<PAGE>
P R O S P E C T U S
SMITH BARNEY FUNDS, INC.
Short-Term
High Grade
Bond Fund
APRIL 28, 1998,
as Amended
JULY 2, 1998
PROSPECTUS BEGINS ON PAGE ONE
LOGO Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
PROSPECTUS
April 28, 1998, as Amended July 2, 1998
Smith Barney Funds, Inc.
Short-Term High Grade Bond Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The Short-Term High Grade Bond Fund (the "Portfolio"), formerly the Short-
Term U.S. Treasury Securities Fund, is one of three investment portfolios that
currently comprise Smith Barney Funds, Inc. (the "Fund"). The Portfolio seeks
current income, preservation of capital and liquidity. The Portfolio seeks to
achieve its objective by investing its assets primarily in "high grade" bonds,
including U.S. government securities and corporate obligations.
This Prospectus sets forth concisely certain information about the Fund and
the Portfolio, including distribution and service fees and expenses, that pro-
spective investors will find helpful in making an investment decision. Invest-
ors are encouraged to read this Prospectus carefully and retain it for future
reference.
Additional information about the Portfolio is contained in a Statement of
Additional Information dated April 28, 1998, as amended July 2, 1998 and as
may hereafter be amended or supplemented from time to time, that is available
upon request and without charge by calling or writing the Fund at the tele-
phone number or address set forth above or by contacting a Smith Barney Finan-
cial Consultant. The Statement of Additional Information has been filed with
the Securities and Exchange Commission (the "SEC") and is incorporated by ref-
erence into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
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FINANCIAL HIGHLIGHTS 7
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 9
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VALUATION OF SHARES 14
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DIVIDENDS, DISTRIBUTIONS AND TAXES 14
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PURCHASE OF SHARES 16
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EXCHANGE PRIVILEGE 18
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REDEMPTION OF SHARES 21
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MINIMUM ACCOUNT SIZE 25
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PERFORMANCE 25
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MANAGEMENT OF THE FUND 26
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DISTRIBUTOR 28
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ADDITIONAL INFORMATION 28
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</TABLE>
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No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund
or Smith Barney Inc. (the "Distributor"). This Prospectus does not constitute
an offer by the Fund or the Distributor to sell or a solicitation of an offer
to buy any of the securities offered hereby in any jurisdiction to any person
to whom it is unlawful to make such offer or solicitation in such jurisdiction.
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2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, management investment company.
The Portfolio's investment objective is to seek current income, preservation
of capital and liquidity. The Portfolio seeks to achieve its objective by
investing its assets primarily in "high grade" bonds, including U.S. govern-
ment securities and corporate obligations. See "Investment Objective and Man-
agement Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers two classes of shares
("Classes") to investors. The general public is offered Class A shares. Class
Y shares are offered only to investors meeting an initial investment minimum
of $15,000,000. See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value without a sales
charge. Class A shares acquired as part of an exchange privilege transaction,
which were originally acquired in one of the other funds of the Smith Barney
Mutual Funds at net asset value subject to a contingent deferred sales charge
("CDSC"), remain subject to the original fund's CDSC while held in the Portfo-
lio. Class A shares are subject to an annual service fee of up to 0.25% and an
annual distribution fee of 0.10% of the average daily net assets of this
Class.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net
asset value with no initial sales charge or CDSC. They are not subject to any
service or distribution fees.
See "Distributor" for a complete description of the service and distribution
fees for Class A shares and "Valuation of Shares," "Dividends, Distributions
and Taxes" and "Exchange Privilege" for other differences between the Classes
of shares.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as other types of participant directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A shares are available as investment alterna-
tives under both of these programs. See "Purchase of Shares -- Smith Barney
401(k) and ExecChoice(TM) Programs."
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
PURCHASE OF SHARES Shares may be purchased through a brokerage account main-
tained with Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
other institutional investors, may purchase shares directly from the Fund
through the Fund's transfer agent, First Data Investors Services Group, Inc.
("First Data"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A shares may open an account by making
an initial investment of at least $1,000 for each account, or $250 for an
individual retirement account ("IRA") or a Self-Employed Retirement Plan.
Investors in Class Y shares may open an account for an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made in either
Class. For participants in retirement plans qualified under Section 403(b)(7)
or Section 401(a) of the Code, the minimum investments requirement for Class A
shares and the subsequent investment requirement for both Class A and Class Y
shares is $25. The minimum investment requirements for purchases of Portfolio
Shares through the Systematic Investment Plan are described below. See "Pur-
chase of Shares."
SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Portfolio shares. The minimum initial
investment requirement for Class A shares and the subsequent investment
requirement for all Classes for Shareholders purchasing shares through the
Systematic Investment Plan on a monthly basis is $25 and on a quarterly basis
is $50. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE PORTFOLIO Mutual Management Corp., formerly Smith Barney
Mutual Funds Management Inc. (the "Manager"), serves as the Portfolio's
investment manager. The Manager is a wholly owned subsidiary of Salomon Smith
Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of
Travelers Group Inc. ("Travelers"), a diversified financial services holding
company engaged, through its subsidiaries, principally in four business seg-
ments: Investment Services, including Asset Management, Consumer Finance Serv-
ices, Life Insurance Services and Property & Casualty Insurance Services. See
"Management of the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respec-
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
tive net asset values next determined, plus any applicable sales charge dif-
ferential. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Portfolio for the prior day gener-
ally is quoted daily in the financial section of most newspapers and is also
available from a Smith Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly. Distributions of net realized capital gains, if any, are paid annual-
ly. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of the
Portfolio will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at net asset value. See "Div-
idends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The value of the Portfo-
lio's investments, and thus the net asset value of the Portfolio's shares,
will fluctuate in response to changes in market and economic conditions, as
well as the financial condition and prospects of issuers in which the Portfo-
lio invests. See "Investment Objective and Management Policies."
THE PORTFOLIO'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Portfolio based, unless otherwise noted, on the Portfolio's operating
expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
SHORT-TERM HIGH GRADE BOND FUND CLASS A CLASS Y
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<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) None None
Maximum CDSC
(as a percentage of original cost or redemption
proceeds, whichever is lower) None* None
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ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.45% 0.45%
12b-1 fees 0.35 --
Other expenses 0.15 0.05
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TOTAL PORTFOLIO OPERATING EXPENSES 0.95% 0.50%
- ----------------------------------------------------------------------
</TABLE>
* Class A shares acquired as part of an exchange privilege transaction, which
were originally acquired in one of the other funds of the Smith Barney
Mutual Funds at net asset value subject to a CDSC, remain subject to the
original fund's CDSC while held in the Portfolio.
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class A shares of the Portfolio purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly. The
fee will vary to a maximum of 1.50%, depending on the amount of assets held
through the Program. For more information, please call your Smith Barney Finan-
cial Consultant.
Smith Barney receives an annual 12b-1 fee of 0.35% of the value of average
daily net assets of Class A shares, consisting of a 0.10% distribution fee and
a service fee of up to 0.25%. "Other expenses" in the above table include fees
for shareholder services, custodial fees, legal and accounting fees, printing
costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Portfolio will bear directly or indirect-
ly. The example assumes payment by the Portfolio of operating expenses at the
levels set forth in the table above. See "Purchase of Shares," "Redemption of
Shares" and "Management of the Fund."
<TABLE>
<CAPTION>
SHORT-TERM HIGH GRADE BOND FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on
a $1,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the
end of each time period:
Class A.................................... $10 $30 $53 $117
Class Y.................................... 5 16 28 63
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</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
6
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP, indepen-
dent auditors, whose report thereon appears in the Portfolio's annual report
dated December 31, 1997. The information set out below should be read in con-
junction with the financial statements and related notes that also appear in
the Fund's annual report, which is incorporated by reference into the State-
ment of Additional Information.
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SHORT-TERM
HIGH GRADE BOND FUND
CLASS A SHARES 1997 1996 1995 1994 1993 1992 1991(A)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $4.05 $4.19 $3.91 $4.16 $4.12 $4.09 $4.01
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
Net investment income 0.22 0.23 0.22 0.18 0.18 0.19 0.03
Net realized and
unrealized gain (loss) 0.04 (0.14) 0.28 (0.25) 0.06 0.04 0.09
- ----------------------------------------------------------------------------------------------
Total Income (Loss)
from Operations 0.26 0.09 0.50 (0.07) 0.24 0.23 0.12
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.22) (0.23) (0.22) (0.18) (0.18) (0.19) (0.03)
Net realized gains -- -- -- -- (0.02) (0.01) (0.01)
- ----------------------------------------------------------------------------------------------
Total Distributions (0.22) (0.23) (0.22) (0.18) (0.20) (0.20) (0.04)
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR $4.09 $4.05 $4.19 $3.91 $4.16 $4.12 $4.09
- ----------------------------------------------------------------------------------------------
TOTAL RETURN 6.73% 2.17% 13.16% (2.15)% 6.01% 5.92% 2.85%++
- ----------------------------------------------------------------------------------------------
NET ASSETS,
END OF YEAR (000S) $71,361 $83,324 $107,099 $88,707 $205,758 $130,280 $93,946
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE
NET ASSETS:
Expenses 0.95% 0.98% 0.98% 0.91% 0.88% 0.91% 0.80%+
Net investment income 5.53 5.62 5.29 4.54 4.40 4.76 4.89+
- ----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 145% 130% 29% 25% 41% 45% 5%
- ----------------------------------------------------------------------------------------------
</TABLE>
(a)For the period from November 11, 1991 (commencement of operations) to
December 31, 1991.
+Annualized.
++Total return is not annualized, as it may not be representative of the
total return for the year.
7
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<S> <C> <C>
SHORT-TERM HIGH GRADE BOND FUND
CLASS Y SHARES 1997 1996(1)
- --------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $4.05 $4.19
- --------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.24 0.22
Net realized gain (loss) 0.04 (0.14)
- --------------------------------------------------------
Total Income From Operations 0.28 0.08
- --------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.24) (0.22)
- --------------------------------------------------------
Total Distributions (0.24) (0.22)
- --------------------------------------------------------
NET ASSET VALUE, END OF YEAR $4.09 $4.05
- --------------------------------------------------------
TOTAL RETURN 7.20% 2.08%++
- --------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $29,786 $32,114
- --------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.50% 0.58%+
Net investment income 6.00 5.99+
- --------------------------------------------------------
PORTFOLIO TURNOVER RATE 145% 130%
- --------------------------------------------------------
</TABLE>
(1) For the period February 7, 1996 (inception date) through December 31, 1996.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
8
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The investment objective of the Portfolio is current income, preservation of
capital and liquidity. There can be no assurance that the investment objective
of the Portfolio will be achieved.
The Portfolio will seek to achieve its objective by investing its assets
primarily in high-grade bonds, including U.S. Government securities and corpo-
rate obligations.
The Portfolio's investments will be limited to debt securities that, at the
time of investment, are considered to be of "investment grade" quality, i.e.
securities rated by a nationally recognized statistical rating organization
("NRSRO") within one of the four highest ratings categories for debt securi-
ties, or securities deemed comparable thereto by MMC. In addition, the Portfo-
lio will invest primarily in the following securities: corporate bonds rated
in one of the three highest categories for debt securities by an NRSRO (such
as A or better by Moody's Investor Service, Inc. ("Moodys") or Standard &
Poor's Ratings Group ("S&P")); U.S. government securities; and negotiable bank
certificates of deposit and bankers' acceptances issued by domestic banks (but
not their foreign branches) having total assets in excess of $1 billion. Obli-
gations rated in the lowest of the top four rating categories (such as Baa by
Moody's or BBB by S&P) may have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weak-
ened capacity to make principal and interest payments, including a greater
possibility of default or bankruptcy of the issuer, than is the case with
higher grade bonds. Subsequent to its purchase by the Portfolio, an issue of
securities may cease to be rated or its rating may be reduced below the mini-
mum required for purchase by the Portfolio. In addition, it is possible that
Moody's, S&P and other NRSROs might not timely change their ratings of a par-
ticular issue to reflect subsequent events. None of these events will require
the sale of the securities by the Portfolio, although MMC will consider these
events in determining whether the Portfolio should continue to hold the secu-
rities.
Changes in the portfolio securities held from time to time may result in
increases or decreases in the Portfolio's current income available for distri-
bution to shareholders. If the Portfolio's expectations of changes in interest
rates or its evaluation of the normal yield relationships between securities
prove to be incorrect, the Portfolio's income, net asset value and potential
capital gain may be reduced or its potential capital loss may be increased. An
increase in interest rates will generally reduce the value of portfolio
investments (and, therefore, the net asset value of the shares of the Portfo-
lio), and a decline in interest rates will generally increase their value.
However, in an effort to minimize fluctuations in market value, the dollar-
weighted average maturity of the Portfolio's securities shall normally not be
less than one nor more than four years, and the average duration of the Port-
folio will typically be no greater than 3.5 years. The maximum remaining matu-
rity of the securities in which the Portfolio shall normally invest will be no
greater than ten
9
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
years. In calculating the maturity of a mortgage-backed security (such as a
GNMA Certificate, described below), the Portfolio will use the average life of
the underlying mortgages in the pool backing the security, which takes into
account the expected rate of prepayments.
The Portfolio may maintain a portion of its assets, which will usually not
exceed 10%, in money market obligations and in cash to provide for payment of
the Portfolio's expenses and to meet redemption requests. It is the policy of
the Portfolio to be as fully invested in debt securities as practicable at all
times. The Portfolio reserves the right, as a defensive measure, to hold money
market securities, including repurchase agreements or cash, in such propor-
tions as, in the opinion of management, prevailing market or economic condi-
tions warrant.
The following describes the Portfolio's investments and investment tech-
niques. Further detail is set forth in the SAI.
U.S. Government Securities. U.S. government securities are obligations of,
or are guaranteed by, the United States government, its agencies or instrumen-
talities. These include bills, certificates of indebtedness, and notes and
bonds issued by the United States Treasury or by agencies or instrumentalities
of the United States government. Some U.S. government securities, such as U.S.
Treasury bills and bonds, are supported by the full faith and credit of the
United States Treasury; others are supported by the right of the issuer to
borrow from the United States Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the United States government to purchase the agency's obligations; still oth-
ers, such as those of the Student Loan Marketing Association and the Federal
Home Loan Mortgage Corporation ("FHLMC") are supported only by the credit of
the instrumentality. Mortgage participation certificates issued by the FHLMC
generally represent ownership interests in a pool of fixed-rate conventional
mortgages. Timely payment of principal and interest on these certificates is
guaranteed solely by the issuer of the certificate. Other investments will
include Government National Mortgage Association Certificates ("GNMA Certifi-
cates"), which are mortgage-backed securities representing part ownership of a
pool or mortgage loans on which timely payment of interest and principal is
guaranteed by the full faith and credit of the United States government. While
the United States government guarantees the payment of principal and interest
on GNMA Certificates, the market value of the securities is not guaranteed and
will fluctuate.
Yankee Obligations. The Portfolio may also invest in Yankee obligations,
including Yankee obligations of foreign banks. Yankee obligations are dollar
denominated obligations issued in the U.S. capital markets by foreign issuers.
Yankee obligations are subject to certain sovereign risks. One such risk is
the possibility that a foreign government might prevent dollar denominated
funds from flowing across its borders. Other risks include: adverse political
and economic develop -
10
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ments in a foreign country; the extent and quality of government regulation of
financial markets and institutions; the imposition of foreign withholding tax-
es; and expropriation or nationalization of foreign issuers.
Repurchase Agreements. The Portfolio may enter into repurchase agreements
secured by U.S. government securities in order to earn income on available
cash. A repurchase agreement arises when the Portfolio acquires a security and
simultaneously agrees to resell it to the vendor at an agreed-upon future date,
normally the next business day. The resale price is greater than the purchase
price and reflects an agreed-upon return unrelated to the coupon rate on the
purchased security. Such transactions afford an opportunity for the Portfolio
to invest temporarily available cash at no market risk. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the resale price. The Portfolio's 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 disposi-
tion costs in connection with liquidating the collateral.
Reverse Repurchase Agreements. The Portfolio may enter into reverse repur-
chase agreements with the same parties with whom it may enter into repurchase
agreements. Under a reverse repurchase agreement, the Portfolio will sell secu-
rities and agree to repurchase them at a particular price at a future date. At
the time the Portfolio enters into a reverse
Zero Coupon Bonds. The Portfolio may invest in zero-coupon debt securities,
which may be subject to greater volatility than other types of debt securities.
Because zero-coupon securities do not make interest payments, such securities
may fall more dramatically when interest rates rise than securities paying out
interest on a current basis. However, when interest rates fall, zero-coupon
securities may rise more rapidly in value because the securities have locked-in
a particular rate of reinvestment that becomes more attractive the further
rates fall.
Short-term Trading. The Portfolio may, to a limited degree, engage in short-
term trading to attempt to take advantage of short-term market variations, or
may dispose of a portfolio security prior to its maturity if it believes such
disposition advisable or it needs to generate cash to satisfy redemptions. As
the portfolio turnover rate increases, so will the Portfolio's dealer mark-ups
and other transaction related expenses. Investors should realize that risk of
loss is inherent in the ownership of any securities and that shares of the
Portfolio will fluctuate with the market value of its securities.
When-Issued, Delayed Delivery and Forward Commitment Investments. The Portfo-
lio may purchase or sell securities on a when-issued, delayed delivery or
11
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
forward commitment basis. Such transactions arise when securities are pur-
chased or sold by the Portfolio with payment and delivery taking place in the
future in order to secure what is considered to be an advantageous price and
yield to the Portfolio at the time of entering into the transaction. Purchas-
ing such securities involves the risk of loss if the value of the securities
declines prior to settlement date. The sale of securities for delayed delivery
involves the risk that the prices available in the market on the delivery date
may be greater than those obtained in the sale transaction. The Portfolio's
custodian will maintain, in a segregated account on behalf of the Portfolio,
cash, U.S. Government securities or other liquid securities having a value
equal to or greater than the Portfolio's purchase commitments; the custodian
will likewise segregate securities sold on a delayed basis.
Borrowing and Lending. The Portfolio may borrow money from banks for tempo-
rary or emergency purposes. Consistent with applicable regulatory require-
ments, the Portfolio's securities may be lent to brokers, dealers and other
financial organizations provided: (a) the loan is secured continuously by col-
lateral consisting of U.S. government securities, cash or cash equivalents
maintained on a daily marked-to-market basis in an amount at least equal to
the current market value of the securities loaned; (b) the Portfolio may at
any time call the loan and obtain the return of the securities loaned; and (c)
the Portfolio will receive any interest or dividends paid on the loaned secu-
rities. The risks in lending portfolio securities, as with other extensions of
secured credit, consists of possible delays in receiving additional collateral
or in the recovery of the securities or possible loss should the borrower fail
financially. Loans will be made to institutions approved by MMC and will not
be made unless, in the judgement of MMC, the consideration to be earned from
such loans would justify the risk.
Interest Rate Futures Contracts and Related Options. The Portfolio may pur-
chase and sell interest rate futures contracts ("futures contracts") and
options thereon as a hedge against changes in interest rates. A futures con-
tract is an agreement between two parties to buy and sell a security for a set
price on a future date. Futures contracts are traded on designated "contracts
markets" which, through their clearing corporations, guarantee performance of
the contracts. Currently, there are futures contracts based on securities such
as long-term Treasury bonds, Treasury notes, GNMA Certificates and three-month
Treasury bills.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into a futures contract for the
sale of securities has an effect similar to the actual sale of securities,
although the sale of the futures contract might be accomplished more easily
and quickly. If interest rates increased and the value of the Portfolio's
securities declined, the value of the Portfolio's futures contracts would
increase, thereby protecting the Portfolio by preventing the net asset value
from declining as much as it otherwise would
12
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
have. Similarly, entering into futures contracts for the purchase of securities
has an effect similar to actual purchase of the underlying securities, but per-
mits the continued holding of securities other than the underlying securities.
For example, if the Manager expects interest rates to decline, the Portfolio
might enter into futures contracts for the purchase of securities, so that it
could gain rapid market exposure that may offset anticipated increases in the
cost of securities it intends to purchase.
The Portfolio may not purchase futures contracts or options thereon if, imme-
diately thereafter, more than 10% of the Portfolio's total assets would be so
invested. In purchasing and selling futures contracts, the Portfolio will com-
ply with rules and interpretations of the Commodity Futures Trading Commission
("CFTC"), under which the Fund is excluded from regulation as a "commodity
pool." CFTC regulations permit use of commodity futures for bona fide hedging
purposes without limitations on the amount of assets committed to margin.
The Portfolio will not engage in transactions involving futures contracts or
options thereon for speculation but only as a hedge against changes in the mar-
ket values of debt securities held, or intended to be purchased, by the Portfo-
lio and where the transactions are appropriate to reduction of the Portfolio's
risks. The Portfolio's futures, and options on futures, transactions will be
entered into for traditional hedging purposes-- that is, futures contracts will
be sold to protect against a decline in the price of securities that the Port-
folio owns, or futures contracts will be purchased to protect the Portfolio
against an increase in the price of securities it is committed to purchase.
There is no assurance that the Portfolio will be able to close out its
futures positions at any time, in which case it would be required to maintain
the margin deposits on the contract. There can be no assurance that hedging
transactions will be successful, as there may be an imperfect correlation (or
no correlation) between movements in the prices of the futures contracts and of
the debt securities being hedged, or price distortions due to market conditions
in the futures markets. Where futures contracts are purchased to hedge against
an increase in the price of securities, but the market declines and the Portfo-
lio does not invest in securities, the Portfolio would realize a loss on the
futures contracts, which would not be offset by a reduction in the price of
securities purchased. Where futures contracts are sold to hedge against a
decline in the price of the Portfolio's securities but the market advances, the
Portfolio would lose part or all of the benefit of the advance due to offset-
ting losses in its futures positions.
The Portfolio's investment objective may be changed only by the "vote of a
majority of the outstanding voting securities" as defined in the 1940 Act.
Except as specifically noted, the Portfolio's investment policies are not fun-
damental and, as such, may be modified by the Board of Directors of the Fund
(the "Board") pro -
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
vided such modification is not prohibited by fundamental investment restric-
tions (which are set forth in the Statement of Additional Information) or
applicable law, and any such change will first be disclosed in the then current
prospectus.
Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Smith Barney, the Fund's
Distributor, depend on the smooth functioning of their computer systems. Many
computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were
encoded and calculated. That failure could have a negative impact on the Fund's
operations, including the handling of securities trades, pricing and account
services. The Manager and Smith Barney have advised the Fund that they have
been reviewing all of their computer systems and actively working on necessary
changes to their systems to prepare for the year 2000 and expect that their
systems will be compliant before that date. In addition, the Manager has been
advised by the Fund's custodian, transfer agent and accounting service agent
that they are also in the process of modifying their systems with the same
goal. There can, however, be no assurance that the Manager, Smith Barney or any
other service provider will be successful, or that interaction with other non-
complying computer systems will not impair Fund services at that time.
VALUATION OF SHARES
The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE on each day that the NYSE is open, by dividing the
Portfolio's net asset values attributable to each Class by the total number of
shares of the Class outstanding.
Securities owned by the Portfolio are valued at the mean between the bid and
asked quotations for those securities or if no quotations are available, then
for securities of similar type, yield and maturity. Short-term investments that
have a maturity of more than 60 days are valued at prices based on market quo-
tations for securities of similar type, yield and maturity. Short-term invest-
ments with a remaining maturity of 60 days or less are valued at amortized cost
where the Board has determined that amortized cost approximates fair value.
Other investments of the Portfolio, if any, are valued at a fair value deter-
mined by the Board in good faith.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Portfolio declares a dividend of substantially all of its net investment
income on each day the NYSE is open. Net investment income includes interest
accrued and discount earned and all short-term realized gains and losses on
portfolio securities and is less premium amortized and expenses accrued. Income
dividends are paid monthly. Distributions of net realized capital gains, if
any, are paid annually.
14
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
If a shareholder does not otherwise instruct, dividends and capital gain dis-
tributions will be reinvested automatically in additional shares of the same
Class at net asset value.
Income dividends and capital gain distributions that are reinvested are cred-
ited to shareholders' accounts in additional shares at the net asset value as
of the close of business on the payment date. A shareholder may change the
option at any time by notifying a Smith Barney Financial Consultant. Accounts
held directly by First Data should notify First Data in writing at least five
business days prior to the payment date to permit the change to be entered in
the shareholder's account. If a shareholder redeems in full an account between
payment dates, all dividends accrued to the date of liquidation will be paid
with the proceeds from the redemption of shares.
The per share dividends on Class A shares of the Portfolio may be lower than
the per share dividends on Class Y shares principally as a result of the serv-
ice and distribution fees applicable to Class A shares. Distributions of capi-
tal gains, if any, will be in the same amount for Class A and Class Y shares.
TAXES
The Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Code to be relieved of Federal income tax on that part of
its net investment income and realized capital gains which it pays out to its
shareholders. To qualify, the Portfolio must meet certain tests, including dis-
tributing at least 90% of its investment company taxable income.
Dividends from net investment income and distributions of realized short-term
capital gains on the sale of securities, whether paid in cash or automatically
invested in additional shares of the Portfolio, are taxable to shareholders of
the Portfolio as ordinary income. The Portfolio's dividends will not qualify
for the dividends received deduction for corporations. Distributions out of net
long-term capital gains (i.e., net long-term capital gains in excess of net
short-term capital losses) are taxable to shareholders as long-term capital
gains, regardless of how long the shareholder has held his or her shares.
Information as to the tax status of dividends paid or deemed paid in each cal-
endar year will be mailed to shareholders as early in the succeeding year as
practical but not later than January 31.
A shareholder's gain or loss on the disposition of Portfolio shares (whether
by redemption, sale or exchange), generally will be a long-term or short-term
gain or loss depending on the length of time the shares had been owned at dis-
position. Losses realized by a shareholder on the disposition of Portfolio
shares owned for six months or less will be treated as a long-term capital loss
to the extent a capital gain dividend had been distributed on such shares.
15
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption,
regardless of whether gain or loss is realized upon the redemption, for share-
holders who do not provide the Fund with a correct taxpayer identification num-
ber (social security or employer identification number). Withholding from tax-
able dividends and capital gain distributions also is required for shareholders
who otherwise are subject to backup withholding. Any tax withheld as a result
of backup withholding does not constitute an additional tax, and may be claimed
as a credit on the shareholders' federal income tax return.
Prior to investing in shares of the Portfolio, investors should consult with
their tax advisors concerning the Federal, state and local tax consequences of
such an investment.
PURCHASE OF SHARES
GENERAL
The Portfolio offers two Classes of shares. Class A shares are sold to
investors without an initial sales charge or CDSC but are subject to annual
service and distribution fees. (In addition, Class A shares acquired as part of
an exchange privilege transaction, which were originally acquired in one of the
other funds of the Smith Barney Mutual Funds at net asset value subject to a
CDSC, remain subject to the original fund's CDSC while held in the Portfolio.)
Class Y shares are sold without an initial sales charge or CDSC or service or
distribution fees, and are available only to investors investing a minimum of
$15,000,000 (except for purchases of Class Y shares by Smith Barney Concert
Allocation Series Inc., for which there is no minimum purchase amount).
Purchases of Portfolio shares must be made through a brokerage account main-
tained with Smith Barney, an Introducing Broker or an investment dealer in the
selling group. In addition, certain investors, including qualified retirement
plans and certain other institutional investors, may purchase shares directly
from the Fund through First Data. When purchasing shares of the Portfolio,
investors must specify whether the purchase is for Class A or Class Y shares.
Smith Barney and other broker/dealers may charge their customers an annual
account maintenance fee in connection with a brokerage account through which an
investor purchases or holds shares. Accounts held directly at First Data are
not subject to a maintenance fee.
Investors in Class A shares may open an account by making an initial invest-
ment of at least $1,000 for each account, or $250 for an IRA or a Self-Employed
Retirement Plan in the Portfolio. Investors in Class Y shares may open an
account by making an initial investment of $15,000,000. Subsequent investments
of at least
16
<PAGE>
PURCHASE OF SHARES (CONTINUED)
$50 may be made for each Class. For participants in retirement plans qualified
under Section 403(b)(7) or Section 401(a) of the Code, the minimum initial
investment requirement for Class A shares and the subsequent investment
requirement for both Classes in the Portfolio is $25. For shareholders purchas-
ing shares of the Portfolio through the Systematic Investment Plan on a monthly
basis, the minimum initial investment requirement for Class A Shares and the
subsequent investment requirement for both Classes is $25. For shareholders
purchasing shares of the Portfolio through the Systematic Investment Plan on a
quarterly basis, the minimum initial investment requirement for Class A shares
and the subsequent requirement for all classes is $50. There are no minimum
investment requirements in Class A shares for employees of Travelers and its
subsidiaries, including Smith Barney, Directors or Trustees of any Travelers-
affiliated funds, including the Smith Barney Mutual Funds, and their spouses
and children. Share certificates are issued only upon a shareholder's written
request to First Data. The Fund reserves the right to waive or change minimums,
to decline any order to purchase its shares and to suspend the offering of
shares from time to time. Shares purchased will be held in the shareholder's
account by the Fund's transfer agent, First Data.
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Portfolio calculates its net asset
value, are priced according to the net asset value determined on that day (the
"trade date"). Orders received by dealers or Introducing Brokers prior to the
close of regular trading on the NYSE on any day the Portfolio calculates its
net asset value, are priced according to the net asset value determined on that
day, provided the order is received by the Fund or Smith Barney prior to Smith
Barney's close of business. For shares purchased through Smith Barney or Intro-
ducing Brokers purchasing through Smith Barney, payment for Portfolio shares is
due on the third business day after the trade date. In all other cases, payment
must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis to charge the regular bank account or other financial institu-
tion indicated by the shareholder to provide systematic additions to the share-
holder's Portfolio account. A shareholder who has insufficient funds to com-
plete the transfer will be charged a fee of up to $25 by Smith Barney or First
Data. The Systematic Investment Plan also authorizes Smith Barney to apply cash
held in the shareholder's Smith Barney brokerage account or redeem the share-
holder's shares of a Smith Barney money market fund to make additions to the
account. Additional information is available from the Fund or a Smith Barney
Financial Consultant.
17
<PAGE>
PURCHASE OF SHARES (CONTINUED)
LETTER OF INTENT
Class Y Shares. A Letter of Intent provides an opportunity for investors to
meet the minimum investment requirement for Class Y shares by aggregating
investments over a 13-month period. Such investors must make an initial minimum
purchase of $5,000,000 in Class Y shares of the Portfolio and agree to purchase
a total of $15,000,000 of Class Y shares of the Portfolio within 13 months from
the date of the Letter. If a total investment of $15,000,000 is not made within
the 13 month period, all Class Y shares purchased to date will be transferred
to Class A shares, where they will be subject to all fees (including a service
fee of up to 0.25% and a distribution fee of 0.10%) and expenses applicable to
the Portfolio's Class A shares. Please contact a Smith Barney Financial Consul-
tant or First Data for further information.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions which are outlined below, are offered to all plans partic-
ipating ("Participating Plans") in these programs.
The Portfolio offers to Participating Plans Class A shares as an investment
choice under the Smith Barney 401(k) and ExecChoice(TM) Programs, provided the
Participating Plan makes an initial investment of $1,000,000 or more of Class A
shares of one or more funds of the Smith Barney Mutual Funds. Class A shares
acquired through the Participating Plans are subject to the same service and/or
dis-
tribution fees as the Class A shares acquired by other investors; however, they
are not subject to any initial sales charge or contingent deferred sales charge
("CDSC").
Participating Plans wishing to acquire shares of the Portfolio through the
Smith Barney 401(k) Program or Smith Barney ExecChoice(TM) Program must pur-
chase such shares directly from First Data. For further information regarding
these Programs, investors should contact a Smith Barney Financial Consultant.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state or
residence. Exchanges of Class A shares are subject to minimum investment
requirements and all shares are subject to the other requirements of the fund
into which exchanges are made and a sales charge differential may apply.
18
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
FUND NAME
Growth Funds
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Natural Resources Fund, Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Taxable Fixed-Income Funds
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Municipal High Income Fund
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
19
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Global Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- Income Portfolio
Money Market Funds
Smith Barney Money Funds, Inc. -- Cash Portfolio
Smith Barney Money Funds, Inc. -- Government Portfolio
*Smith Barney Money Funds, Inc. -- Retirement Portfolio
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Muni Funds -- California Money Market Portfolio
Smith Barney Muni Funds -- New York Money Market Portfolio
- --------------------------------------------------------------------------------
* Available only for exchange with Class A shares of the Portfolio.
Class A Exchanges. Class A shares of the Portfolio may be subject to a "sales
charge differential" upon the exchange of such shares for Class A shares of
another fund of the Smith Barney Mutual Funds sold with a sales charge. The
"sales charge differential" is the sales charge rate applicable to purchases of
shares of the mutual fund being acquired in the exchange. To the extent that
the Portfolio shares relinquished in the exchange are attributable to predeces-
sor shares for which a sales charge was paid, the sales charge differential
does not apply. For purposes of the exchange privilege, shares obtained through
automatic reinvestment of dividends and capital gain distributions are treated
as having paid the same sales charges applicable to the shares in which the
dividends or distributions were paid; however, except in the case of the Smith
Barney 401(k) Program and ExecChoice (TM) Program, if no sales charge was
imposed upon the initial purchase of shares, any shares obtained through auto-
matic reinvestment will be subject to a sales charge differential upon
exchange.
20
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Class Y Exchanges. Class Y shareholders of the Portfolio who wish to
exchange all or a portion of their Class Y shares for Class Y shares in any of
the funds identified above may do so without imposition of any charge.
Additional Information Regarding the Exchange Privilege. Excessive exchange
transactions may be detrimental to the Portfolio's performance and its share-
holders. The Manager may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of the Portfolio's other share-
holders. In this event, the Fund may, at its discretion, decide to limit addi-
tional purchases and/or exchanges by the shareholder. Upon such a determina-
tion, the Fund will provide notice in writing or by telephone to the share-
holder at least 15 days prior to suspending the exchange privilege and during
the 15 day period the shareholder will be required to (a) redeem his or her
shares in the Portfolio or (b) remain invested in the Portfolio or exchange
into any of the funds of the Smith Barney Mutual Funds ordinarily available,
which position the shareholder would be expected to maintain for a significant
period of time. All relevant factors will be considered in determining what
constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined, plus any applicable sales
charge differential. Redemption procedures discussed below are also applicable
for exchanging shares, and exchanges will be made upon receipt of all support-
ing documents in proper form. If the account registration of the shares of the
fund being acquired is identical to the registration of the shares of the fund
exchanged, no signature guarantee is required. A capital gain or loss for tax
purposes will be realized upon the exchange, depending upon the cost or other
basis of shares redeemed. Before exchanging shares, investors should read the
current prospectus describing the shares to be acquired. The Portfolio
reserves the right to modify or discontinue exchange privileges upon 60 days'
prior notice to shareholders.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Portfolio tendered to it,
as described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at no
charge other than any applicable CDSC. Redemption requests received after the
close of regular trading on the NYSE are priced at the net asset value next
determined.
If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemp-
21
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
tion request will be delayed until the Fund's transfer agent receives further
instructions from Smith Barney, or if the shareholder's account is not with
Smith Barney, from the shareholder directly. The redemption proceeds will nor-
mally be remitted on the business day following receipt of proper tender but,
in any event, payment will be made within three business days thereafter,
except on any days on which the NYSE is closed or as permitted under the 1940
Act in extraordinary circumstances. Generally, if the redemption proceeds are
remitted to a Smith Barney brokerage account, these funds will not be invested
for the shareholder's benefit without specific instruction and Smith Barney
will benefit from the use of temporarily uninvested funds. Redemption proceeds
for shares purchased by check, other than a certified or official bank check,
will be remitted upon clearance of the check, which may take up to ten days or
more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Funds, Inc./Short-Term High Grade Bond Fund
Class A or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a written redemption request in excess of
$10,000 or share certificate stock power must be guaranteed by an eligible
guarantor institution, such as a domestic bank, savings and loan institution,
domestic credit union, member bank of the Federal Reserve System or member firm
of a national securities exchange. Written redemption requests of $10,000 or
less do not require a signature guarantee unless more than one such redemption
request is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting doc-
uments for redemptions made by corporations, executors, administrators, trust-
ees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.
22
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
AUTOMATIC CASH WITHDRAWAL PLAN
The Portfolio offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the share-
holder is eligible to receive qualified distributions and has an account value
of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Portfolio. Any applicable CDSC will not be
waived on amounts withdrawn by a shareholder that exceed 1.00% per month of the
value of the shareholder's shares subject to the CDSC at the time the with-
drawal plan commences. (With respect to withdrawal plans in effect prior to
November 7, 1994, any applicable CDSC will be waived on amounts withdrawn that
do not exceed 2.00% per month of the value of the shareholder's shares subject
to the CDSC.) For further information regarding the automatic cash withdrawal
plan, shareholders should contact a Smith Barney Financial Consultant.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Portfolio shares by telephone. To determine if a share-
holder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a sig-
nature guarantee, that will be provided by First Data upon request. (Alterna-
tively, an investor may authorize telephone redemptions on the new account
application with the applicant's signature guarantee when making his/her ini-
tial investment in the Portfolio.)
Redemptions. Redemption requests of up $10,000 of any class or classes of the
Portfolio's shares may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 and 5:00 p.m. (New
York City time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
determined. Redemptions of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedure, the bank receiving the proceeds must be a mem-
ber of the Federal Reserve System or have a correspondent relationship with a
member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from
23
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
which shares were redeemed. In order to change the bank account designated to
receive redemption proceeds, a shareholder must complete a new Telephone/Wire
Authorization Form and, for the protection of the shareholder's assets, will
be required to provide a signature guarantee and certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00
p.m. (New York City time) on any day on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine.
The Fund and its agents will employ procedures designed to verify the identity
of the caller and legitimacy of instructions (for example, a shareholder's
name and account number will be required and phone calls may be recorded). The
Fund reserves the right to suspend, modify or discontinue the telephone
redemption and exchange program or to impose a charge for this service at any
time following at least (7) days prior notice to shareholders.
CONTINGENT DEFERRED SALES CHARGE
Class A shares of the Portfolio acquired as part of an exchange privilege
transaction, which were originally acquired in one of the other Smith Barney
Mutual Funds at net asset value subject to a CDSC, continue to be subject to
any applicable CDSC of the original fund. Therefore, Class A shares that are
redeemed within 12 months of the date of purchase of the original fund may be
subject to a CDSC of 1.00%. The amount of any CDSC will be paid to and
retained by Smith Barney. The CDSC will be assessed based on an amount equal
to the lesser of the cost of the shares being redeemed or their account value
at the time of redemption, and will not be imposed on increases in value above
the initial purchase price in the original fund. In addition, no charge will
be assessed on shares derived from reinvestment of dividends or capital gain
distributions.
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestments of dividends and capital gain distribu-
tions and finally of other shares held by the shareholder for the longest
period of time. The length of time that Class A shares acquired through an
exchange have been held will be calculated from the date that the Class A
shares were initially acquired in one of the other Smith Barney Mutual Funds,
and the amount of shares being redeemed will be considered to represent, as
applicable, the value of capital appreciation or dividend and capital gain
distribution reinvestments in such other funds. For Fed-
24
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
eral income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption.
The CDSC on Class A shares, if any, will be waived on (a) exchanges (see
"Exchange Privilege" above); (b) automatic cash withdrawals in amounts equal
to or less than 1.00% per month of the value of the shareholder's shares at
the time the withdrawal plan commences (see "Automatic Cash Withdrawal Plan")
(provided, however, that automatic cash withdrawals in amounts equal to or
less than 2.00% per month of the value of the shareholder's shares will be
permitted for withdrawal plans that were established prior to November 7,
1994); (c) redemptions of shares within twelve months following the death or
disability of the shareholder; (d) redemption of shares made in connection
with qualified distributions from retirement plans or IRAs upon the attainment
of age 59 1/2; (e) involuntary redemptions; and (f) redemptions of shares to
effect a combination of the Portfolio with any investment company by merger,
acquisition of assets or otherwise. In addition, a shareholder who has
redeemed shares from other funds of the Smith Barney Mutual Funds may, under
certain circumstances, reinvest all or part of the redemption proceeds within
60 days and receive pro rata credit for any CDSC imposed on the prior redemp-
tion.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by First Data in the
case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Portfolio if the aggregate net asset value of the shares held
in the Portfolio account is less than $500. (If a shareholder has more than
one account in this Portfolio, each account must satisfy the minimum account
size.) The Fund, however, will not redeem shares based solely upon market
reductions in net asset value. Before the Fund exercises such right, share-
holders will receive written notice and will be permitted 60 days to bring
accounts up to the minimum to avoid involuntary liquidation.
PERFORMANCE
From time to time the Portfolio may include its total return, average annual
total return and yield in advertisements. In addition, in other types of sales
liter- ature the Portfolio may include its current dividend return. These fig-
ures are computed separately for Class A and Class Y shares of the Portfolio.
These figures
25
<PAGE>
PERFORMANCE (CONTINUED)
are based on historical earnings and are not intended to indicate future per-
formance. Total return is computed for a specified period of time assuming
reinvestment of all income dividends and capital gain distributions on the
reinvestment dates at prices calculated as stated in this Prospectus, then
dividing the value of the investment at the end of the period so calculated by
the initial amount invested and subtracting 100%. The standard average annual
total return, as prescribed by the SEC, is derived from this total return,
which provides the ending redeemable value. Such standard total return infor-
mation may also be accompanied with nonstandard total return information for
differing periods computed in the same manner but without annualizing the
total return. The yield of the Portfolio refers to the net investment income
earned by investments in the Portfolio over a thirty-day period. This net
investment income is then annualized, i.e., the amount of income earned by the
investment during that thirty-day period is assumed to be earned each 30-day
period for twelve periods and is expressed as a percentage of the investments.
The yield quotation is calculated according to a formula prescribed by the SEC
to facilitate comparison with yields quoted by other investment companies. The
Portfolio calculates current dividend return for each Class by annualizing the
most recent distribution and dividing by the net asset value on the last day
of the period for which current dividend return is presented. The Portfolio's
current dividend return for each Class may vary from time to time depending on
market conditions, the composition of its investment portfolio and operating
expenses. These factors and possible differences in the methods used in calcu-
lating current dividend return should be considered when comparing the Portfo-
lio's current return to yields published for other investment companies and
other investment vehicles. The Portfolio may also include comparative perfor-
mance information in advertising or marketing its shares. Such performance
information may include data from Lipper Analytical Services, Inc. and other
financial publications.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Portfolio rests
with the Fund's Board. The Board approves all significant agreements between
the Fund and the companies that furnish services to the Fund and the Portfo-
lio, including agreements with the Fund's distributor, investment manager,
custodian and transfer agent. The day-to-day operations of the Portfolio are
delegated to the Manager. The Statement of Additional Information contains
background information regarding each Director and executive officer of the
Fund.
MANAGER
Mutual Management Corp. manages the day-to-day operations of the Portfolio
pursuant to a management agreement entered into by the Fund on behalf of the
26
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
Portfolio under which the Manager offers the Portfolio advice and assistance
with respect to the acquisition, holding or disposal of securities and recom-
mendations with respect to other aspects and affairs of the Portfolio and
furnishes the Portfolio with bookkeeping, accounting and administrative servic-
es, office space and equipment, and the services of the officers and employees
of the Fund. By written agreement the research and other departments of Smith
Barney and staff furnish the Manager with information, advice and assistance
and are available for consultation on the Fund's Portfolios, thus Smith Barney
may also be considered an investment adviser to the Fund. Smith Barney's serv-
ices are paid for by the Manager on the basis of direct and indirect costs to
Smith Barney for performing such services; there is no charge to the Fund for
such services.
For the Portfolio's last fiscal year, the effective rate of the management
fee was 0.45% of the Portfolio's average net assets and the Portfolio's total
operating expenses were 0.95% and 0.50% of average daily net assets for Class A
shares and Class Y shares, respectively.
The Manager was incorporated on March 12, 1968 under the laws of Delaware. As
of March 31, 1998 the Manager had aggregate assets under management of approxi-
mately $100.5 billion. The Manager, Smith Barney and Holdings are each located
at 388 Greenwich Street, New York, New York 10013. The term "Smith Barney" in
the title of the Fund has been adopted by permission of Smith Barney and is
subject to the right of Smith Barney to elect that the Fund stop using the term
in any form or combination of its name.
PORTFOLIO MANAGEMENT
James Conroy, a Managing Director of Smith Barney, is Portfolio Manager of
the Portfolio and is responsible for managing the day-to-day investment opera-
tions of the Portfolio, including the making of investment decisions since Jan-
uary 1996. Mr. Conroy is also Portfolio Manager of the Fund's U.S. Government
Securities Portfolio. Mr. Conroy has also served as Vice President and Invest-
ment Officer of Smith Barney Managed Governments Fund Inc. since February 1990
and as a Vice President and Investment Officer of Smith Barney Government Secu-
rities Fund since its inception in March 1984.
Management's discussion and analysis, and additional performance information
regarding the Portfolio during the fiscal year ended December 31, 1997 is
included in the Annual Report dated December 31, 1997. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the
27
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
third quarter of 1998, is subject to various regulatory approvals, including
approval by the Federal Reserve Board. The transaction is also subject to
approval by the stockholders of each of Travelers and Citicorp. Upon consumma-
tion of the merger, the surviving corporation would be a bank holding company
subject to regulation under the Bank Holding Company Act of 1956 (the "BHCA"),
the requirements of the Glass-Steagall Act and certain other laws and regula-
tions. Although the effects of the merger of Travelers and Citicorp and compli-
ance with the requirements of the BHCA and the Glass-Steagall Act are still
under review, the Manager does not believe that its compliance with applicable
law following the merger of Travelers and Citicorp will have a material adverse
effect on its ability to continue to provide the Fund with the same level of
investment advisory services that it currently receives.
DISTRIBUTOR
Smith Barney distributes shares of the Portfolio as principal underwriter and
as such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Portfolio
under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a serv-
ice fee with respect to Class A shares of the Portfolio at an annual rate of up
to 0.25% of the average daily net asset value of that Class. Smith Barney is
also paid a distribution fee with respect to Class A shares at the annual rate
of 0.10% of the average daily net asset value attributable to that Class. The
fees are used by Smith Barney to pay its Financial Consultants for servicing
shareholder accounts and to cover expenses primarily intended to result in the
sale of those shares. These expenses include: advertising expenses; the cost of
printing and mailing prospectuses to potential investors; payments to and
expenses of Smith Barney Financial Consultants and other persons who provide
support services in connection with the distribution of shares; interest and/or
carrying charges; and indirect and overhead costs of Smith Barney associated
with the sale of Portfolio shares, including lease, utility, communications and
sales promotion expenses.
Amounts expended by Smith Barney but not reimbursed by the Portfolio in any
year will not be a continuing liability of the Portfolio in subsequent years.
Because the Portfolio reimburses Smith Barney only for actual expenditures,
Smith Barney realizes no profit from the Plan.
ADDITIONAL INFORMATION
The Fund, an open-end, diversified investment company, was incorporated in
Maryland on December 2, 1966. The Fund has an authorized capital of
28
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
2,000,000,000 shares with a par value of $.01 per share. The Fund has
outstanding three series of shares, each representing shares in separate
portfolios, and the Board of Directors may authorize the issuance of additional
classes of shares in the future. The assets of each portfolio are segregated
and separately managed and a shareholder's interest is in the assets and
earnings of the portfolio in which he or she holds shares. Class A and Class Y
shares of the Portfolio represent interests in the assets of the Portfolio and
have identical voting, dividend, liquidation and other rights on the same terms
and conditions except that expenses related to the distribution of each Class
of shares are borne solely by each Class and each Class of shares has exclusive
voting rights with respect to provisions of the Fund's Rule 12b-1 distribution
plan which pertains to that particular Class. Shareholders are entitled to one
vote for each share held and will vote in the aggregate and not by Portfolio
except as otherwise required by the 1940 Act or Maryland law. As described
under "Voting" in the Statement of Additional Information, the Fund ordinarily
will not hold meetings of shareholders annually; however, shareholders have the
right to call a meeting upon a vote of 10% of the Fund's outstanding shares for
the purpose of voting to remove directors. Shareholders will receive assistance
in communicating with other shareholders in connection with the removal of
directors as required by the 1940 Act. Shares do not have cumulative voting
rights or preemptive rights and are fully paid, transferable and nonassessable
when issued for payment as described in this Prospectus.
PNC Bank, National Association, located at 17th and Chestnuts Streets,
Philadelphia, Pennsylvania 19103, serves as custodian of the Portfolio's
investments.
First Data, located at 53 State Street, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the period covered. In an effort to reduce the Fund's printing and
mailing costs, the Fund plans to consolidate the mailing of its semi-annual and
annual reports by household. This consolidation means that a household having
multiple accounts with the identical address of record will receive a single
copy of each report. Shareholders who do not want this consolidation to apply
to their account should contact their Smith Barney Financial Consultant or
First Data.
29
<PAGE>
SMITH BARNEY
-------------------------------
A Member of TravelersGroup LOGO
SMITH BARNEY FUNDS, INC.
SHORT-TERM
HIGH GRADE BOND FUND
388 Greenwich Street
New York, New York 10013
FD 2319 7/98
Part B
April 28, 1998
Amended as of July 2, 1998
SMITH BARNEY FUNDS, INC.
388 Greenwich Street
New York, New York 10013
STATEMENT OF ADDITIONAL INFORMATION
Smith Barney Funds, Inc. (the "Fund") currently consists of three
Portfolios: the Large Cap Value Fund, the U.S. Government Securities
Fund and the Short-Term High Grade Bond Fund (collectively referred to
as "Portfolios" and each individually as a "Portfolio"). The Large Cap
Value Fund had been named the "Equity Income Portfolio" prior to
February 20, 1998; prior to December 11, 1995, it had been named the
"Income and Growth Portfolio." The Short-Term High Grade Bond Fund had
been named Short-Term U.S. Treasury Securities Fund prior to July 2,
1998.
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 3
Investment Restrictions 5
Additional Tax Information 7
IRA and Other Prototype Retirement Plans 9
Performance Information 9
Valuation of Shares 11
Purchase and Redemption of Shares 12
Investment Management Agreement
and Other Services 12
Custodian 15
Independent Auditors 15
Voting 15
Financial Statements 19
Appendix - Ratings of Debt Obligations 20
DIRECTORS AND OFFICERS
DONALD R. FOLEY, Director
Retired, 3668 Freshwater Drive, Jupiter, Florida 33477. Director of ten
investment companies associated with Smith Barney Inc. ("Smith Barney").
Formerly Vice President of Edwin Bird Wilson, Incorporated
(advertising); 76.
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; 66.
*HEATH B. McLENDON, Chairman of the Board, President and Chief Executive
Officer
Managing Director of Smith Barney ; Director of forty-two investment
companies associated with Smith Barney; Chairman and President of the
Manager; Chairman of the Board of Smith Barney Strategy Advisors Inc.
and President of Travelers Investment Adviser, Inc. ("TIA"); prior to
July 1993, Senior Executive Vice President of Shearson Lehman Brothers
and Vice Chairman of the Board of Asset Management; 64.
RODERICK C. RASMUSSEN, Director
Investment Counselor, 9 Cadence Court, Morristown, New Jersey 07960.
Director of ten investment companies associated with Smith Barney.
Formerly Vice President of Dresdner and Company Inc. (investment
counselors); 71.
*BRUCE D. SARGENT, Director and Vice President
Managing Director of Smith Barney and Vice President and Director of
the Manager and of Smith Barney Small Cap Blend Fund, Inc. and Smith
Barney World Funds, Inc.; 54.
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; 67.
LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Smith Barney, Senior Vice President and Treasurer
of forty-two investment companies associated with Smith Barney, and
Director and Senior Vice President of the Manager and TIA; 40.
JAMES E. CONROY, Vice President
Managing Director of Smith Barney and Vice President of four investment
companies associated with Smith Barney; prior to July 1993, Managing
Director of Shearson Lehman Advisors; 46.
THOMAS M. REYNOLDS, Controller
Director of Smith Barney and Controller and Assistant Secretary of
thirty-seven investment companies associated with Smith Barney; 38.
CHRISTINA T. SYDOR, Secretary
Managing Director of Smith Barney, Secretary of forty-two investment
companies associated with Smith Barney; Secretary and General Counsel of
the Manager and TIA; 47.
_________________________
* Designates a Director of the Fund who is an "interested person" of the
Fund as defined in the Investment Company Act of 1940. The business
address of each such Director and of each officer listed above, is 388
Greenwich Street, New York, New York 10013.
On April 3, 1998, directors and officers owned in the aggregate less
than 1% of the outstanding shares of each Portfolio.
The business address of each officer indicated above is 388 Greenwich
Street, New York, New York 10013.
The following table shows the compensation paid by the Fund to each
Director during the Fund's last fiscal year. None of the
officers of the Fund received any compensation from the Fund for such
period. Officers and interested directors of the Fund are
compensated by Smith Barney.
COMPENSATION TABLE
Pension or Number of
Retirement Total Funds for
Aggregate Benefits Accrued Compensation Which Person
Compensation as part of from Fund Serves Within
Name of Person from Fund Fund Expenses Complex Fund Complex
Joseph H. Fleiss+@ $3,362 0 $54,900 10
Donald R. Foley+ 3,462 0 55,400 10
Paul Hardin 3,462 0 73,000 12
Francis P. Martin+ 3,162 0 53,000 10
Heath B. McLendon* 0 0 0 42
Roderick C. Rasmussen 3,462 0 55,400 10
Bruce D. Sargent* 0 0 0 3
John P. Toolan+ 3,462 0 55,400 10
* Designates a Director who is an "interested person".
+ Pursuant to a deferred compensation plan, the indicated Directors have
elected to defer payment of the following amounts of their compensation
from the Fund: Joseph H. Fleiss - $631, Donald R. Foley - $631, Francis
P. Martin- $3,162 and John P. Toolan - $3,462, and the following amounts
of their compensation from the Fund Complex: Joseph H. Fleiss: $21,000,
Donald R. Foley: $21,000, Francis P. Martin: $53,000 and John P. Toolan:
$55,400.
@ Effective January 1, 1998, Mr. Fleiss became a Director Emeritus.
Upon attainment of age 72 the Fund's current Directors may elect to
change to emeritus status. Any directors elected or appointed to the
Board in the future will be required to change to emeritus status upon
attainment of age 80. Directors 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 the Fund's Directors, together with reasonable out-of-
pocket expenses for each meeting attended. For the last Fiscal year,
the total paid to emeritus directors by the Fund was $1,431.
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.
Each Portfolio effects portfolio transactions with a view towards
attaining the investment objectives of the Portfolio 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 may invest in investment grade bonds, i.e. U.S.
Government Obligations or bonds rated, at the time of purchase, in the
four highest ratings categories by a nationally recognized statistical
rating organization ("NRSRO"), such as those rated Aaa, Aa, A and Baa by
Moody's Investors Service, Inc. ("Moody's") or AAA, AA, A and BBB by
Standard & Poor's Corporation ("S&P").
Repurchase and Reverse Repurchase Agreements. Each Portfolio may
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.
Reverse repurchase agreements involve the sale of Fund 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 a Portfolio 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 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. A 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 a Portfolio may
pay reasonable finders, administrative and custodial fees. 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 Large Cap Value Fund may invest in
securities of foreign issuers. Such investments 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 or market value of securities. 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.
The Short-Term High Grade Bond Fund may invest in Yankee obligations,
including Yankee obligations of foreign banks. Yankee obligations are
dollar denominated obligations issued in the U.S. capital markets by
foreign issuers. Yankee obligations are subject to certain sovereign
risks. One such risk is the possibility that a foreign government might
prevent dollar denominated funds from flowing across its borders. Other
risks include: adverse political and economic developments in a foreign
country; the extent and quality of government regulation of financial
markets and institutions; the imposition of foreign withholding taxes;
and expropriation or nationalization of foreign issuers.
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.
Futures Contracts and Related Options. Futures contracts and
options thereon may be undertaken for hedging and other risk management
purposes in an effort to reduce the impact of several kinds of
anticipated price fluctuation risks on the securities held by a
Portfolio. For example, put options on interest rate futures might be
purchased to protect against declines in the market values of debt
securities occasioned by higher interest rates. If these transactions
are successful, the futures or options positions taken by the Portfolio
will rise in value by an amount which approximately offsets the decline
in value of the portion of the securities held by a Portfolio that is
being hedged.
On other occasions, a Portfolio may enter into contracts to purchase the
underlying instrument. For example, futures contracts for the purchase
of debt securities might be entered into to protect against an
anticipated increase in the price of debt securities to be purchased in
the future resulting from decreased interest rates.
A Portfolio will incur brokerage costs whether or not its hedging is
successful and will be required to post and maintain "margin" as a good-
faith deposit against performance of its obligations under futures
contracts and under options written by the Portfolio. Futures and
options positions are marked to the market daily and the Portfolio may
be required to make subsequent "variation" margin payments depending
upon whether its positions increase or decrease in value. In this
context margin payments involve no borrowing on the part of the
Portfolio.
INVESTMENT RESTRICTIONS
Each of the Portfolios is subject to certain restrictions and policies
that are "fundamental," which means that they may not be changed without
a "vote of a majority of the outstanding voting securities" of the
Portfolio, as defined under the Investment Company Act of 1940, as
amended (the "Act") and Rule 18f-2 thereunder (see "Voting"). The
Portfolios are subject to other restrictions and policies that are "non-
fundamental" and which may be changed by the Fund's Board of Directors
without shareholder approval, subject to any applicable disclosure
requirements.
Fundamental Policies - All Portfolios. Without the approval of a
majority of its outstanding voting securities, no Portfolio may:
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 Act and the rules,
regulations and orders thereunder, except as
permitted under the 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 instrumentalities) 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 Portfolio 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 Portfolio 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
Portfolio 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 Portfolio may invest consistent
with its investment objectives and policies; (b) repurchase agreements;
and (c) loans of its portfolio securities, to the fullest extent
permitted under the Act.
6. engage in the business of underwriting securities issued by other
persons, except to the extent that the Portfolio may technically be
deemed to be an underwriter under the Securities Act of 1933, as
amended, in disposing of portfolio securities.
7. for the Large Cap Value Fund and the U.S. Government Securities
Fund: purchase or sell real estate, real estate mortgages, commodities
or commodity contracts, but this restriction shall not prevent the
Portfolio 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.
for the Short-Term High Grade Bond Fund only: purchase or sell
real estate, real estate mortgages, real estate investment trust
securities, 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; or (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).
Nonfundamental Policies. As a nonfundamental policy, no Portfolio may:
1. purchase any securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and sales of
portfolio securities) or sell any securities short (except "against the
box"). For purposes of this restriction, the deposit or payment by the
Portfolio of underlying securities and other assets in escrow and
collateral agreements with respect to initial or maintenance margin in
connection with futures contracts and related options and options on
securities, indexes or similar items is not considered to be the
purchase of a security on margin;
2. invest in securities of another investment company except as
permitted by Section 12(d)(1) of the Act or as part of a merger,
consolidation, or acquisition;
3. purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets would be invested in securities that
are illiquid.
Additional Nonfundamental Policies - Large Cap Value Fund. As a
nonfundamental policy, the Large
Cap Value Fund may not:
1. 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;
2. invest in any company for the purpose of exercising control of
management;
3. 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;
or
4. invest in interests in oil or gas or other mineral exploration or
development programs.
All of the foregoing restrictions which are stated in terms of
percentages will apply at the time an investment is made; a subsequent
increase or decrease in the percentage that may result from changes in
values or net assets will not result in a violation of the restriction.
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 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, therefore, net long-term and short-term capital gains, net
income and operating expenses will be determined separately for each
Portfolio.
Each Portfolio 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; and (ii) diversify its
holdings so that, at the end of each quarter of its taxable year, the
following two conditions are met: (a) at least 50% of the market value
of the Portfolio's total assets is represented by cash, U.S. Government
securities, securities of other regulated investment companies and other
securities, with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the Portfolio's assets and
not more than 10% of the outstanding voting securities of such issuer;
and (b) not more than 25% of the value of the Portfolio's assets is
invested in securities of any one issuer (other than U.S. Government
securities or securities of other regulated investment companies). The
diversification requirements described above may limit 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, 1997 the unused capital loss carryovers of the Fund were
approximately as follows: Short-Term High Grade Bond Fund: $6,900,000.
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)
2001 2002 2003
2004
Short-Term High Grade Bond Fund --- 4,805 1,124
$971
Distributions
If the net asset value of shares of a Portfolio is reduced below a
shareholder's cost as a result of a distribution by the Portfolio, such
distribution will be taxable even though it represents a return of
invested capital. All dividends are taxable to the shareholder whether
reinvested in additional shares or received in cash. Shareholders
receiving distributions in the form of additional shares will have a
cost basis for Federal income tax purposes in each share received equal
to the net asset value of a share of the Fund on the reinvestment date.
Shareholders will be notified annually as to the Federal tax status of
distributions.
Investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares
purchased at that time includes the amount of the forthcoming
distribution but the distribution generally would be taxable to the
investor.
Redemption of Shares
Upon redemption, sale or exchange of his shares, a shareholder
will realize a taxable gain or loss depending upon his basis for his
shares. Such gain or loss will be treated as capital gain or loss if
the shares are capital assets in the shareholder's hands. Such gain or
loss generally will be long-term or short-term depending upon the
shareholder's holding period for the shares (for individuals, the
maximum tax rate for long-term capital gains is 28%, or 20% if the
shares have been held for more than 18 months).
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
distributions received by the shareholder with respect to such shares.
Additionally, any loss realized on a redemption or exchange of Portfolio
shares will be disallowed to the extent the shares disposed of are
replaced within a period of 61 days beginning 30 days before and ending
30 days after such disposition, such as pursuant to reinvestment of
dividends in Portfolio shares.
Options and Futures
Certain options, futures contracts and forward contracts in which
the Portfolios may invest are "section 1256 contracts." Gains or
losses on 1256 contracts generally are considered 60% long-term and 40%
short-term capital gains or losses ("60/40"); however, foreign
currency gains or losses arising from certain section 1256 contracts may
be treated as ordinary income or loss. Also, section 1256 contracts
held by a Portfolio at the end of each taxable year are "marked-to-
market" with the result that unrealized gains or losses are treated as
though they were realized and the resulting gain or loss is treated as
60/40 gain or loss as ordinary income or loss, as the case may be.
These contracts also may be marked-to-market for purposes of the 4%
excise tax under rules prescribed in the Code.
Some of the hedging transactions undertaken by the Portfolios may
will result in "straddles" for Federal income tax purposes. Straddles
are defined to include "offsetting positions" in actively traded
personal property. It is not entirely clear under what circumstances
one investment will be treated as offsetting another investment. In
general, positions are offsetting if there is a substantial diminution
in the risk of loss from holding one position by reason of holding one
or more other positions. The straddle rules may affect the character of
gains (or losses) realized on straddle positions. In addition, losses
realized by a Portfolio on straddle positions may be deferred under the
straddle rules, rather than being taken into account in calculating the
taxable income for the taxable year in which losses are realized.
Hedging transactions may increase the amount of short-term capital gain
realized by a Portfolio which is taxed as ordinary income when
distributed to the shareholders. The Fund may make one or more of the
elections available under the Code which are applicable to straddles.
If a Fund makes any of the elections, the amount, character and timing
of the recognition of gains or losses from the affected straddle
positions will be determined under rules that vary according to the
election(s) made.
General
The foregoing discussion relates only to Federal income tax law as
applicable to United States citizens. Distributions by the Funds also
may be subject to state, local and foreign taxes, and their treatment
under state, local and foreign income tax laws may differ from the
Federal income tax treatment. The Portfolios' dividends, to the extent
they consist of interest from obligations of the United States
government and certain of its agencies and instrumentalities, may be
exempt from state and local income taxes in some jurisdictions. The
Company intends to advise shareholders of the proportion of that Fund's
dividends which are derived from such interest. Shareholders should
consult their tax advisors with respect to particular questions of
Federal, state, local and foreign taxation.
IRA AND OTHER PROTOTYPE RETIREMENT PLANS
Copies of the following plans with custody or trust agreements
have been approved by the Internal Revenue Service and are available
from the Fund or Smith Barney; investors should consult with their own
tax or retirement planning advisors prior to the establishment of a
plan.
IRA, Rollover IRA and Simplified Employee Pension - IRA
The Small Business Job Protection Act of 1996 changed the
eligibility requirements for participants in Individual Retirement
Accounts ("IRAs"). Under these new provisions, if you or your spouse
have earned income, each of you may establish an IRA and make maximum
annual contributions equal to the lesser of earned income or $2,000. As
a result of this legislation, married couples where one spouse is non-
working may now contribute a total of $4,000 annually to their IRAs.
The Taxpayer Relief Act of 1997 has changed the requirements for
determining whether or not you are eligible to make a deductible IRA
contribution. Under the new rules effective January 1, 1998, if you are
considered an active participant in an employer-sponsored retirement
plan, you may still be eligible for a full or partial deduction depending
upon your combined adjusted gross income ("AGI"). For married couples
filing jointly, a full deduction is permitted if your combined AGI is
$50,000 or less ($30,000 for unmarried individuals); a partial deduction
will be allowed when AGI is between $50,000-$60,000 ($30,000-$40,000 for
an unmarried individual); and no deduction when AGI is $60,000 ($40,000
for an unmarried individual). However, if you are married and your
spouse is covered by a employer-sponsored retirement plan, but you are
not, you will be eligible for a full deduction if your combined AGI is
$150,000 or less. A partial deduction is permitted if your combined AGI
is between $150,000-$160,000 and no deduction is permitted after
$160,000.
A Rollover IRA is available to defer taxes on lump sum payments and
other qualifying rollover amounts (no maximum) received from another
retirement plan.
An employer who has established a Simplified Employee Pension - IRA
("SEP-IRA") on behalf of eligible employees may make a maximum annual
contribution to each participant's account of 15% (up to $24,000) of each
participant's compensation. Compensation is capped at $160,000 for 1998.
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, and for the
life of the Portfolio (except for the Large Cap Value Fund and U.S.
Government Securities Fund which displays performance data for ten
years), ended December 31, 1997 is as follows:
One Year Five Years Life Inception Date
Large Cap Value 21.45% 15.87% 14.22%*
5/18/67
U.S. Government 4.77 5.88 8.56*
10/9/84
Short-Term High Grade 6.73 5.20 5.67
11/11/91
* Representative of ten years, not life of the Large Cap Value Fund and
the U.S. Government Securities Fund.
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, 1997 is as follows:
Portfolio One Year Life Inception Date
Large Cap Value 21.83% 22.29% 11/7/94
U.S. Government 4.62 9.12 11/7/94
Each Portfolio's average annual total return with respect to its Class C
Shares for the one-year period, five-year period and for the life of
such Portfolio's Class C shares through December 31, 1997 is as follows:
Portfolio One Year Five Years Life Inception
Date
Large Cap Value 25.85% 16.18% 16.02%
12/2/92
U.S. Government 8.18 6.28 6.40
12/2/92
Each Portfolio's average annual total return with respect to its Class Y
Shares for the one-year period and for the life of such Portfolio's
Class Y shares through December 31, 1997 is as follows:
Portfolio One Year Life Inception Date
Large Cap Value 28.21% 21.48%
2/07/96
U.S. Government 10.00 6.91 1/12/93
Short-Term High Grade 7.20 4.87
2/07/96
Each Portfolio's average annual total return with respect to its Class Z
Shares (where applicable) for the one-year period and for the life of
such Portfolio's Class Z shares through December 31, 1997 is as follows:
Portfolio One Year Life Inception Date
Large Cap Value 28.27% 24.18%
11/07/94
U.S. Government 9.98 10.50 11/07/94
Note that effective October 10, 1994 Class C shares were
reclassified as additional Class A shares with respect to the Large Cap
Value Fund and that effective November 7, 1994 Class C shares were
redesignated Class Y shares with respect to the U.S. Government
Securities Fund. In addition, 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 High Grade Bond Fund)
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
annualizing 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 Fund 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 Large Cap Value Fund by
dividing the dividends from investment income declared during the most
recent twelve months by the net asset value or the maximum public
offering price (including sales charge) on the last day of the period
for which current dividend return is presented. The Fund calculates
current dividend return for the Short-Term High Grade Bond Fund 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.
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, Martin Luther King, Jr. 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, 1995, 1996 and 1997, the
investment management fees paid by each Portfolio were as follows:
Portfolio 1995 1996 1997
U.S. Government $1,869,768 $1,770,235 $ 1,571,535
Large Cap Value 4,093,396 4,622,817 5,536,984
Short-Term High Grade 403,161 479,559 538,831
Pursuant to the Management Agreement, the management fee for the
Large Cap Value Fund 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 Fund 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 Portfolio, and 0.40% of the aggregate average daily net
assets of the Portfolio in excess of $200 million. The management fee
for the Short-Term High Grade Bond Fund is calculated at the annual rate
of 0.45% of such Portfolio's average daily net assets.
The Management Agreement for each of the 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 Portfolio or the Fund. Expenses payable by the Portfolio or 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 among the various
Portfolios 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, 1997, the table below represents
the fees which have been accrued and/or paid to Smith Barney under the
Plans of Distribution pursuant to Rule 12b-1 for the Portfolios. The
distribution expenses for 1997 included compensation of Financial
Consultants and printing costs of prospectuses and marketing materials.
Portfolio Class A Class B Class C
Class Y Total
Large Cap Value $1,785,010 $212,156 $375,116 N/A
$2,372.282
U.S. Government 720,768 88,018 106,129 N/A
914,915
Short-Term High Grade 272,848 N/A N/A
N/A 272,848
For the fiscal years 1995, 1996 and 1997, aggregate sales
commissions of approximately $364,000, $689,000 and $608,000,
respectively, were paid to Smith Barney by the purchasers of Fund
shares. As set forth in the Propectus, 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 Large
Cap Value Fund the maximum CDSC is 5.00% of redemption proceeds,
declining by 1.00% each year after the date of purchase to zero. For
Class B shares of the U.S. Government Securities Fund the maximum CDSC
is 4.50% of redemption proceeds, declining by 0.50% the first year after
purchase and by 1.00% each year thereafter to zero. A CDSC of 1.00% is
imposed on redemptions of Class A shares 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.
Portfolio Transactions
Large Cap Value Fund - Brokerage
The Manager is responsible for allocating the Large Cap Value
Fund's brokerage transactions in equity securities. 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 Large Cap Value Fund and
has received a substantial portion of brokerage fees paid by such
Portfolio. The Portfolio will not 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,
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 Manager 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 Manager takes into
consideration the fact that a particular broker may, in addition to
execution capability, provide other services to the Portfolio 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 or Smith Barney in connection with services
rendered to other advisory clients and not all such services may be used
in connection with the Portfolio.
Shown below are the total brokerage fees paid by the Large Cap
Value Fund during 1995, 1996 and 1997. Also shown is the portion paid to
Smith Barney and the portion paid to other brokers for the execution of
orders allocated in consideration of research and statistical services
or solely for their ability to execute the order. During fiscal year
1997, the total amount of commissionable transactions was $750,403,262;
$230,114,604 (31%) of which was directed to Smith Barney and executed by
unaffiliated brokers and $520,288,658 (69%) of which was directed to
other brokers.
To Others For
For Execution Only Execution,
Research and Statistical
Total To Smith Barney To Others
Services
1995........ $896,018 $312,572* 34.9% $496,622 55.4% $86,824 9.7%
1996........ 956,742 441,702* 46.2 493,445 51.6 21,595 2.2
1997 892,140 279,132* 31.3 572,298 64.140,710 4.6
_________________
*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.
All Portfolios - Other Portfolio Transactions
The Fund's fixed income securities ordinarily are purchased from
and sold to parties acting as either principal or agent. Newly issued
securities ordinarily are purchased directly from the issuer or from an
underwriter; other purchases and sales usually are placed with those
dealers from which the Manager determines that the best execution will
be obtained. (Newly issued U.S. Treasury securities would be purchased
through the auction process.) Usually no brokerage commissions, as
such, are paid for purchases and sales of fixed-income securities, which
are typically undertaken through principal transactions, although the
price paid usually includes compensation to the dealer acting in the
form of a spread or mark-up. The prices paid to underwriters of newly
issued securities (other than U.S. Treasury Securities) typically
include a concession paid by the issuer to the underwriter, and
purchasers of after-market fixed-income securities from dealers
ordinarily are executed at a price between the bid and asked price.
Transactions in fixed-income securities are allocated to various
broker-dealers by the Investment Manager in its best judgment. The
primary consideration is prompt and effective execution of orders at the
most favorable price. Subject to that primary consideration, broker-
dealers may be selected for research, statistical or other services to
enable the Investment Manager to supplement its own research and
analysis with the views and information of other securities firms. The
Fund may utilize Smith Barney Inc. ("Smith Barney") as a commodities
broker in connection with entering into options and futures contracts.
Research services furnished by broker-dealers through which the
Fund effects securities transactions may be used by the Manager in
managing other investment funds and, conversely, research services
furnished to the Manager by broker-dealers in connection with other
funds the Manager advises may be used by the Manager in advising the
Fund. Although it is not possible to place a dollar value on these
services, the Manager is of the view that the receipt of the services
should not reduce the overall costs of its research services.
Investment decisions for each Portfolio are made independently
from those of other Portfolios, and other investment companies managed
by the Manager. If those investment companies are prepared to invest
in, or desire to dispose of, investments at the same time as the Fund,
however, available investments or opportunities for sales will be
allocated equitably to each client of the Investment Manager. In some
cases, this procedure may adversely affect the size of the position
obtained for or disposed of by the Fund or the price paid or received by
the Fund.
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, 1998 to examine 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.
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 April 3, 1998, 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:
Large Cap Value Fund
Class Y
Smith Barney Concert Allocation Series, Inc.
Growth Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 3,918,422.686 # (54.64%) shares
Smith Barney Concert Allocation Series, Inc.
High Growth Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 1,566,837.698 (21.85%) shares
Smith Barney Concert Allocation Series, Inc.
Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 1,136,415.762 (15.85%) shares
U.S. Government Securities Fund
Class Y
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 (28.13%) shares
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 (22.05%) shares
Avron Wahl
Smith Barney Inc. Sep Custodian
5 Evergreen Drive
Ocean, NJ 07712
owned 34,728.657 (12.60%) shares
Luby Enterprises Inc.
c/o Joe Luby
1900 E. Girard Place
Englewood, CO 80110
owned 30,511.892 (11.07%) 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 (10.37%) shares
E. J. Browder
And Mrs. Peggy J. Browder JTWROS
2208 Kristin Lane
Bartlesville, OK 74006-6313
Owned 23,580.247 # (8.56%)shares
Short-Term High Grade Bond Fund
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 4,734,806.272 (56.42%) shares
Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 1,467,214.159 (17.48%) shares
Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 1,254,412.306 (14.95%) shares
Smith Barney Concert Series, Inc.
Select Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 647,064.207 (7.71%) shares
FINANCIAL STATEMENTS
The following financial information is hereby incorporated by
reference to the indicated pages of the Fund's 1997 Annual Reports to
Shareholders, copies of which are furnished with this Statement of
Additional Information.
Page(s) in
Annual Report:
Large Cap Value U.S.Gov't
Average Annual Total Return 5 6
Line Graph Showing Growth of $10,000 Investment 6-7 7
Schedules of Investments 8-10 8
Statements of Assets and Liabilities
dated December 31, 1997 11 9
Statements of Operations
for the year ended December 31, 1997 12 10
Statements of Changes in Net Assets
for the years ended December 31, 1997 and 1996 13 11
Notes to Financial Statements 14-17 12-16
Financial Highlights 18-22 17-19
Independent Auditors' Report 23 20
Page(s) in
Annual Report:
Short-Term
Average Annual Total Return 4
Line Graph Showing Growth of $10,000 Investment 5
Schedule of Investments 6
Statement of Assets and Liabilities
dated December 31, 1997 7
Statement of Operations
for the year ended December 31, 1997 8
Statement of Changes in Net Assets
for the years ended December 31, 1997 and 1996 9
Notes to Financial Statements 10-13
Financial Highlights 14
Independent Auditors' Report 15
APPENDIX - RATINGS FOR 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 Ratings Group
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 Ratings Group
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.
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