Part B
April 1, 1996
Amended as of July 3, 1996
SMITH BARNEY FUNDS, INC.
388 Greenwich Street
New York, New York 10013
STATEMENT OF ADDITIONAL INFORMATION
Shares of Smith Barney Funds, Inc. (the "Fund") are offered currently with a
choice of four Portfolios: the Equity Income Portfolio, the U.S. Government
Securities Portfolio, the Income Return Account Portfolio and the Short-Term
U.S. Treasury Securities Portfolio. (collectively referred to as "Portfolios"
and individually as "Portfolio").
This Statement of Additional Information is not a prospectus. It is intended
to provide more detailed information about Smith Barney Funds, Inc. as well as
matters already discussed in the Prospectus of the applicable Portfolio and
therefore should be read in conjunction with such Portfolio's Prospectus
which may be obtained from the Fund or a Smith Barney Financial Consultant.
TABLE OF CONTENTS
Directors and Officers 2
Investment Policies 4
Investment Restrictions 7
Additional Tax Information 11
IRA and Other Prototype Retirement Plans 12
Performance Information 13
Valuation of Shares 16
Purchase and Redemption of Shares 17
Investment Management Agreement
and Other Services 17
Custodian 20
Independent Auditors 20
Voting 20
Financial Statements 26
Appendix - Ratings of Debt Obligations 27
DIRECTORS AND OFFICERS
*JESSICA M. BIBLIOWICZ, Director and President
Executive Vice President of Smith Barney Inc. ("Smith Barney"); Director of
twelve investment companies associated with Smith Barney, President of thirty-
nine investment companies associated with Smith Barney; President and Chief
Executive Officer of Smith Barney Mutual Funds Management, Inc. (the
"Manager"). Prior to January 1994, Director of Sales and Marketing for
Prudential Mutual Funds; Prior to September 1991, Director, Salomon Brothers
Inc.; 36.
JOSEPH H. FLEISS, Director
Retired, 3849 Torrey Pines Blvd., Sarasota, Florida 34238. Director of ten
investment companies associated with Smith Barney. Formerly Senior Vice
President of Citibank, Manager of Citibank's Bond Investment Portfolio and
Money Management Desk and a Director of Citicorp Securities Co., Inc; 78.
DONALD R. FOLEY, Director
Retired, 3668 Freshwater Drive, Jupiter, Florida 33477. Director of ten
investment companies associated with Smith Barney. Formerly Vice President of
Edwin Bird Wilson, Incorporated (advertising); 73.
PAUL HARDIN, Director
Professor of Law at University of North Carolina at Chapel Hill, 103 S.
Building, Chapel Hill, North Carolina 27599; Director of twelve investment
companies associated with Smith Barney; and a Director of The Summit
Bancorporation; Formerly, Chancellor of the University of North Carolina at
Chapel Hill, University of North Carolina; 64.
FRANCIS P. MARTIN, Director
Practicing physician, 2000 North Village Avenue, Rockville Centre, New York
11570. Director of ten investment companies associated with Smith Barney.
Formerly President of the Nassau Physicians' Fund, Inc.; 71.
*HEATH B. McLENDON, Chairman of the Board and Chief Executive Officer
Managing Director of Smith Barney ; Director of forty-one investment companies
associated with Smith Barney; Chairman of the Manager; Chairman of the Board
of Smith Barney Strategy Advisors Inc.; prior to July 1993, Senior Executive
Vice President of Shearson Lehman Brothers; Vice Chairman of the Board of
Asset Management; 62.
RODERICK C. RASMUSSEN, Director
Investment Counselor, 81 Mountain Road, Verona, New Jersey 07044. Director of
ten investment companies associated with Smith Barney. Formerly Vice
President of Dresdner and Company Inc. (investment counselors); 69.
* Designates an "interested person" as defined in the Investment Company Act
of 1940 whose business address is 388 Greenwich Street, New York, New York
10013.
*BRUCE D. SARGENT, Director and Vice President
Managing Director of Smith Barney and Vice President and Director of the
Manager and of three investment companies associated with Smith Barney; 52.
JOHN P. TOOLAN, Director
Retired, 13 Chadwell Place, Morristown, New Jersey 07960. Director of ten
investment companies associated with Smith Barney. Formerly, Director and
Chairman of Smith Barney Trust Company, Director of Smith Barney Holdings
Inc. and the Manager and Senior Executive Vice President, Director and Member
of the Executive Committee of Smith Barney; 65.
C. RICHARD YOUNGDAHL, Director
Retired, 339 River Drive, Tequesta, Florida 33469. Director of ten investment
companies associated with Smith Barney and Member of the Board of Directors
of D.W. Rich & Company, Inc. Formerly Chairman of the Board of Pensions of
the Lutheran Church in America, Chairman of the Board and Chief Executive
Officer of Aubrey G. Lanston & Co. (dealers in U.S. Government securities) and
President of the Association of Primary Dealers in U.S. Government Securities;
80.
*LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Smith Barney, Senior Vice President and Treasurer of
forty-one investment companies associated with Smith Barney, and Director and
Senior Vice President the Manager; 38.
*PATRICK SHEEHAN, Vice President
Managing Director of Smith Barney and Vice President of two investment
companies associated with Smith Barney. Prior to January 1992, Portfolio
Manager of Value Line Inc., Senior Vice President of Seaman's Bank for
Savings, Assistant Vice President of Capital Markets of Federal Home Loan
Board of New York and Vice President and Treasurer of Poughkeepsie Savings
Bank; 48.
*THOMAS M. REYNOLDS, Controller and Assistant Secretary
Director of Smith Barney and Controller and Assistant Secretary of thirty-
seven investment companies associated with Smith Barney. Prior to September
1991, Assistant Treasurer of Aquila Management Corporation and its associated
investment companies; 36.
*CHRISTINA T. SYDOR, Secretary
Managing Director of Smith Barney, Secretary of forty-one investment
companies associated with Smith Barney; Secretary and General Counsel of the
Manager; 45.
On March 15, 1996, directors and officers owned in the aggregate less than 1%
of the outstanding shares of each Portfolio.
* Designates an "interested person" as defined in the Investment Company Act
of 1940 whose business address is 388 Greenwich Street, New York, New York
10013.
The following table shows the compensation paid by the Fund to each incumbent
director during the Fund's last fiscal year. None of the oficers of the Fund
received any compensation from the Fund for such period. Officers and
interested directors of the Fund are compensated by Smith Barney.
COMPENSATION TABLE
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
Jessica M. Bibliowicz* $0 $0 $0 12
Joseph H. Fleiss 4,650 0 53,300 10
Donal R. Foley 5,050 0 56,100 10
Paul Hardin 4,250 0 68,200 12
Heath B. McLendon* 0 0 0 41
Francis P. Martin 5,050 0 56,100 10
Roderick C. Rasmussen 5,050 0 56,100 10
Bruce D. Sargent* 0 0 0 3
John P. Toolan 5,050 0 56,100 10
C. Richard Youngdahl 4,650 0 53,300 10
* Designates an "interested director".
INVESTMENT POLICIES
The Articles of Incorporation of the Fund permit the Board of Directors to
establish additional Portfolios of the Fund from time to time. The investment
objectives, policies and restrictions applicable to additional Portfolios
would be established by the Board of Directors at the time such Portfolios
were established and may differ from those set forth in the Prospectus and
this Statement of Additional Information.
The Fund effects portfolio transactions with a view towards attaining
the investment objectives of the Portfolios and is not limited to a
predetermined rate of portfolio turnover. A high portfolio turnover results
in correspondingly greater transaction costs in the form of dealer spreads or
brokerage commissions and other transaction costs that a Portfolio will bear
directly, and may result in the realization of net capital gains which are
taxable when distributed to shareholders. See " Financial Highlights" in the
Prospectus and "Investment Management Agreement and Other Services -
Brokerage" in this Statement of Additional Information.
Each Portfolio, other than the Short-Term U.S. Treasury Securities
Portfolio, may invest in investment grade bonds, i.e. U.S. Government
Obligations or bonds rated Aaa, Aa, A and Baa by Moody's Investors Service,
Inc. ("Moody's") or AAA, AA, A and BBB by Standard & Poor's ("S&P").
Repurchase and Reverse Repurchase Agreements. Each Portfolio may on occasion
enter into repurchase agreements, wherein the seller agrees to repurchase a
security from the Portfolio at an agreed-upon future date, normally the next
business day. The resale price is greater than the purchase price, which
reflects the agreed-upon rate of return for the period the Portfolio holds the
security and which is not related to the coupon rate on the purchased
security. The Fund requires continual maintenance of the market value of the
collateral in amounts at least equal to the resale price, thus risk is limited
to the ability of the seller to pay the agreed-upon amount on the delivery
date; however, if the seller defaults, realization upon the collateral by the
Portfolio may be delayed or limited or the Portfolio might incur a loss if the
value of the collateral securing the repurchase agreement declines and might
incur disposition costs in connection with liquidating the collateral. A
Portfolio will only enter into repurchase agreements with broker/dealers or
other financial institutions that are deemed creditworthy by the Manager under
guidelines approved by the Board of Directors. It is the policy of the Fund
not to invest in repurchase agreements that do not mature within seven days if
any such investment together with any other illiquid assets held by a
Portfolio amount to more than 15% of that Portfolio's total assets.
The Fund has never entered into reverse repurchase agreements even though it
is permitted to do so on behalf of the Income Return Account Portfolio and the
U.S. Government Securities Portfolio. The Fund does not currently intend to
commit to such agreements more than 5% of the net assets of any of these two
Portfolios, although the fundamental policies of the Income Return Account
Portfolio and the Utility Portfolio permit each Portfolio to invest up to 1/3
of its total assets in reverse repurchase agreements, and this right is
reserved. Each of these Portfolios may enter into reverse repurchase
agreements with broker/dealers and other financial institutions. Such
agreements involve the sale of Portfolio securities with an agreement to
repurchase the securities at an agreed-upon price, date and interest payment
and have the characteristics of borrowing. Since the proceeds of borrowings
under reverse repurchase agreements are invested, this would introduce the
speculative factor known as "leverage." The securities purchased with the
funds obtained from the agreement and securities collateralizing the agreement
will have maturity dates no later than the repayment date. Generally the
effect of such a transaction is that the Fund can recover all or most of the
cash invested in the portfolio securities involved during the term of the
reverse repurchase agreement, while in many cases it will be able to keep some
of the interest income associated with those securities. Such transactions
are only advantageous if the Portfolio has an opportunity to earn a greater
rate of interest on the cash derived from the transaction than the interest
cost of obtaining that cash. Opportunities to realize earnings from the use
of the proceeds equal to or greater than the interest required to be paid may
not always be available, and the Fund intends to use the reverse repurchase
technique only when the Manager believes it will be advantageous to the
Portfolio. The use of reverse repurchase agreements may exaggerate any
interim increase or decrease in the value of the participating Portfolio's
assets. The Fund's custodian bank will maintain a separate amount for the
Portfolio with securities having a value equal to or greater than such
commitments.
Securities Lending. Each Portfolio, other than the Income Return
Account Portfolio and the Short-Term U.S. Treasury Securities Portfolio, may
seek to increase its net investment income by lending its securities provided
such loans are callable at any time and are continuously secured by cash or
U.S. Government Obligations equal to no less than the market value, determined
daily, of the securities loaned. The Portfolio will receive amounts equal to
dividends or interest on the securities loaned. It will also earn income for
having made the loan because cash collateral pursuant to these loans will be
invested in short-term money market instruments. In connection with lending
of securities the Fund may pay reasonable finders, administrative and
custodial fees. Management will limit such lending to not more than one-third
of the value of the total assets of the U.S. Government Securities Portfolio,
and the investment restriction of the Equity Income Portfolio limits it to
less than 20% of such Portfolio's net assets. Where voting or consent rights
with respect to loaned securities pass to the borrower, management will follow
the policy of calling the loan, in whole or in part as may be appropriate, to
permit the exercise of such voting or consent rights if the issues involved
have a material effect on the Portfolio's investment in the securities loaned.
Apart from lending its securities and acquiring debt securities of a type
customarily purchased by financial institutions, none of the foregoing
Portfolios will make loans to other persons. The risks in lending portfolio
securities, as with other extensions of secured credit, consist of possible
delay in receiving additional collateral or in the recovery of the securities
or possible loss of rights in the collateral should the borrower fail
financially. Loans will only be made to borrowers whom the Manager deems to
be of good standing and will not be made unless, in the judgment of the
Manager, the interest to be earned from such loans would justify the risk.
Foreign Investments. The Equity Income Portfolio may invest its assets
in the securities of foreign issuers. Investments in foreign securities
involve certain risks not ordinarily associated with investments in securities
of domestic issuers. Such risks include currency exchange control regulations
and costs, the possibility of expropriation, seizure, or nationalization of
foreign deposits, less liquidity and volume and more volatility in foreign
securities markets and the impact of political, social, economic or diplomatic
developments or the adoption of other foreign government restrictions that
might adversely affect the payment of principal and interest on securities in
a Portfolio. If it should become necessary, the Fund might encounter greater
difficulties in invoking legal processes abroad than would be the case in the
United States. In addition, there may be less publicly available information
about a non-U.S. company, and non-U.S. companies are not generally subject to
uniform accounting and financial reporting standards, practices and
requirements comparable to those applicable to U.S. companies. Furthermore,
some of these securities may be subject to foreign brokerage and withholding
taxes.
For many foreign securities, there are U.S. dollar-denominated American
Depositary Receipts ("ADRs"), which are traded in the United States on
exchanges or over the counter and are sponsored and issued by domestic banks.
ADRs represent the right to receive securities of foreign issuers deposited in
a domestic bank or a correspondent bank. ADRs do not eliminate all the risk
inherent in investing in the securities of foreign issuers. However, by
investing in ADRs rather than directly in foreign issuers' stock, the
Portfolio can avoid currency risks during the settlement period for either
purchases or sales. In general, there is a large, liquid market in the United
States for many ADRs. The information available for ADRs is subject to the
accounting, auditing and financial reporting standards of the domestic market
or exchange on which they are traded, which standards are more uniform and
more exacting that those to which many foreign issuers may be subject.
Additional Policies - Equity Income Portfolio
Although the Equity Income Portfolio may, as described below, sell short
"against the box," buy or sell puts or calls and borrow money, the Equity
Income Portfolio has not done so during the last fiscal year and neither
Portfolio has any intention of doing so in the foreseeable future.
Although the Equity Income Portfolio may lend money or assets, as
described in investment restriction 18 on page 11, the Portfolio has not
engaged in this practice within the last year and does not currently intend to
engage in loans other than short-term loans.
While the Equity Income Portfolio is permitted to invest in warrants
(including 2% or less of the Portfolio's total net assets in warrants that are
not listed on the New York Stock Exchange or American Stock Exchange), the
Portfolio has not purchased any warrants during its last fiscal year and has
no intention of doing so in the foreseeable future. For purposes of computing
the foregoing percentage, warrants acquired by the Portfolio in units or
attached to securities will be deemed to be without value.
In addition, although each of the Equity Income Portfolio may buy or
sell put and call options up to 15% of its net assets, provided such options
are listed on a national securities exchange, neither Portfolio has done so in
the last year, and neither Portfolio currently intends to commit more than 5%
of its assets to be invested in or subject to put and call options. A "call
option" gives a holder the right to purchase a specific stock at a specified
price referred to as the "exercise price," within a specific period of time
(usually 3, 6, or 9 months). A "put option" gives a holder the right to sell
a specific stock at a specified price within a specified time period. The
initial purchaser of a call option pays the "writer" a premium, which is paid
at the time of purchase and is retained by the writer whether or not such
option is exercised. Put and call options are currently traded on The Chicago
Board Options Exchange and several other national exchanges. Institutions,
such as the Fund, that sell (or "write") call options against securities held
in their investment portfolios retain the premium. If the writer determines
not to deliver the stock prior to the option's being exercised, the writer may
purchase in the secondary market an identical option for the same stock with
the same price and expiration date in fulfillment of the obligation. In the
event the option is exercised the writer must deliver the underlying stock to
fulfill the option obligation. The brokerage commissions associated with the
buying and selling of call options are normally proportionately higher than
those associated with general securities transactions.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and fundamental policies
that cannot be changed without approval by a "vote of a majority of the
outstanding voting securities" of each Portfolio affected by the change as
defined in the Investment Company Act of 1940 (the "Act") and Rule 18f-2
thereunder (see "Voting").
Without the approval of a majority of its outstanding voting securities
the Equity Income Portfolio may not:
1. Invest more than 5% of the value of its total assets in any one
issuer (except securities of the U.S. Government and its instrumentalities);
2. Invest more than 25% of the value of its total assets in any one industry;
3. Invest more than 5% of its total assets in issuers with less than three
years of continuous operation (including that of predecessors) or so-called
"unseasoned" equity securities that are not either admitted for trading on a
national stock exchange or regularly quoted in the over-the-counter market; 4.
Purchase more than 10% of any class of outstanding securities, or any class of
voting securities, of any one issuer; 5. Purchase any securities on margin;
6. Make short sales of securities or maintain a short position unless at all
times when a short position is open, the Portfolio owns or has the right to
obtain, at no added cost, securities identical to those sold short; 7. Borrow
money, except as a temporary measure for extraordinary or emergency purposes,
and then not in excess of the lesser of 10% of its total assets taken at cost
or 5% of the value of its total assets; 8. Mortgage or pledge any of its
assets; 9. Act as a securities underwriter or invest in real estate or
commodities (the purchase by the Portfolio of securities for which there is an
established market of companies engaged in real estate activities or
investments shall not be deemed to be prohibited by this fundamental
investment limitation); 10. Invest in securities of another investment
company except as permitted by Section 12(d)(1) of the Investment Company Act
of 1940 or as part of a merger, consolidation, or acquisition; 11. Invest in
or hold securities of an issuer if those officers and directors of the Fund,
its Adviser, or Smith Barney owning beneficially more than 1/2 of 1% of the
securities of such issuer together own more than 5% of the securities of such
issuer; 12. Invest in "restricted securities", that is, securities which at
the time of purchase by the Portfolio would have to be registered under the
Securities Act of 1933 before they could be sold; 13. Invest in any company
for the purpose of exercising control of management; 14. Have more than 15%
of its net assets at any time invested in or subject to puts, calls or
combinations thereof and may not purchase or sell options that are not listed
on a national securities exchange; 15. Invest in interests in oil or gas or
other mineral exploration or development programs; 16. Purchase or sell any
securities other than shares of the Fund from or to the Adviser or any officer
or director of the Adviser or the Fund; and 17. Lend money or assets, except
that the Portfolio may purchase a portion of issues of publicly distributed
bonds, debentures or notes and may invest in certificates of deposit or
commercial paper, and may lend a portion of its portfolio securities to
broker-dealers and financial institutions, provided that any such loan must be
secured at all times by cash or U.S. Government Obligations equal at all times
to at least 100% of the market value of the portfolio securities loaned. The
Portfolio will not make a portfolio securities loan if immediately thereafter
as a result thereof, portfolio securities with a market value of 20% or more
of the Portfolio's total net assets would be subject to such loans.
Without the approval of a majority of its outstanding voting securities
the U.S. Government Securities Portfolio may not:
1. Purchase any securities other than obligations issued or guaranteed
by the U.S. Government or its agencies or instrumentalities, some of which may
be subject to repurchase agreements. There is no limit on the amount of its
assets which may be invested in the securities of any one issuer of such
obligations; 2. Purchase securities on margin, sell securities short
(provided however each Portfolio may sell short if it maintains a segregated
account of cash or U.S. Government Obligations with the Custodian, so that the
amount deposited in it plus the collateral deposited with the broker equals
the current market value of the securities sold short and is not less than the
market value of the securities at the time they were sold short) or purchase
mortgage-related securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities); 3. Borrow money, except from banks for
temporary purposes and then in amounts not in excess of 5% of the value of
each Portfolio's assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in connection with any such borrowing and in
amounts not in excess of 7 1/2% of the value of the Fund's assets at the time
of such borrowing. (This borrowing provisions is not for investment leverage,
but solely to facilitate management of each Portfolio by enabling each
Portfolio to meet redemption requests where the liquidation of portfolio
securities is deemed to be disadvantageous or inconvenient.) Borrowings may
take the form of a sale of portfolio securities accompanied by a simultaneous
agreement as to their repurchase; 4. Make loans, except through the purchase
of debt obligations (described in restriction 1 above), repurchase agreements
and loans of each Portfolio's securities; and 5. Act as an underwriter of
securities except to the extent the Fund may be deemed to be an underwriter in
connection with the sale of portfolio holdings.
Without the approval of a majority of its outstanding voting securities
the Income Return Account Portfolio may not:
1. Purchase common stocks, preferred stocks, warrants, other equity
securities or municipal obligations; 2. Borrow money except from banks for
temporary purposes in an amount up to 10% of the value of its total assets and
may pledge its assets in an amount up to 10% of the value of its total assets
only to secure such borrowings. The Portfolio will borrow money only to
accommodate requests for the redemption of shares while effecting an orderly
liquidation of portfolio securities or to clear securities transactions and
not for leveraging purposes. This restriction shall not be deemed to prohibit
the Portfolio from entering into reverse repurchase agreements so long as not
more than 33 1/3% of the Portfolio's total assets are subject to such
agreements; 3. With respect to 75% of its assets, invest more than 5% of its
assets in the securities of any one issuer, except securities issued or
guaranteed as to principal and interest by the U.S. Government, its agencies
or instrumentalities; 4. Purchase securities on margin or sell securities
short; 5. Write or purchase put or call options; 6. Underwrite the
securities of other issuers or knowingly purchase securities subject to
restrictions on disposition under the Securities Act of 1933 (i.e. "restricted
securities"); 7. Purchase or sell commodities or commodity futures contracts,
oil and gas interests or real estate (however, the Portfolio may purchase
mortgage-related securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities); 8. Make loans to others (except through the
purchase of debt obligations as described in the Fund's then current
Prospectus), except that the Fund may purchase and simultaneously resell for
later delivery, obligations issued or guaranteed as to principal and interest
by the U.S. Government or its agencies or instrumentalities; provided,
however, that the Portfolio will not enter into such a repurchase agreement
if, as a result thereof, more than 10% of its total assets (taken at current
value) at that time would be subject to repurchase agreements maturing in more
than seven days; 9. Invest in companies for the purpose of exercising
control;
10. Invest in securities of other investment companies, except as they may be
acquired as part of a merger, consolidation or acquisition of assets; 11.
Purchase any securities, other than obligations of the U.S. Government, its
agencies or its instrumentalities, if immediately after such purchase more
than 25% of the Portfolio's total assets would be invested in the securities
of issuers in the same industry; 12. Issue senior securities as defined in
the Act except insofar as the Fund may be deemed to have issued a senior
security by reason of (a) entering into any repurchase agreement or reverse
repurchase agreement; or (b) permitted borrowings of money; and 13. Purchase
any security if as a result the Portfolio would then have more than 5% of its
total assets (taken at current value) invested in securities of companies
(including predecessors) that have been operation for less than three years or
in equity securities for which market quotations are not readily available.
Without the approval of a majority of its outstanding voting securities,
the Short-Term U.S. Treasury Securities Portfolio may not:
1. Invest more than 5% of the value of its total assets in the
securities of any one issuer (other than obligations issued or guaranteed by
the United States Government, its agencies or instrumentalities); 2. Purchase
common stocks, preferred stocks, warrants, other equity securities, corporate
bonds, municipal bonds or industrial revenue bonds; 3. Borrow money except
from banks for temporary purposes in an amount up to 10% of the value of its
total assets. The Portfolio will borrow money only to accommodate requests
for the redemption of shares while effecting an orderly liquidation of
portfolio securities or to clear securities transactions and may not for
leveraging purposes. Whenever borrowings exceed 5% of the value of the
Portfolio's total assets, the Portfolio will not make any additional
investments. This restriction will not be deemed to prohibit the Fund from
obtaining letters of credit solely for purpose of participating in a captive
insurance company sponsored by the Investment Company Institute to provide
fidelity and directors and officers liability insurance; 4. Pledge,
hypothecate, mortgage or otherwise encumber its assets, except in an amount up
to 10% of the value of its total assets, but only to secure borrowings for
temporary purposes; 5. Sell securities short or purchase securities on
margin; 6. Write or purchase put or call options; 7. Underwrite the
securities of other issuers or purchase restricted securities; 8. Purchase or
sell real estate, real estate investment trust securities, commodities or
commodity contracts or oil and gas interests; 9. Make loans to others except
through the purchase of qualified debt obligations in accordance with the
Portfolio's investment objective and policies; 10. Issue senior securities as
defined in the Act except insofar as the Portfolio may be deemed to have
issued a senior security by reason of: (a) borrowing money in accordance with
restrictions described above or (b) by purchasing securities on a when-issued
or delayed delivery basis or purchasing or selling securities on a forward
commitment basis; and 11. Invest in securities of other investment companies,
except as they may be acquired as part of a merger, consolidation, acquisition
of assets or plan of reorganization.
The foregoing percentage restrictions apply at the time an investment is
made; a subsequent increase or decrease in percentage may result from changes
in values or net assets.
ADDITIONAL TAX INFORMATION
The following summary addresses the principal United States income tax
considerations regarding the purchase, ownership and disposition of shares in
a Portfolio of the Fund.
General.
Each Portfolio within the Fund is generally treated as a separate
corporation for federal income tax purposes, and thus the provisions of the
Internal Revenue Code of 1986, as amended (the "Code") generally will be
applied to each Portfolio separately, rather than to the Fund as a whole. For
tax purposes therefor, net long-term and short-term capital gains, net income
and operating expenses will be determined separately for each Portfolio.
Each Portfolio within the Fund intends to qualify and elect to be
treated for each taxable year as a "regulated investment company" under
Sections 851-855 of the Code. To so qualify, each Portfolio must, among other
things, (i) derive at least 90% of its gross income in each taxable year from
dividends, interest, proceeds from loans of stock and securities, gains from
the sale or other disposition of stock, securities or foreign currency, of
certain other income (including but not limited to gains from options, futures
and forward contracts) derived from its business of investing stock,
securities or currency; (ii) derive less than 30% of its gross income in each
taxable year from the sale or other disposition of any of the following which
was held for less than three months: (a) stocks or securities, (b) options,
futures or forward contracts (other than options, futures or forward contracts
on foreign currency), but only if such currency (or options futures of forward
contracts) is not directly related to each Portfolio's principal business of
investing in stock or securities (or options or futures with respect to stock
or securities); and (iii) diversify its holding so that , at the end of each
quarter of its taxable years, the following two conditions are met: (a) at
least 50% of the market value of the Portfolio's total assets is represented
by cash, U.S. Government securities, securities of other regulated investment
companies and other securities, with such other securities limited, in respect
of any one issuer, to an amount not greater than 5% of the Portfolio's assets
and not more than 10% of the outstanding voting securities of such issuer; and
(b) not more than 25% of the value of the Portfolio's assets is invested in
securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies). The diversification
requirements described above may limit a Portfolio's ability to engage in
hedging transactions by writing or buying options or by entering into futures
or forward contracts.
At December 31, 1995 the unused capital loss carryovers of the Fund by
Portfolio were approximately as follows: U.S. Government Securities
Portfolio, $4,584,000; Income Return Account Portfolio, $1,695,000; and Short-
Term U.S. Treasury Securities Portfolio, $8,073,000. For federal income tax
purposes, these amounts are available to be applied against future securities
gains, if any, realized. The carryovers expire as follows:
December 31,
(in thousands)
1996 1997 2001 2002 2003
U.S. Government Securities Portfolio $ 392 $898 $430 $2,864 -----
Income Return Account Portfolio 930 218 --- 547 -----
Short-Term U.S. Treasury --- --- 1,477 5,472 1,124
Securities Portfolio
Distributions
If the net asset value of shares of a Portfolio is reduced below a
shareholder's costs as a result of a distribution by the Portfolio, such
distribution will be taxable even though it represents a return of invested
capital.
Redemption of Shares.
Any gain or loss realized on the redemption or exchange of Portfolio
shares by a shareholder who is not a dealer in securities will be treated as
long-term capital loan or loss if the shares have been held for more than one
year, and otherwise as short-term capital gain or loss.
However, any loss realized by a shareholder upon the redemption or
exchange of Portfolio shares held six months or less will be treated as a
long-term capital loss to the extent of any long-term capital gain
distributors received by the shareholder with respect to such shares.
Additionally, any loss realized on a redemption or exchange of Portfolio
shares will be disallowed to the extent the shares disposed of are replaced
within a period of 61 days beginning 30 days before and ending 30 days after
such disposition, such as pursuant to reinvestment of dividends in Portfolio
shares.
IRA AND OTHER PROTOTYPE RETIREMENT PLANS
Copies of the following plans with custody or trust agreements have been
approved by the Internal Revenue Service and are available from the Fund or
Smith Barney; investors should consult with their own tax or retirement
planning advisors prior to the establishment of a plan.
IRA, Rollover IRA and Simplified Employee Pension - IRA
The Tax Reform Act of 1986, as amended, (the "Tax Reform Act") changed the
eligibility requirements for participants in Individual Retirement Accounts
("IRAs"). Under the Tax Reform Act's new provisions, if you or your spouse
has earned income and neither your nor your spouse is an active participant in
any employer-sponsored retirement plan, each of you may establish an IRA and
make maximum annual contributions equal to the lesser of earned income or
$2,000. If your spouse is not employed, you may contribute and deduct on your
joint venture a total of $2,250 between two IRA's.
If you or you spouse is an active participant in an employer-sponsored
retirement plan, a deduction for contributions to an IRA might still be
allowed in full or in part, depending on your combined adjusted gross income.
For married couples filing jointly, a full deduction of contributions to an
IRA will be allowed where the couples' adjusted gross income is below $40,001
($25,001 for an unmarried individual); a partial deduction will be allowed
when adjusted gross income is between $40,001 - $50,000 ($25,001 - $35,000 for
an unmarried individual); and no deduction when adjusted income is $50,000
($35,000 for an unmarried individual). Shareholders should consult their tax
advisors concerning the effects of the Tax Reform Act on the deductibility of
their IRA contributions.
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 $22,500) of each participant's
compensation.
In addition, certain small employers (those who have 25 or fewer
employees) can establish a Simplified Employees Pension Plan - Salary
Reduction Plan ("SEP - Salary Reduction Plan") under which employees can make
elective pre-tax contributions of up to $9,240 of gross income. Consult your
tax advisor for special rules regarding establishing either type of SEP.
An ERISA disclosure statement providing additional details is included
with each IRA application sent to participants.
Paired Defined Contribution Prototype
Corporations (including Subchapter S corporations) and non-corporate
entities may purchase shares of the Fund through the Smith Barney Prototype
Paired Defined Contribution Plan. The prototype permits adoption of profit-
sharing provisions, money purchase pension provisions, or both, to provide
benefits for eligible employees and their beneficiaries. The prototype
provides for a maximum annual tax deductible contribution on behalf of each
Participant of up to 25% of compensation, but not to exceed $30,000 (provided
that a money purchase pension plan or both a profit-sharing plan and a money
purchase pension plan are adopted thereunder).
PERFORMANCE INFORMATION
From time to time the Fund may advertise a Portfolio's total return,
average annual total return and yield in advertisements. In addition, in
other types of sales literature the Fund may also advertise a Portfolio's
current dividend return. These figures are based on historical earnings and
are not intended to indicate future performance. The total return shows what
an investment in the Portfolio would have earned over a specified period of
time (one, five or ten years) assuming the payment of the maximum sales load
when the investment was first made, that all distributions and dividends by
the Portfolio were reinvested on the reinvestment dates during the period less
the maximum sales load charged upon reinvestment and less all recurring fees.
The average annual total return is derived from this total return, which
provides the ending redeemable value. The Fund may also quote a Portfolio's
total return for present shareholders that eliminates the sales charge on the
initial investment.
Each Portfolio's average annual total return with respect to its Class A
Shares for the one-year period, five-year period, if any, and for the life of
the Portfolio (except for the Equity Income Portfolio, Income Return Account
Portfolio and U.S. Government Securities Portfolio which displays performance
data for ten years) ended December 31, 1995 is as follows:
One Year Five Years Life Inception Date
Equity Income 26.40% 13.82% 11.59%* 1/1/72
Income Return 6.27 5.88 6.92* 3/4/85
U.S. Government 11.28 7.71 8.53* 10/9/84
Short-Term U.S. 13.16 N/A 6.26 11/11/91
* Representative of ten years, not life of the Equity Income Portfolio, the
Income Return Portfolio and the U.S. Government Securities Portfolio.
Each Portfolio's average annual total return with respect to its Class B
Shares (where applicable) for the one-year period and the life of such
Portfolio's Class B shares through December 31, 1995 is as follows:
Portfolio One Year Life Inception Date
Equity Income 27.07% 22.62% 11/7/94
U.S. Gov't 11.53 12.43 11/7/94
Each Portfolio's average annual total return with respect to its Class C
Shares (where applicable) for the one-year period and for the life of such
Portfolio's Class C shares through December 31, 1995 is as follows:
Portfolio One Year Life Inception Date
Equity Income 31.01% 13.01% 12/2/92
Income Return 7.06 4.50 12/16/92
U.S. Government 14.93 6.47 12/2/92
Each Portfolio's average annual total return with respect to its Class Y
Shares (where applicable) for the one-year period and for the life of such
Portfolio's Class Y shares through December 31, 1995 is as follows:
Portfolio One Year Life Inception Date
Income Return 8.43% 4.59% 2/1/93
U.S. Government 16.88 6.78 1/12/93
Each Portfolio's average annual total return with respect to its Class Z
Shares (where applicable) for the life of such Portfolio's Class Z shares
through December 31, 1995 is as follows:
Portfolio One Year Life Inception Date
Income Return 8.43% 7.75% 11/7/94
U.S. Government 16.89 16.67 11/7/94
Equity Income 33.41 27.72 11/7/94
Note that effective October 10, 1994 Class C shares were reclassified as
additional Class A shares with respect to the Equity Income Portfolio and that
effective November 7, 1994 Class C shares were redesignated Class Y shares
with respect to the U.S. Government Securities Portfolio and the Income Return
Account Portfolio. Note further that effective November 7, 1994 then existing
Class B shares of each Portfolio were designated as Class C shares. Each
Portfolio (except the Short-Term U.S. Treasury Securities Portfolio) began to
offer new Class B shares on November 7, 1994.
Each 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 annualyzing the result.
For purposes of the yield calculation, interest income is determined based on
a yield to maturity percentage for each long-term debt obligation in the
Portfolio; income on short-term obligations is based on current payment rate.
The Fund calculates current dividend return for the U.S. Government
Securities Portfolio by analyzing the most recent quarterly distribution from
investment income, including net equalization credits or debits, and dividing
by the net asset value or the maximum public offering price (including sales
charge) on the last day of the period for which current dividend return is
presented. The Fund calculates current dividend return for the Equity Income
Portfolio by dividing the dividends from investment income declared during the
most recent twelve months by the net asset value or the maximum public
offering price (including sales charge) on the last day of the period for
which current dividend return is presented. The Fund calculates current
dividend return for the Income Return Account Portfolio and the Short-Term
U.S. Treasury Securities Portfolio by analyzing the most recent monthly
distribution, including net equalization credits and debits, and dividing by
the net asset value or the maximum public offering price (including sales
charge) on the last day of the period for which current dividend return is
presented. From time to time, the Fund may include a Portfolio's current
dividend return in information furnished to present or prospective
shareholders and in advertisements.
A Portfolio's current dividend return may vary from time to time depending
on market conditions, the composition of its investment portfolio and
operating expenses. These factors and possible differences in the methods
used in calculating current dividend return should be considered when
comparing the Portfolio's current dividend return to yields published for
other investment companies in other investment vehicles. Current dividends
return should also be considered relative to changes in the value of the
Portfolio's shares and to the risks associated with the Portfolio's investment
objective and policies. For example, in comparing current dividend returns
with those offered by Certificates of Deposit ("CDs"), it should be noted that
CDs are insured (up to $100,000) and offer a fixed rate of return. Returns of
the Income Return Account Portfolio and the Short-Term U.S. Treasury
Securities Portfolio may from time to time be compared with returns of money
market funds measured by Donoghue's Money Fund Report, a widely-distributed
publication on money market funds.
Performance information may be useful in evaluating a Portfolio and for
providing a basis for comparison with other financial alternatives. Since the
performance of each Portfolio changes in response to fluctuations in market
conditions, interest rates and Portfolio expenses, no performance quotation
should be considered a representation as to the Portfolio's performance for
any future period.
VALUATION OF SHARES
The net asset value of each Portfolio's Classes of shares will be
determined on any day that the New York Stock Exchange is open. The New York
Stock Exchange is closed on the following holidays: New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
PURCHASE AND REDEMPTION OF SHARES
The Fund has committed itself to pay in cash all requests for redemption
by any shareholder of record limited in amount during any 90-day period to the
lesser of $250,000 or 1% of the net asset value of the Fund at the beginning
of such period. Such commitment is irrevocable without the prior approval of
the Securities and Exchange Commission. Redemptions in excess of the above
limit may be paid in portfolio securities, in cash or any combination or both,
as the Board of Directors may deem advisable; however, payments shall be made
wholly in cash unless the Board of Directors believes that economic conditions
exist that would make such a practice detrimental to the best interests of the
Fund and its remaining shareholders. If a redemption is paid in portfolio
securities, such securities will be valued in accordance with the procedures
described under "Valuation of Shares" in the Prospectus and a shareholder
would incur brokerage expenses if these securities were then converted to
cash.
INVESTMENT MANAGEMENT AGREEMENT AND OTHER SERVICES
Manager
For the fiscal years ended December 31, 1993, 1994 and 1995, the management
fees for each Portfolio were as follows:
Portfolio 1993 1994 1995
U.S. Gov't $2,178,838 $1,987,629 $1,869,768
Income Return 257,413 208,151 125,055
Equity Income 3,654,378 4,079,437 4,093,396
Short-Term U.S. 808,698 735,555 403,161
Pursuant to the Management Agreement, the management fee for the Equity
Income Portfolio is calculated at a rate in accordance with the following
schedule: 0.60% of the first $500 million of average daily net assets; 0.55%
of the next $500 million; and 0.50% of average daily net assets over $1
billion. The management fee for the U.S. Government Securities Portfolio and
the Income Return Account Portfolio is calculated at a rate in accordance with
the following schedule: 0.50% of the first $200 million of aggregate average
daily net assets of the two Portfolios, and 0.40% of the aggregate average
daily net assets of the three Portfolios in excess of $200 million. The
management fee for the Short-Term U.S. Treasury Securities Portfolio is
calculated at the annual rate of 0.45% of such Portfolios average daily net
assets.
The Management Agreement for each of the Fund's Portfolios further
provides that all other expenses not specifically assumed by the Manager under
the Management Agreement on behalf of the Portfolio are borne by the Fund.
Expenses payable by the Fund include, but are not limited to, all charges of
custodians (including sums as custodian and sums for keeping books and for
rendering other services to the Fund) and shareholder servicing agents,
expenses of preparing, printing and distributing all prospectuses, proxy
material, reports and notices to shareholders, all expenses of shareholders'
and directors' meetings. filing fees and expenses relating to the registration
and qualification of the Fund's shares and the Fund under Federal or state
securities laws and maintaining such registrations and qualifications
(including the printing of the Fund's registration statements), fees of
auditors and legal counsel, costs of performing portfolio valuations, out-of-
pocket expenses of directors and fees of directors who are not "interested
persons" as defined in the Act, interest, taxes and governmental fees, fees
and commissions of every kind, expenses of issue, repurchase or redemption of
shares, insurance expense, association membership dues, all other costs
incident to the Fund's existence and extraordinary expenses such as litigation
and indemnification expenses. Direct expenses are charged to each Portfolio;
general corporate expenses are allocated on the basis of relative net assets.
Plan of Distribution
Pursuant to a Plan of Distribution adopted by the Fund on behalf of each
Portfolio under Rule 12b-1 under the Investment Company Act of 1940 (the
"Plan"), Smith Barney incurs the expenses of distributing each Portfolio's
Class A, Class B, Class C and Class Y shares. See "Distributor" in each
Portfolio's applicable Prospectus.
For the year ended December 31, 1995, the table below represents the fees
which have been accrued and/or paid to Smith Barney under the Plans of
Distribution pursuant to Rule 12b-1 for the Fund's Portfolios. The
distribution expenses for 1995 included compensation of Financial Consultants
and printing costs of prospectuses and marketing materials.
Portfolio Class A Class B Class C Class Y Total
U.S. Gov't $914,410 $45,752 $152,207 $N/A $1,112,369
Income Return N/A N/A 9,541 N/A 9,541
Equity Income 1,442,402 23,501 275,007 N/A 1,740,910
Short-Term Treas 313,569 N/A N/A N/A 313,569
During the fiscal years 1993 and 1994 aggregate sales commissions of
$8,756,000 and $1,992,000 respectively, were paid to Smith Barney by the
purchasers of Fund shares. For the fiscal year 1995, aggregate sales
commissions of approximately $364,000 were paid to Smith Barney by the
purchasers of Fund shares. A contingent deferred sales charge ("CDSC") may be
imposed on certain redemptions of Class A, Class B shares and Class C shares.
The amount of the CDSC will depend on the number of years since the
shareholder made the purchase payment from which the amount is being redeemed.
For Class B shares, for the Equity Income Portfolio the maximum CDSC is 5.00%
of redemption proceeds, declining by 1.00% each year after the date of
purchase to zero. For Class B shares of each of the U.S. Government Securities
Portfolio the maximum CDSC is 4.50% of redemption proceeds, declining by 0.50%
the first year after purchase and by 1.00% each year thereafter to zero. A
CDSC of 1.00% is imposed on redemptions of Class A which when combined with
Class A shares offered with a sales charge currently held by an investor equal
or exceed $500,000 in the aggregate and Class C shares if such redemptions
occur within 12 months from the date such investment was made. Any sales
charge imposed on redemptions is paid to the distributor of the Fund shares.
Note that effective October 10, 1994 Class C shares were reclassified as
additional Class A shares with respect to the Equity Income Portfolio and that
effective November 7, 1994 Class C shares were redesignated Class Y shares
with respect to the U.S. Government Securities Portfolio and the Income Return
Account Portfolio. Note further that effective November 7, 1994 Class B shares
of each Portfolio were designated as Class C shares.
Each Portfolio (except the Short-Term U.S. Treasury Securities Portfolio)
began to offer new Class B shares on November 7, 1994.
Brokerage
The Manager is responsible for allocating the Fund's brokerage. Orders
may be directed to any broker including, to the extent and in the manner
permitted by applicable law, Smith Barney. Smith Barney has acted as the
Fund's principal broker on behalf of the Equity Income Portfolio (no
commissionable transactions have been paid to date on behalf of the U.S.
Government Securities Portfolio or the Income Return Account Portfolio, or the
Short-Term U.S. Treasury Securities Portfolio) and has received a substantial
portion of brokerage fees paid by such Portfolios. No Portfolio will deal
with Smith Barney in any transaction in which Smith Barney acts as principal.
The Fund attempts to obtain the most favorable execution of each portfolio
transaction, that is, the best combination of net price and price and prompt
reliable execution. In the opinion of the Manager or the Subadviser, as the
case may be, however, it is not possible to determine in advance that any
particular broker will actually be able to effect the most favorable execution
because, in the context of a constantly changing market, order execution
involves judgments as to price, commission rates, volume, the direction of the
market and the likelihood of future change. In making its decision as to
which broker or brokers are most likely to provide the most favorable
execution, the management of the Fund takes into account the relevant
circumstances. These include, in varying degrees, the size of the order, the
importance of prompt execution, the breadth and trends of the market in the
particular security, anticipated commission rates, the broker's familiarity
with such security including its contacts with possible buyers and sellers and
its level of activity in the security, the possibility of a block transaction
and the general record of the broker for prompt, competent and reliable
service in all aspects of order processing, execution and settlement.
Commissions are negotiated and take into account the difficulty involved
in execution of a transaction, the time it took to conclude, the extent of the
broker's commitment of its own capital, if any, and the price received.
Anticipated commission rates are an important consideration in all trades and
are weighed along with the other relevant factors affecting order execution
set forth above. In allocating brokerage among those brokers who are believed
to be capable of providing equally favorable execution, the Fund takes into
consideration the fact that a particular broker may, in addition to execution
capability, provide other services to the Fund such as research and
statistical information. It is not possible to place a dollar value on such
services nor does their availability reduce the expenses of the Manager, the
Subadviser or Smith Barney in connection with services rendered to other
advisory clients and not all such services may be used in connection with the
Fund.
Shown below are the total brokerage fees paid by the Fund on behalf of the
Equity Income Portfolio during 1993, 1994 and 1995 (the fees for 1993 and
1994 include fees on behalf of the Utility Portfolio which has been merged
into the Smith Barney Utilities Fund). Also shown is the portion paid to Smith
Barney and the portion paid to other brokers for the execution of orders
allocated in consideration of research and statistical services or solely for
their ability to execute the order. During fiscal year 1995, the total amount
of commissionable transactions was $667,359,552; $247,133,082 (37.0%) of which
was directed to Smith Barney and executed by unaffiliated brokers and
$420,226,470 (63.0%) of which was directed to other brokers.
Commissions
To Others For
Execution,
For Execution Only
Research and
Statistical
Total To Smith Barney To Others Services
1993 $1,169,691 $342,492* 29.3% $242,492 20.7% $584,707 50.0%
1994 1,062,407 177,691* 16.7 271,982 25.6 613,334 57.7
1995 896,018 312,572* 34.9 496,622 55.4 86,824 9.7
* Directed to Smith Barney and executed by unaffiliated brokers.
The Board of Directors of the Fund has adopted certain policies and
procedures incorporating the standards of Rule 17e-1 issued by the Securities
and Exchange Commission under the Act which requires that the commissions paid
to Smith Barney must be "reasonable and fair compared to the commission, fee
or other remuneration received or to be received by other brokers in
connection with comparable transactions involving similar securities during a
comparable period of time." The Rule and the policy and procedures also
contain review requirements and require the Manager to furnish reports to the
Board of Directors and to maintain records in connection with such reviews.
CUSTODIAN
Portfolio securities and cash owned by the Fund are held in the custody of
PNC Bank, National Association, 17th and Chestnut Streets, Philadelphia,
Pennsylvania 19103 (foreign securities, if any, will be held in the custody
of the Barclays Bank, PLC)
In the event of the liquidation or dissolution of the Fund, shares of a
Portfolio are entitled to receive the assets belonging to that Portfolio that
are available for distribution and a proportionate distribution, based upon
the relative net assets of the respective Portfolios, of any general assets
not belonging to any particular Portfolio that are available for distribution.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has been
selected as the Fund's independent auditors for its fiscal year ending
December 31, 1996 to exammine and report on the Fund's financial statements
and highlights.
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 or
removal of any director when requested in writing to do so by the record
holders of not less than 10% of the outstanding shares of the Fund. At such a
meeting, a director may be removed after the holders of record of not less
than a majority of the outstanding shares of the Fund have declared that the
director be removed either by declaration in writing or by votes cast in
person or by proxy. Except as set forth above, the directors shall continue
to hold office and may appoint successor directors.
As used in the Prospectus and this Statement of Additional Information, a
"vote of a majority of the outstanding voting securities" means the
affirmative vote of the lesser of (a) more than 50% of the outstanding shares
of the Fund (or the affected Portfolio or class) or (b) 67% or more of such
shares present at a meeting if more than 50% of the outstanding shares of the
Fund (or the affected Portfolio or class) are represented at the meeting in
person or by proxy. A Portfolio or class shall be deemed to be affected by a
matter unless it is clear that the interests of each Portfolio or class in the
matter are identical or that the matter does not affect any interest of the
Portfolio or class. Under the Rule the approval of a management agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a Portfolio only if approved by a "vote of a majority of the
outstanding voting securities" of the Portfolio affected by the matter;
however, the ratification of independent accountants, the election of
directors, and the approval of a distribution agreement that is submitted to
shareholders are not subject to the separate voting requirements and may be
effectively acted upon by a vote of the holders of a majority of all Fund
shares voting without regard to Portfolio. As of March 15, 1996, the Smith
Barney 401(k) Employee Savings Plan, 388 Greenwich Street, New York, New York,
10013, owned of record, but not beneficially, 6,945,952.470 (100%) of the
outstanding Class Z shares of the Equity Income Portfolio; the Smith Barney
401(k) Employee Savings Plan, 388 Greenwich Street, New York, New York, 10013,
owned of record, but not beneficially, 1,583,135.712 (100%) of the outstanding
Class Z shares of the U.S. Government Securities Portfolio; and the Smith
Barney 401(k) Employee Savings Plan, 388 Greenwich Street, New York, New York,
10013, owned of record, but not beneficially, 589,405.696 (100%) of the
outstanding Class Z shares of the Income Return Account Portfolio. The
following table contains a list of shareholders who of record or beneficially
own at least 5% of the outstanding shares of a particular class of shares of a
Portfolio of the Fund:
Equity Income Portfolio
Class Y
Smith Barney Concert Series, Inc.
Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 73,927.493 (68.44%) shares
Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 18,862.330 (17.46%) shares
Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 15,228.410 (14.10%) shares
U.S. Government Securities Portfolio
Class B
The American National Red Cross Blood Services
Northeast Region
Attn. Donald Knowles.
180 Rustcraft Road
Dedham, MA 02026
owned 101,479.375 (12.18%) shares
Class Y
Virginia P. Swindal Tr.
UAD 4-9-92
Virginia P. Swindal Rev Trust
5111 South Nichols Street
Tampa, FL 33611-4132
owned 60,757.000 (12.23%) shares
Frederick L. Swindal Tr.
UAD 4-9-92
Frederick L. Swindal Trust
5111 South Nichols Street
Tampa, FL 33611-4132
owned 28,591.000 (5.76%) shares
Baxter P. Freeze & Anne Freeze TRS
U/A/D 4/24/92
Baxter P. Freeze Charitable Trust
1515 Wickliff Avenue
High Point, NC 27262-4551
owned 77,532.849 (15.61%) shares
Arthur Smith Corporation
c/o Phyllis Smith
4888 Loop Central Drive
Suite 500
Houston, TX 77081-2214
owned 105,560.000 (21.26%) shares
Raul Cuadrado
3250 Riveria Drive
Coral Gables, FL 33134-6477
owned 28,999.119 (5.84%) shares
Charles Dockery
Smith Barney Inc. Rollover Cust
338 Deauville Road
Statesville, NC 28677-7501
owned 38,228.012 (7.70%) shares
Avron Wahl
Smith Barney Inc. Sep Custodian
5 Evergreen Drive
Ocean, NJ 07712
owned 31,133.384 (6.27%) shares
Luby Enterprises Inc.
c/o Joe Luby
1900 E. Girard Place
Englewood, CO 80110
ownewd 26, 489.915 (5.33%) shares
Short-Term U.S. Treasury Securities Portfolio
Class Y shares
Smith Barney Concert Series, Inc.
Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 293,963.105 (56.68%) shares
Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 87,815.497 (16.93%) shares
Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 136,877.849 (26.39%) shares
Income Return Account Portfolio
Class A
Kerry E. Barnett, Receiver
FOR North-West Insurance Co.
c/o Jack Sanguin
350 Morgan Bldg., 720 S.W. Washington
Portland, OR 97205-3500
owned 451,588.896 (27.08%) shares
Class C
Marshall E. Redding / IRA
Smith Barney IRA Cust.
2530 Atlantic Avenue, Suite - A
Long Beach, CA 90806-2741
owned 21,996.538 (9.34%) shares
Brendan T. Cremen
Susan Delany Cremen
c/o Delany
17 Libarary Road
Shankill
County Dublin, Ireland
owned 19,9731.108 (8.48%) shares
Process Supplies And
Accessories Incorporated
Profit Sharing Plan
Attn. Larry E. Wright
P.O. 11025
Knoxville, TN 37939
owned 16,874.713 (7.16%) shares
Iona Trimble Trust
U/A/ 8-18-93
Iona Trimble Rev Trust
HC 72 Box 164
Cookson, OK 74427-9707
owned 12, 861 (5.46%) shares
Class Y
Beatrice S. Wind
Smith Barney IRA Cust.
8101 S.W. 72nd Avenue
Miami, FL 33143-7609
owned 47,098.760 (49.92%) shares
Elizabeth Lynn Schneider &
Theodre J. Vittoria
Beatrice S. Wind Charitable
630 Fifth Avenue
New York, NY 10111
owned 23,227.630 (24.62%) shares
David B. Heyler Jr.
Myrtle Elaine Cornish Trust
FBO South Coast Botanic Garden
Foundation
2049 Century PArk East # 1200
Los Angeles, CA 90067
owned 18,785.201 (19.91) shares
William J. Roberts IRA
Smith Barney Inc. IRA Custodian
2175 Hudson Terrace
Fort Lee, NJ 07024
owned 5,232.646 (5.55%) shares
FINANCIAL STATEMENTS
The following financial information is hereby incorporated by reference to
the indicated pages of the Fund's 1995 Annual Reports to Shareholders, copies
of which are furnished with this Statement of Additional Information.
Page(s) in
Annual Report:
Equity Income U.S.Gov't
Average Annual Total Return 7 3-5
Line Graph Showing Growth of $10,000 Investment 9 6
Schedules of Investments 10-12 7
Statements of Assets and Liabilities
dated December 31, 1995 13 8
Statements of Operations
for the year ended December 31, 1995 14 9
Statements of Changes in Net Assets
for the years ended December 31, 1995 and 1994 15 10
Notes to Financial Statements 16-20 11-17
Financial Highlights 21-22 18-19
Independent Auditors' Report 23 20
Page(s) in
Annual Report:
Income Return
Average Annual Total Return 4-6, 8
Line Graph Showing Growth of $10,000 Investment 7,9
Schedule of Investments 10-11
Statement of Assets and Liabilities
dated December 31, 1995 12
Statement of Operations
for the year ended December 31, 1995 13
Statement of Changes in Net Assets
for the years ended December 31, 1995 and 1994 14-15
Notes to Financial Statements 16-21
Financial Highlights 22-26
Independent Auditors' Report 27-28
APPENDIX - RATINGS OR DEBT OBLIGATIONS
BOND (AND NOTES) RATINGS
Moody's Investors Service, Inc.
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 edged." 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 by 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 which 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 which are rated B generally lack characteristics of the
desirable investment. 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 which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Con (..) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: 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 Corporation
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, CCC, CC, C - Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is 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' indicates the lowest degree of speculation and 'C' the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from 'AA' to 'B' may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
The investor should exercise judgment with respect to such likelihood and
risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds where the underlying deposit collateral is fully insured
by the Federal Savings & Loan Insurance Corp. or the Federal Deposit Insurance
Corp.
Continuance of the rating is contingent upon S&P's receipt of closing
documentation confirming investments and cash flow.
* Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
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 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 changes 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 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 Corporation
A-1 - This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issuers
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.
