.....................................................
11
Valuation of Shares
........................................................
.......................................
12
Performance Data (See in the Prospectus Performance)
...................................
12
Taxes (See in the Prospectus Dividends, Distributions
and Taxes) ..................
13
Additional Information
.........................................................
.................................
15
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund. These organizations are the
following:
Name
Service
Smith Barney Inc. (Smith
Barney)...................................
Distributor
Travelers Investment Management Company
(TIMCO)
Investment Adviser
Smith Barney Mutual Funds Management Inc.
(SBMFM)
...........................................
....................
Administrator
PNC Bank, National Association (PNC Bank)
..........
Custodian
First Data Investor Services Group, Inc.
(First Data),
Transfer Agent
These organizations and the functions they perform for the Fund are discussed
in the Prospectus and in this SAI.
Trustees and Executive Officers of the Fund
The Trustees and executive officers of the Fund, together with information as
to their principal business occupations during the past five years, are shown
below. Each Trustee who is an interested person of the Fund, as defined in
the Investment Company Act of 1940, as amended (the 1940 Act), is indicated
by an asterisk.
Herbert Barg, Trustee (Age 74). Private Investor. His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti, Trustee (Age 74). Retired; formerly Senior
Consultant to Dean Witter Reynolds Inc. His address is 19 Circle End Drive,
Ramsey, New Jersey 07466.
Martin Brody, Trustee (Age 76). Consultant, HMK Associates; Retired
Vice Chairman of the Board of Restaurant Associates Corp. His address is c/o
HMK Associates, 30 Columbia Turnpike, Florham Park, New Jersey 07932.
Dwight B. Crane, Trustee (Age 59). Professor, Harvard Business School.
His address is c/o Harvard Business School, Soldiers Field Road, Boston,
Massachusetts 02163.
Burt N. Dorsett, Trustee (Age 66). Managing Partner of Dorsett McCabe
Management. Inc., an investment counseling firm; Director of Research
Corporation Technologies, Inc., a nonprofit patent clearing and licensing
firm. His address is 201 East 62nd Street, New York, New York 10021.
Elliot S. Jaffe, Trustee (Age 71). Chairman of the Board and President
of The Dress Barn, Inc. His address is 30 Dunnigan Drive, Suffern, New York
10901.
Stephen E. Kaufman, Trustee (Age 65). Attorney. His address is 277
Park Avenue, New York, New York 10172.
Joseph J. McCann, Trustee (Age 67). Financial Consultant; Retired
Financial Executive, Ryan Homes, Inc. His address is 200 Oak Park Place,
Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board and Investment Officer (Age
64). Managing Director of Smith Barney, Chairman of the Board of Smith
Barney Strategy Advisers Inc. and President of SBMFM and Travelers Investment
Adviser, Inc. (TIA); prior to July 1993, Senior Executive Vice President of
Shearson Lehman Brothers Inc., Vice Chairman of Shearson Asset Management.
Mr. McLendon is Chairman of the Board of 42 Smith Barney Mutual Funds. His
address is 388 Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr., Trustee (Age 63). President, Cornelius C. Rose
Associates, Inc., financial consultants, and Chairman and Director of
Performance Learning Systems, an educational consultant. His address is Fair
Oaks, Enfield, New Hampshire 03748.
James J. Crisona, Director Emeritus. Attorney; formerly Justice of the
Supreme Court of the State of New York. His address is 118 East 60th Street,
New York, New York 10022
Lewis E. Daidone, Senior Vice President and Treasurer (Age 40).
Managing Director of Smith Barney, Chief Financial Officer of the Smith
Barney Mutual Funds; Director and Senior Vice President of SBMFM and TIA. His
address is 388 Greenwich Street, New York, New York 10013.
Sandip Bhagat, Vice President and Investment Officer (Age 37).
President of TIMCO, prior to 1995, Senior Portfolio Manager of TIMCO. His
address is One Tower Square, Hartford, Connecticut, 06183-2030.
John Lau, Assistant Vice President and Investment Officer (Age 32).
Portfolio Manager of TIMCO; prior to 1995, Lead Engineer of knowledge-based
engineering projects at United Technologies, Pratt and Whitney Aircraft
Engine Division. His address is One Tower Square, Hartford, Connecticut,
06183-2030.
Christina T. Sydor, Secretary (Age 46). Managing Director of Smith
Barney; General Counsel and Secretary of SBMFM and TIA. Her address is 388
Greenwich Street, New York, New York 10013.
No officer, director or employee of Smith Barney or any parent or subsidiary
of Smith Barney receives any compensation from the Fund for serving as an
officer or Trustee of the Fund. The Trust pays each Trustee who is not an
officer, director or employee of Smith Barney or any of their affiliates a
fee of $4,000 per annum plus $500 per meeting attended. All Trustees are
reimbursed for travel and out-of-pocket expenses incurred to attend such
meetings.
For the calendar year ended November 30, 1997, the Trustees of the Fund were
paid the following compensation.
Total
Pension or Compensation Number of
Retirement from Fund Funds for
Aggregate Benefits Accrued and Fund Which
Director
Compensation as part of Complex Serves Within
Name of Person from Fund Fund Expenses Paid to Directors Fund Complex
Herbert Berg $0 $0 $105,175
18
Alfred Bianchetti 0 0 51,000
13
Martin Brody 0 0 124,286
21
Dwight B. Crane 0 0 140,375
24
Burt N. Dorsett* 0 0 47,400
13
Elliot S. Jaffe 0 0 51,100
13
Stephen E. Kaufman 0 0 92,336
15
Joseph J. McCann 0 0 52,700
13
Heath B. McLendon ** - - -
42
Cornelius C. Rose, Jr. 0 0 51,400
13
James J. Crisona*** 0 0 20,575
12
* Pursuant to the Funds deferred compensation plan, Mr. Dorsett elected to
defer the compensation due to him from the Fund. As of January 1, 1997,
Mr. Dorsett elected not to defer his future compensation.
** Designates an interested Director.
*** Upon attainment of age 80, Fund Trustees are required to change to
emeritus status. Trustees Emeritus are entitled to serve
in emeritus status for a maximum of 10 years, during which time they are
paid 50% of the annual retainer fee and meeting fees otherwise applicable
to Fund Trustees, together with reasonable out-of-pocket expenses for each
meeting attended. Mr. Crisona is a Director Emeritus and as such may
attend meetings but has no voting rights.
Investment Adviser-TIMCO
TIMCO serves as investment adviser to the Fund pursuant to a written
agreement (the Advisory Agreement). The services provided by the Investment
Adviser under the Advisory Agreement are described in the Prospectus under
Management of the Fund. The Investment Adviser will pay the salary of any
officer and employee who is employed by both it and the Fund. The Investment
Adviser will bear all expenses in connection with the performance of its
services. The Investment Adviser is a wholly owned subsidiary of Travelers
Group Inc. (Travelers). As compensation for the Investment Advisers
investment advisory services rendered to the Fund, the Fund will pay a fee
computed daily and paid monthly at the annual rate of 0.15% of the Funds
average daily net assets.
Administrator-SBMFM
SBMFM serves as administrator to the Fund pursuant to a written agreement
(the Administration Agreement). The services provided by the Administrator
under the Administration Agreement are described in the Prospectus under
Management of the Fund. The Administrator will pay the salary of any officer
and employee who is employed by both it and the Fund and bears all expenses
in connection with the performance of its services.
As compensation for administrative services rendered to the Fund, the
Administrator will receive a fee computed daily and paid monthly at the
annual rate of 0.10% of the value of the Funds average daily net assets.
The Fund bears expenses incurred in its operation, including: taxes,
interest, brokerage fees and commissions, if any; fees of Trustees who are
not officers, directors, shareholders or employees of the Investment Adviser
or the Administrator or their affiliates; SEC fees and state Blue Sky
qualification fees; charges of custodians; transfer and dividend disbursing
agents fees; certain insurance premiums; outside auditing and legal expenses;
costs of maintaining corporate existence; investor services (including
allocated telephone and personnel expenses); costs of preparation and
printing of prospectuses and statements of additional information for
regulatory purposes and for distribution to existing shareholders; costs of
shareholders reports and shareholder meetings; and meetings of the officers
or Board of Trustees of the Fund.
Counsel and Auditors
Willkie Farr & Gallagher serves as counsel to the Trust. The Trustees who are
not interested persons of the Fund have selected Stroock & Stroock & Lavan
LLP to serve as their legal counsel.
KPMG Peat Marwick LLP, independent accountants, 345 Park Avenue, New York,
New York 10154, serve as auditors of the Trust and will render an opinion on
the Trusts financial statements annually beginning with the fiscal period
ending November 30, 1998.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Funds investment objective and the policies it
employs to achieve its objective. This section contains supplemental
information concerning the types of securities and other instruments in which
the Fund may invest, the investment policies and portfolio strategies that
the Fund may utilize and certain risks attendant to such investments,
policies and strategies.
Money Market Instruments. The Fund may invest in corporate and government
bonds and notes and money market instruments. Money market instruments in
which the Fund may invest include: obligations issued or guaranteed by the
United States government, its agencies or instrumentalities (U.S. government
securities); certificates of deposit, time deposits and bankers acceptances
issued by domestic banks (including their branches located outside the United
States and subsidiaries located in Canada), domestic branches of foreign
banks, savings and loan associations and similar institutions; high grade
commercial paper; and repurchase agreements with respect to the foregoing
types of instruments. The following is a more detailed description of such
money market instruments.
Certificates of deposit (CDs) are short-term, negotiable obligations of
commercial banks. Time deposits (TDs) are non-negotiable deposits maintained
in banking institutions for specified periods of time at stated interest
rates. Bankers acceptances are time drafts drawn on commercial banks by
borrowers, usually in connection with international transactions.
Domestic commercial banks organized under Federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System and to be insured by the Federal Deposit Insurance
Corporation (the FDIC). Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. Most state banks are
insured by the FDIC (although such insurance may not be of material benefit
to the Fund, depending upon the principal amount of CDs of each bank held by
the Fund) and are subject to Federal examination and to a substantial body of
Federal law and regulation. As a result of governmental regulations, domestic
branches of domestic banks are, among other things, generally required to
maintain specified levels of reserves, and are subject to other supervision
and regulation designed to promote financial soundness.
Obligations of foreign branches of domestic banks, such as CDs and TDs, may
be general obligations of the parent bank in addition to the issuing branch,
or may be limited by the terms of a specific obligation and governmental
regulation. Such obligations are subject to different risks than are those of
domestic banks or domestic branches of foreign banks. These risks include
foreign economic and political developments, foreign governmental
restrictions that may adversely affect payment of principal and interest on
the obligations, foreign exchange controls and foreign withholding and other
taxes on interest income. Foreign branches of domestic banks are not
necessarily subject to the same or similar regulatory requirements that apply
to domestic banks, such as mandatory reserve requirements, loan limitations,
and accounting, auditing and financial recordkeeping requirements. In
addition, less information may be publicly available about a foreign branch
of a domestic bank than about a domestic bank. CDs issued by wholly owned
Canadian subsidiaries of domestic banks are guaranteed as to repayment of
principal and interest (but not as to sovereign risk) by the domestic parent
bank.
Obligations of domestic branches of foreign banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by
the terms of a specific obligation and by Federal and state regulation as
well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may or may not be subject to reserve requirements imposed by the
Federal Reserve System or by the state in which the branch is located if the
branch is licensed in that state. In addition, branches licensed by the
Comptroller of the Currency and branches licensed by certain states (State
Branches) may or may not be required: (a) to pledge to the regulator by
depositing assets with a designated bank within the state, an amount of its
assets equal to 5% of its total liabilities; and (b) to maintain assets
within the state in an amount equal to a specified percentage of the
aggregate amount of liabilities of the foreign bank payable at or through all
of its agencies or branches within the state. The deposits of State Branches
may not necessarily be insured by the FDIC. In addition, there may be less
publicly available information about a domestic branch of a foreign bank than
about a domestic bank.
In view of the foregoing factors associated with the purchase of CDs and TDs
issued by foreign branches of domestic banks or by domestic branches of
foreign banks, the Investment Adviser will carefully evaluate such
investments on a case-by-case basis.
Savings and loan associations whose CDs may be purchased by the Fund are
supervised by the Office of Thrift Supervision and are insured by the Savings
Association Insurance Fund which is administered by the FDIC and is backed by
the full faith and credit of the United States government. As a result,
such savings and loan associations are subject to regulation and examination.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund may lend securities from its portfolio to brokers,
dealers and other financial organizations. The Fund may not lend its
portfolio securities to the Investment Adviser or the Administrator or their
affiliates unless they have applied for and received specific authority from
the SEC. Loans of portfolio securities by the Fund will be collateralized by
cash, letters of credit or U.S. government securities that are maintained at
all times in an amount equal to at least 100% of the current market value of
the loaned securities.
In lending its portfolio securities, the Fund can increase its income by
continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in short-term instruments or obtaining yield in
the form of interest paid by the borrower when U.S. government securities are
used as collateral. Requirements of the SEC, which may be subject to future
modifications, currently provide that the following conditions must be met
whenever the Funds portfolio securities are loaned: (a) the Fund must receive
at least 100% cash collateral or equivalent securities from the borrower; (b)
the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (c) the Fund must be
able to terminate the loan at any time; (d) the Fund must receive reasonable
interest on the loan, as well as an amount equal to any dividends, interest
or other distributions on the loaned securities, and any increase in market
value; (e) the Fund may pay only reasonable custodian fees in connection with
the loan; and (f) voting rights on the loaned securities may pass to the
borrower; however, if a material event adversely affecting the investment
occurs, the Trusts Board of Trustees must terminate the loan and regain the
right to vote the securities. The risks in lending portfolio securities, as
with other extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the securities or
possible loss of rights in the collateral should the borrower fail
financially. Loans will be made to firms deemed by the Investment Adviser to
be of good standing and will not be made unless, in the judgment of the
Investment Adviser, the consideration to be earned from such loans would
justify the risk. From time to time, the Fund may return a part of the
interest earned from the investment of collateral received for securities
loaned to: (a) the borrower; and/or (b) a third party, which is unaffiliated
with the Fund, the Investment Adviser or Administrator and which is acting as
a finder.
Futures. The Fund may enter into stock index futures contracts and related
options that are traded thereon. A stock index futures agreement is a
contract pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the
index contract was originally written. No physical delivery of the underlying
securities in the index is made.
No consideration will be paid or received by the Fund upon entering into a
futures contract. Initially, the Fund will be required to deposit with the
broker an amount of cash or cash equivalents equal to approximately 1% to 10%
of the contract amount (this amount is subject to change by the board of
trade on which the contract is traded and members of such board of trade may
charge a higher amount). This amount, known as initial margin, is in the
nature of a performance bond or good faith deposit on the contract and is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. Subsequent payments, known as
variation margin, to and from the broker will be made daily as the price of
the index underlying the futures contract fluctuates, making the long and
short positions in the futures contract more or less valuable, a process
known as marking-to-market. At any time prior to expiration of a futures
contract, the Fund may elect to close the position by taking an opposite
position, which will operate to terminate the Funds existing position in the
contract.
Several risks are associated with the use of futures contracts as a hedging
device. Successful use of futures contracts by the Fund will be subject to
the ability of the Investment Adviser to predict correctly changes in market
conditions. These predictions involve skills and techniques that may be
different from those involved in the management of the Fund being hedged. In
addition, there can be no assurance that there will be a correlation between
movements in the price of the underlying index and movements in the price of
the securities that are the subject of a hedge. A decision of whether, when
and how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected trends in interest rates or currency values.
Although the Fund intends to enter into futures contracts only if there is an
active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit
has been reached in a particular contract, no trades may be made that day at
a price beyond that limit. It is possible that futures contract prices could
move 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. In such event, and in
the event of adverse price movements, the Fund would be required to make
daily cash payments of variation margin, and an increase in the value of the
portion of the Fund being hedged, if any, may partially or completely offset
losses on the futures contract. As described above, however, there is no
guarantee that the price of the securities being hedged will, in fact,
correlate with the price movements in a futures contract and thus provide an
offset to losses on the futures contract.
If the Fund hedges against the possibility of a change in market conditions
adversely affecting the value of securities held in its portfolio and market
conditions move in a direction opposite to that which has been anticipated,
the Fund will lose part or all of the benefit of the increased value of
securities that it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund had
insufficient cash, it may have to sell securities to meet daily variation
margin requirements at a time when it may be disadvantageous to do so. These
sales of securities may, but will not necessarily, be at increased prices
that reflect the change in interest rates, market conditions or currency
values, as the case may be.
Options on Futures Contracts. An option on a futures contract, as contrasted
with the direct investment in such a contract, gives the purchaser the right,
in return for the premium paid, to assume a position in the underlying
futures contract at a specified exercise price at any time prior to the
expiration date of the option. Upon exercise of an 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 writers
futures margin account, which represents the amount by which the market price
of the futures contract exceeds, in the case of a call, or is less than, in
the case of put, the exercise price of the option on the futures contract.
The potential for loss related to the purchase of an option on a futures
contract is limited to the premium paid for the option plus transaction
costs. Because the value of the option is fixed at the point of sale, there
are no daily cash payments to reflect changes in the value of the underlying
contract; however, the value of the option does change daily and that change
would be reflected in the net asset value of the Fund.
The Fund may purchase and write put and call options on futures contracts
that are traded on a U.S. exchange or board of trade as a hedge against
changes in the value of its portfolio securities, or in anticipation of the
purchase of securities, and may enter into closing transactions with respect
to such options to terminate existing positions. There is no guarantee that
such closing transactions can be effected.
Several risks are associated with options on futures contracts. The ability
to establish and close out positions on such options will be subject to the
existence of a liquid market. In addition, the purchase of put or call
options will be based upon predictions by the Investment Adviser as to
anticipated trends, which predictions could prove to be incorrect. Even if
the expectations of the Investment Adviser are correct, there may be an
imperfect correlation between the change in the value of the options and of
the portfolio securities being hedged.
Foreign Securities and American Depository Receipt The Fund may purchase
common stocks, including American Depository Receipts, of foreign
corporations represented in the S&P 500 Index (such securities are publicly
traded on securities exchanges or over-the-counter in the United States). the
Funds investment in common stock of foreign corporations represented in the
S&P 500 Index may also be in the form of American Depository Receipts (ADRs).
ADRs are receipts typically issued by a United States bank or trust company
evidencing ownership of the underlying securities and are designed for use in
the U.S securities markets.
Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies.
These include differences in accounting, auditing and financial reporting
standards, the possibility of expropriation or confiscatory taxation,
adverse changes in investment or exchange control regulations, political
instability which could affect U.S. investments in foreign countries, and
potential restrictions on the flow of international capital. Moreover,
individual foreign economies may differ favorably or unfavorably from the
U.S. economy in such respects as growth of gross domestic product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payment positions.
Investment Restrictions
The Fund has adopted the following investment restrictions for the protection
of shareholders. Restrictions 1 through 7 below cannot be changed without
approval by the holders of a majority of the outstanding shares of the Fund,
defined as the lesser of (a) 67% or more of the Funds shares present at a
meeting, if the holders of more than 50% of the outstanding shares are
present in person or by proxy or (b) more than 50% of the Funds outstanding
shares. The remaining restrictions may be changed by the Funds Board of
Trustees at any time. In accordance with these restrictions, the Fund will
not:
1. 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. 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.
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 instumentalities) and securities of state or
municipal governments and their political subdivisions are not considered to
be issued by members of any industry.
4. 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.
5. Make loans. This restriction does not apply to: (a) the purchase of
debt obligations in which the Fund may invest consistent with its investment
objective and policies; (b) repurchase agreements; and (c) loans of its
portfolio securities, to the fullest extent permitted under the 1940 Act.
6. 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.
7. 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.
8. 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.
9. Invest in oil, gas or other mineral exploration or development
programs.
10. 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.
11. Invest for the purpose of exercising control of management.
If any percentage restriction described above is complied with at the time of
an investment, a later increase or decrease in percentage resulting from a
change in values or assets will not constitute a violation of such
restriction.
Certain Investment Activities
While the Fund is authorized to borrow money from banks for purposes of
investment (leveraging), it has no current intention of engaging in these
investment activities and will do so only when the Trusts Board of Trustees
determines that such activity is in the best interests of shareholders.
Portfolio Turnover
Generally, an index fund sells securities only to respond to redemption
requests or to adjust the number of shares held to reflect a change in the
Funds target index. Because of this, the turnover rate for the Fund will be
relatively low.
Portfolio Transactions
Decisions to buy and sell securities for the Fund are made by the Investment
Adviser, subject to the overall supervision and review of the Trusts Board of
Trustees. Portfolio securities transactions for the Fund are effected by or
under the supervision of the Investment Adviser.
Transactions on stock exchanges involve the payment of negotiated brokerage
commissions. There is generally no stated commission in the case of
securities traded in the over-the-counter market, but the price of those
securities includes an undisclosed commission or mark-up. Over-the-counter
purchases and sales are transacted directly with principal market makers
except in those cases in which better prices and executions may be obtained
elsewhere. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealers mark-up or mark-down.
In executing portfolio transactions and selecting brokers or dealers, it is
the Funds policy to seek the best overall terms available. The Investment
Adviser, in seeking the most favorable price and execution, considers all
factors it deems relevant, including, for example, the price, the size of the
transaction, the reputation, experience and financial stability of the
broker-dealer involved and the quality of service rendered by the broker-
dealer in other transactions. The Investment Adviser receives research,
statistical and quotation services from several broker-dealers with which it
places the Funds portfolio transactions. It is possible that certain of the
services received primarily will benefit one or more other accounts for which
the Investment Adviser exercises investment discretion. Conversely, the Fund
may be the primary beneficiary of services received as a result of portfolio
transactions effected for other accounts. The Investment Advisers fee under
the Advisory Agreement is not reduced by reason of its receiving such
brokerage and research services. The Trusts Board of Trustees, in its
discretion, may authorize the Investment Adviser to cause the Fund to pay a
broker that provides brokerage and research services to the Investment
Adviser a commission in excess of that which another qualified broker would
have charged for effecting the same transaction. Smith Barney will not
participate in commissions from brokerage given by the Fund to other brokers
or dealers and will not receive any reciprocal brokerage business resulting
therefrom.
In accordance with Section 17(e) of the 1940 Act and Rule 17e-1 thereunder,
the Funds Board of Trustees has determined that any portfolio transaction for
the Fund may be executed through Smith Barney or an affiliate of Smith Barney
if, in the Investment Advisers judgment, the use of Smith Barney or an
affiliate is likely to result in price and execution at least as favorable as
those of other qualified brokers and if, in the transaction, Smith Barney or
the affiliate charges the Fund a commission rate consistent with those
charged by Smith Barney or an affiliate to comparable unaffiliated customers
in similar transactions. In addition, under SEC rules Smith Barney may
directly execute such transactions for the Fund on the floor of any national
securities exchange, provided: (a) the Board of Trustees has expressly
authorized Smith Barney to effect such transactions; and (b) Smith Barney
annually advises the Fund of the aggregate compensation it earned on such
transactions.
Even though investment decisions for the Fund are made independently from
those of the other accounts managed by the Investment Adviser, investments of
the kind made by the Fund also may be made by those other accounts. When the
Fund and one or more accounts managed by the Investment Adviser are prepared
to invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner believed
by the Investment Adviser to be equitable. In some cases, this procedure may
adversely affect the price paid or received by the Fund or the size of the
position obtained for or disposed of by the Fund.
PURCHASE OF SHARES
Determination of Public Offering Price
The Fund offers its shares to the public on a continuous basis. The public
offering price for shares of the Fund is equal to the net asset value per
share at the time of purchase. The method of computation of the public
offering price is shown in the Funds financial statements incorporated by
reference in their entirety into this SAI.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed (a)
for any period during which the NYSE is closed (other than for customary
weekend or holiday closings), (b) when trading in markets the Fund normally
utilizes is restricted, or an emergency, as determined by the SEC, exists so
that disposal of the Funds investments or determination of net asset value is
not reasonably practicable or (c) for such other periods as the SEC by order
may permit for the protection of the Funds shareholders.
Distributions in Kind
If the Board of Trustees of the Trust determines that it would be detrimental
to the best interests of the Funds remaining shareholders to make a
redemption payment wholly in cash, the Trust may pay in respect of the Fund,
in accordance with SEC rules, any portion of a redemption in excess of the
lesser of $250,000 or 1% of the Funds net assets by distribution in kind of
portfolio securities in lieu of cash. Securities issued as a distribution in
kind may incur brokerage commissions when shareholders subsequently sell
those securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the Withdrawal Plan) is available to
shareholders who own shares with a value of at least $10,000 ($5,000 for
retirement plan accounts) and who wish to receive specific amounts of cash
monthly or quarterly. Withdrawals of at least $50 may be made under the
Withdrawal Plan by redeeming as many shares of the Fund as may be necessary
to cover the stipulated withdrawal payment. To the extent withdrawals exceed
dividends, distributions and appreciation of a shareholders investment in the
Fund, there will be a reduction in the value of the shareholders investment
and continued withdrawal payments will reduce the shareholders investment and
ultimately may exhaust it. Withdrawal payments should not be considered as
income from investment in the Fund. Furthermore, as it generally would not be
advantageous to a shareholder to make additional investments in the Fund at
the same time he or she is participating in the Withdrawal Plan, purchases by
such shareholders in amounts of less than $5,000 ordinarily will not be
permitted.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates with
First Data as agent for Withdrawal Plan members. All dividends and
distributions on shares in the Withdrawal Plan are reinvested automatically
at net asset value in additional shares of the Fund. Withdrawal Plans should
be set up with a Smith Barney Financial Consultant. Applications for
participation in the Withdrawal Plan must be received by First Data no later
than the eighth day of the month to be eligible for participation beginning
with that months withdrawal. For additional information, shareholders should
contact a financial consultant.
DISTRIBUTOR
Smith Barney serves as a distributor for the Fund on a best efforts basis
pursuant to a written agreement.
When payment is made by the investor, unless otherwise noted by the investor,
the funds will be held as a free credit balance in the investors brokerage
account and Smith Barney may benefit from the temporary use of the funds. The
investor may designate another use for the funds prior to settlement date,
such as an investment in a money market fund (other than Smith Barney
Exchange Reserve Fund) of the Smith Barney Mutual Funds. If the investor
instructs Smith Barney to invest the funds in a Smith Barney money market
fund, the amount of the investment will be included as part of the average
daily net assets of both the Fund and the Smith Barney money market fund, and
affiliates of Smith Barney that serve the funds in an investment advisory or
administrative capacity will benefit from the fact they are receiving fees
from both such investment companies for managing these assets computed on the
basis of their average daily net assets. The Trusts Board of Trustees has
been advised of the benefits to Smith Barney resulting from these settlement
procedures and will take such benefits into consideration when reviewing the
distribution agreements for continuance.
Shareholding Servicing Arrangements
To compensate Smith Barneys Financial Consultants for the services they
provide to Fund shareholders, the Fund has adopted a services plan (the Plan)
pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund pays a
service fee, for Class A shares accrued daily and paid monthly, calculated at
the annual rate of 0.20% of the value of the Funds average daily net assets
attributable to Class A shares. Class D shares are not subject to a service
fee.
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Trusts Board of Trustees,
including a majority of the Trustees who are not interested persons of the
Fund and who have no direct or indirect financial interest in the operation
of the Plan or in the distribution agreement (the Independent Trustees). The
Plan may not be amended to increase the amount of the service fees without
shareholder approval, and all amendments of the Plan also must be approved by
the Trustees and Independent Trustees in the manner described above. The Plan
may be terminated at any time, without penalty, by vote of a majority of the
Independent Trustees or by vote of a majority (as defined in the 1940 Act) of
the outstanding voting securities. Pursuant to the Plan, the Funds
distributor will provide the Board of Trustees with periodic reports of
amounts expended under the Plan and the purpose for which such expenditures
were made.
VALUATION OF SHARES
The net asset value per share is calculated on each day, Monday through
Friday, except days on which the NYSE is closed. The NYSE currently is
scheduled to be closed on New Years Day, Martin Luther King, Jr. Day,
Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas, and on the preceding Friday or subsequent Monday
when one of these holidays falls on a Saturday or Sunday, respectively. The
following is a description of the procedures used by the Fund in valuing its
assets.
Securities that are traded on a national securities exchange will be valued
at the last sale price as of the close of business on the day the securities
are being valued, or, lacking any sales, at the closing bid price. Over-
the-counter securities will be valued on the basis of the bid price at the
close of business on each day, or, if market quotations for those securities
are not readily available, at fair value, as determined in good faith by the
Trusts Board of Trustees. Short-term obligations with maturities of 60 days
or less are valued at amortized cost, which constitutes fair value as
determined by the Trusts Board of Trustees. Amortized cost involves valuing
an instrument at its original cost to the Fund and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of
the effect of fluctuating interest rates on the market value of the
instrument. Securities and other assets for which market quotations are not
readily available are valued at fair market value, as determined in good
faith by or under the direction of the Trustee of the Trust.
PERFORMANCE DATA
From time to time, the Fund may quote its total return in advertisements or
in reports and other communications to shareholders. The Fund may include
comparative performance information in advertising or marketing the Funds
shares. Such performance information may include the following industry and
financial publications: Barrons, Business Week, CDA Investment Technologies,
Inc., Changing Times, Forbes, Fortune, Institutional Investor, Investors
Daily, Money, Morningstar Mutual Fund Values, The New York Times, USA Today
and The Wall Street Journal.
Average Annual Total Return
Average annual total return figures are computed according to a formula
prescribed by the SEC. The formula can be expressed as follows:
P (1 + T)n =
ERV
Where:
P
=
a hypothetical initial payment of $1,000.
T
=
average annual total return.
n
=
number of years.
ERV
=
Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5- or
10-year period at the end of the 1-, 5- or 10-
year period (or fractional portion thereof),
assuming reinvestment of all dividends and
distributions.
Aggregate Total Return
Aggregate total return figures represent the cumulative change in the value
of an investment in the Fund for the specified period and are computed by the
following formula:
ERV-P
P
Where:
P
=
a hypothetical initial payment of $10,000.
ERV
=
Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of a 1-, 5- or
10-year period at the end of the 1-, 5- or 10-
year period (or fractional portion thereof),
assuming reinvestment of all dividends and
distributions.
Performance will vary from time to time depending on market conditions, the
composition of the Funds portfolio and operating expenses. Consequently, any
given performance quotation should not be considered representative of the
Funds performance for any specified period in the future. Because performance
will vary, it may not provide a basis for comparing an investment in the Fund
with certain bank deposits or other investments that pay a fixed yield for a
stated period of time.
TAXES
The following is a summary of certain Federal income tax considerations that
may affect the Fund and its shareholders. The summary is not intended as a
substitute for individual tax advice and investors are urged to consult their
own tax advisors as to the tax consequences of an investment in the Fund.
The Trust intends to qualify each year as a regulated investment company
under the Code. If the Fund (a) qualifies as a regulated investment company
and (b) distributes to its shareholders at least 90% of its net investment
income (including, for this purpose, its net realized short-term capital
gains), the Fund will not be liable for Federal income taxes to the extent
that its net investment income and its net realized long- and short-term
capital gains, if any, are distributed to its shareholders.
As described above, the Fund may invest in futures contracts and options on
futures contracts that are traded on a U.S exchange or board of trade. As a
general rule, these investment activities will increase or decrease the
amount of long-term and short-term capital gains or losses realized by the
Fund and, thus, will affect the amount of capital gains distributed to the
Funds shareholder.
For federal income tax purposes, gain or loss on the futures and options
described above (collectively referred to as Section 1256 Contracts) would,
as a general rule, be taxed pursuant to a special mark-to-market system.
Under the mark-to-market system, the Fund may be treated as realizing a
greater or lesser amount of gains or losses than actually realized. As a
general rule, gain or loss on Section 1256 Contracts is treated as 60% long-
term capital gain or loss and 40% short-term capital gain or loss, and as a
result, the mark-to market will generally affect the amount of capital gains
or losses taxable to the Fund and the amount of distributions taxable to a
shareholder. Moreover, if the Fund invests in both Section 1256 and
offsetting positions in those contracts, then the Fund may not be able to
receive the benefit of certain realized losses for an indeterminate period of
time. The Fund expects that its activities with respect to Section 1256
Contracts and offsetting position in those Contracts (1) will not cause it or
its shareholders to be treated as receiving a materially greater amount of
capital gains or distributions than actually realized or received and (2)
will permit it to use substantially all of its losses for the fiscal years in
which the losses actually occur.
Gains or losses on the sales of stock or securities by the Fund generally
will be long-term capital gains or losses if the Fund has held the stock or
securities for more than one year. Gains or losses on sales of stock or
securities held for not more than one year generally will be short-term
capital gains or losses.
Foreign countries may impose withholding and other taxes on dividends and
interest paid to the Fund with respect to investments in foreign securities.
However, certain foreign countries have entered into tax conventions with the
United States to reduce or eliminate such taxes. Distributions of long-term
capital gains will be taxable to shareholders as such, whether paid in cash
or reinvested in additional shares and regardless of the length of time that
the shareholder has held his or her interest in the Fund. If a shareholder
receives a distribution taxable as long-term capital gain with respect to his
or her investment in the Fund and redeems or exchanges the shares before he
or she has held them for more than six months, any loss on the redemption or
exchange that is less than or equal to the amount of the distribution will be
treated as a long-term capital loss.
Any net long-term capital gains realized by the Fund will be distributed
annually as described in the Prospectus. Such distributions (capital gain
dividends) will be taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held Fund shares, and will be
designated as capital gain dividends in a written notice mailed by the Fund
to shareholders after the close of the Funds prior taxable year. If a
shareholder receives a capital gain dividend with respect to any share and if
the share has been held by the shareholder for six months or less, then any
loss on the sale or exchange of such share will be treated as a long-term
capital loss to the extent of the capital gain dividend.
Investors considering buying shares of the Fund on or just prior to a record
date for a taxable dividend or capital gain distribution should be aware
that, regardless of whether the price of the Fund shares to be purchased
reflects the amount of the forthcoming dividend or distribution payment, any
such payment will be a taxable dividend or distribution payment.
If a shareholder fails to furnish a correct taxpayer identification number,
fails fully to report dividend and interest income, or fails to certify that
he or she has provided a correct taxpayer identification number and that he
or she is not subject to backup withholding, then the shareholder may be
subject to a 31% backup withholding tax with respect to (a) any taxable
dividends and distributions and (b) the proceeds of any redemptions of Fund
shares. An individuals taxpayer identification number is his or her social
security number. The backup withholding tax is not an additional tax and may
be credited against a shareholders regular Federal income tax liability.
The foregoing is only a summary of certain tax considerations generally
affecting the Fund and its shareholders and is not intended as a substitute
for careful tax planning. Shareholders are urged to consult their tax
advisors with specific reference to their own tax situations, including their
state and local tax liabilities.
ADDITIONAL INFORMATION
PNC Bank, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, serves as the custodian of the Fund. Under its agreement with the
Trust on behalf of the Fund, PNC Bank holds the Funds portfolio securities
and keeps all necessary accounts and records. For its services, PNC Bank
receives a monthly fee based upon the month-end market value of securities
held in custody and also receives securities transaction charges. The assets
of the Fund are held under bank custodianship in compliance with the 1940
Act.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Trusts transfer agent. Under the transfer agency agreement, First Data
maintains the shareholder account records for the Trust, handles certain
communications between shareholders and the Trust and distributes dividends
and distributions payable by the Trust. For these services, First Data
receives a monthly fee computed on the basis of the number of shareholder
accounts it maintains for the Trust during the month and is reimbursed for
out-of-pocket expenses
Smith Barney
S&P 500 Index Fund
Statement of
Additional
Information
December 30, 1997
Smith Barney
S&P 500 Index Fund
388 Greenwich Street
New York, New York 10013
SMITH BARNEY
A Member of Travelers Group
9
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