April 30, 1999, amended as of May 11, 1999
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 the "portfolios" and 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 ("SAI") 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 associated
prospectuses, each dated April 30, 1999 as amended and/or supplemented
from time to time. Additional information about each portfolio's
investments is available in the portfolios' annual and semi-annual
reports to shareholders. Each portfolio's prospectus and report may be
obtained from the fund at the address listed above or by calling (800)
421-2010, or from a Salomon Smith Barney Financial Consultant.
TABLE OF CONTENTS PAGE
Investment Policies 2
Investment Restrictions 7
Directors and Officers 9
Additional Information Concerning Taxes 11
IRA and Other Prototype Retirement Plans 14
Performance Information 15
Valuation of Shares 17
Purchase and Redemption of Shares 17
Investment Management Agreement
and Other Services 25
Additional Information about the Manager 30
Custodian 30
Independent Auditors 30
Additional Information about the fund 30
Voting 31
Financial Statements 32
Appendix - Ratings of Debt Obligations 33
INVESTMENT POLICIES
The prospectus describes the investment objectives and policies of
each portfolio. The following discussion supplements the description of
the portfolio's investment policies in the prospectus. The investment
objectives and policies of each portfolio are non-fundamental and thus
may be modified by the Directors of the fund provided that any
modification is not prohibited by the portfolios' investment
restrictions or applicable laws. Each portfolio's investment adviser is
SSBC Fund Management Inc. ("SSBC" or the "manager").
Large Cap Value Fund. The portfolio invests primarily in common
stocks offering a current return from dividends and will also normally
include some interest-paying debt obligations (such as U.S. government
obligations, investment grade bonds and debentures) and high quality
short-term debt obligations (such as commercial paper and repurchase
agreements collateralized by U.S. government securities with
broker/dealers or other financial institutions, including the fund's
custodian). Under normal market conditions, at least 65% of the
portfolio's assets will be invested in common stocks of companies that
have a market capitalization of at least $5 billion at the time of
investment. The portfolio may also purchase preferred stocks and
convertible securities. From time to time, a portion of the assets may
be invested in non-dividend paying stocks. The portfolio may make
investments in foreign securities, although the manager currently
intends to limit such investments to 5% of the portfolio's assets
(including European, Continental and Global Depositary Receipts). An
additional 10% of its assets may be invested in sponsored American
Depositary Receipts representing shares in foreign securities that are
traded in U.S. securities markets.
The portfolio may also invest in options (including swaps, caps,
collars and floors), unseasoned issuers, REITS and other investment
companies and may borrow money as a temporary measure for extraordinary
or emergency purposes.
U.S. Government Securities Fund. The portfolio invests primarily
in Government National Mortgage Association ("GNMA") Certificates of the
modified pass-through type and in mortgage participation certificates
issued by the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC") and will also normally
include other "U.S. government obligations," i.e., obligations issued or
guaranteed by the United States, its agencies or instrumentalities.
Under normal market conditions, the portfolio will seek to invest
substantially all of its assets - and the portfolio will invest not less
than 65% of its assets - in such securities. As a hedge against changes
in interest rates, the portfolio may enter into agreements with dealers
in GNMA Certificates to purchase or sell an agreed-upon principal amount
of GNMA Certificates at a specified price on a certain date; provided,
however, that settlement occurs within 120 days of the trade date.
Short-Term High Grade Bond Fund. The portfolio will seek to
achieve its objective by investing its assets primarily in high-grade
bonds, including U.S. Government securities and corporate 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 securities, or securities deemed comparable thereto
by the manager. In addition, the portfolio 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 Rating
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.
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 portfolio will typically be no greater than 3.5 years.
The maximum remaining maturity of the securities in which the portfolio
shall normally invest will be no greater than ten 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 proportions as, in the
opinion of management, prevailing market or economic conditions warrant.
Credit Quality. Each portfolio may invest in investment grade
bonds, i.e. U.S. government securities or bonds rated, at the time of
purchase, in the four highest ratings categories by an NRSRO, such as
those rated Aaa, Aa, A and Baa by Moody's or AAA, AA, A and BBB by S&P.
Obligations 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 weakened 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 a portfolio, an issue of securities may cease to be rated or
its rating may be reduced below the minimum 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 particular issue to
reflect subsequent events. None of these events will require the sale
of the securities by a portfolio, although the manager will consider
these events in determining whether the portfolio should continue to
hold the securities.
U.S. Government Securities. U.S. government securities are
obligations of, or are guaranteed by, the United States government, its
agencies or instrumentalities. These include bills, certificates of
indebtedness, and notes and bonds issued by the U.S. treasury or by
agencies or instrumentalities of the U.S. government. Some U.S.
government securities, such as U.S. treasury bills and bonds, are
supported by the full faith and credit of the U.S. treasury; others are
supported by the right of the issuer to borrow from the United States
treasury; others, such as those of FNMA, are supported by the
discretionary authority of the U.S. government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association and the FHLMC are supported only by the credit of the
instrumentality. GNMA is a government-chartered corporation owned
entirely by private stockholders, which is subject to general regulation
by the Secretary of Housing and Urban Development. FHLMC is a U.S.
government-created entity controlled by the Federal Home Loan Banks.
GNMA Securities. GNMA Certificates are debt securities issued by
a mortgage banker or other mortgagee representing an interest in a pool
of mortgages insured by the Federal Housing Administration or the
Farmers Home Administration or guaranteed by the Veterans
Administration. The National Housing Act provides that the full faith
and credit of the United States is pledged to the timely payment of
principal and interest by GNMA of amounts due on these GNMA
Certificates. Scheduled payments of principal and interest are made
each month to holders of GNMA Certificates (such as the U.S. Government
Securities portfolio). Unscheduled prepayments of mortgages are passed
through to holders of GNMA Certificates at par with the regular monthly
payments of principal and interest, which have the effect of reducing
future payments on such Certificates and either increasing or decreasing
the yield realized by the portfolio, depending on the cost of the
underlying Certificate and its market value at the time of prepayment.
The income portions of monthly payments received by these portfolios
will be included in their net investment income. The average life of
GNMA Certificates varies with the maturities of the underlying mortgages
(with maximum maturities of 30 years) but is likely to be substantially
less than the original maturity of the mortgage pools underlying the
securities as the result of prepayments, refinancing of such mortgages
or foreclosure.
GNMA Certificates have historically involved no credit risk,
however, due to fluctuations in interest rates, the market value of such
securities will vary during the period of a shareholder's investment in
the U.S. Government Securities portfolio. Prepayments and scheduled
payments of principal will be reinvested by the U.S. Government
Securities portfolio in then available GNMA Certificates which may bear
interest at a rate lower or higher than the Certificate from which the
payment was received. As with other debt securities, the price of GNMA
Certificates is likely to decrease in times of rising interest rates;
however, in periods of falling interest rates the potential for
prepayment may reduce the general upward price increase of GNMA
Certificates that might otherwise occur. If a portfolio buys GNMA
Certificates at a premium, mortgage foreclosures or prepayments may
result in a loss to the portfolio of up to the amount of the premium
paid since only timely payment of principal and interest is guaranteed.
Zero Coupon Bonds. The U.S. Government Securities Fund and Short-
Term High Grade Bond Fund may each 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.
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 a portfolio's
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
account 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 securities 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.
Short-term Trading. U.S. Government Securities Fund and Short-
Term High Grade Bond Fund may, to a limited degree, each 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 a 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 a portfolio will
fluctuate with the market value of its securities.
When-Issued, Delayed Delivery and Forward Commitment Investments.
Each portfolio may purchase or sell securities on a when-issued, delayed
delivery or forward commitment basis. Such transactions arise when
securities are purchased or sold by the portfolio with payment and
delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the portfolio at the
time of entering into the transaction. Purchasing 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 that have a value equal to or greater than the
portfolio's purchase commitments; the custodian will likewise segregate
securities sold on a delayed basis.
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 or other foreign 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. A futures contract 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. 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 a 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.
The U.S. Government Securities Fund and Short-Term High Grade Bond
Fund may purchase and sell interest rate futures contracts ("futures
contracts") and options thereon as a hedge against changes in interest
rates. Currently, there are interest rate 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 a 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 have. Similarly, entering into futures contracts
for the purchase of securities has an effect similar to actual purchase
of the underlying securities, but permits the continued holding of
securities other than the underlying securities. For example, if the
manager expects interest rates to decline, a 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 U.S. Government Securities Fund also may purchase and sell
listed put and call options on futures contracts. An option on a
futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a
put), at a specified exercise price at any time during the option
period. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference
between the current market price of the futures contract and the
exercise price of the option. The U.S. Government Securities Fund may
purchase put options on interest rate futures contracts in lieu of, and
for the same purpose as, the sale of a futures contract. It also may
purchase such put options in order to hedge a long position in the
underlying futures contract in the same manner as it purchases
"protective puts" on securities. The purchase of call options on
interest rate futures contracts is intended to serve the same purpose as
the actual purchase of the futures contract, and the portfolio will set
aside cash or cash equivalents sufficient to purchase the amount of
portfolio securities represented by the underlying futures contracts.
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.
The Short-Term High Grade Bond Fund and U.S. Government Securities
Fund may not purchase futures contracts or options thereon if,
immediately thereafter, more than 10% and 30%, respectively, of their
total assets would be so invested. In purchasing and selling futures
contracts, each portfolio will comply 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.
Neither the U.S. Government Securities Fund nor Short-Term High
Grade Bond Fund will engage in transactions involving futures contracts
or options thereon for speculation but only as a hedge against changes
in the market values of debt securities held, or intended to be
purchased, by the portfolio and where the transactions are appropriate
to reduce the portfolios' risks. Each 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 portfolio 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 a portfolio will be able to close out
it 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 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 a portfolio 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 offsetting losses in its futures positions.
Portfolio Turnover. 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, distributions of which are taxable
to shareholders. See "Financial Highlights" in the prospectus and
"Investment Management Agreement and Other Services - Brokerage" in this
Statement of Additional Information.
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 1940 Act and the
rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
3. invest more than 25% of its total assets in securities, the
issuers of which conduct their principal business activities in
the same industry. For purposes of this limitation, securities of
the U.S. government (including its agencies and 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.
DIRECTORS AND OFFICERS
JANE DASHER, Director
Investment Officer, Korsant Partners, 283 Greenwich Avenue, Greenwich,
Connecticut 06830; Director of seven investment companies associated
with Citigroup Inc. ("Citigroup"); prior to 1997 Independent Financial
Consultant; from 1975 to 1987 held various positions with Philip Morris
Companies, Inc. including Director of Financial Services, Treasurers
Department; 49.
DONALD R. FOLEY, Director
Retired, 3668 Freshwater Drive, Jupiter, Florida 33477. Director of
twelve investment companies associated with Citigroup; trustee John
Hancock Funds; 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 14 investment
companies associated with Citigroup; and a Director of The Summit
Bancorporation; Formerly, Chancellor of the University of North Carolina
at Chapel Hill, University of North Carolina; 67.
*HEATH B. McLENDON, Chairman of the Board, President and Chief Executive
Officer
Managing Director of Salomon Smith Barney, Inc. ("Salomon Smith
Barney"); Director of 64 investment companies associated with Citigroup;
Chairman and President of the manager; Chairman of the Board of Salomon
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; 65.
RODERICK C. RASMUSSEN, Director
Investment Counselor, 9 Cadence Court, Morristown, New Jersey 07960.
Director of twelve investment companies associated with Citigroup.
Formerly Vice President of Dresdner and Company Inc. (investment
counselors); 72.
JOHN P. TOOLAN, Director
Retired, 13 Chadwell Place, Morristown, New Jersey 07960. Director of
twelve investment companies associated with Citigroup. Formerly,
Director and Chairman of Smith Barney Trust Company, Director of Salomon
Smith Barney Holdings Inc. and the manager and Senior Executive Vice
President, Director and Member of the Executive Committee of Smith
Barney; 68.
LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Salomon Smith Barney, Senior Vice President and
Treasurer of 59 investment companies associated with Citigroup, and
Director and Senior Vice President of the manager and TIA; 41.
JAMES E. CONROY, Vice President
Managing Director of Salomon Smith Barney and Vice President of four
investment companies associated with Citigroup; prior to July 1993,
Managing Director of Shearson Lehman Advisors; 47.
ELLEN CARDOZO SONSINO, Vice President
Managing Director of Salomon Smith Barney and Vice President of certain
other investment companies associated with Citigroup; 48.
PAUL BROOK, Controller
Director of Salomon Smith Barney and Controller or Assistant Treasurer
of 43 investment companies associated with Citigroup since 1998;
Managing Director of AMT Capital Services Inc. from 1997-1998; Partner
with Ernst & Young LLP prior to 1997; 45.
CHRISTINA T. SYDOR, Secretary
Managing Director of Salomon Smith Barney, Secretary of 59 investment
companies associated with Citigroup; Secretary and General Counsel of
the manager and TIA; 48.
_________________________
* 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.
As of April 21, 1999, directors and officers owned in the
aggregate less than 1% of the outstanding shares of each portfolio.
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 Salomon
Smith Barney. The Fund pays each Director who is not an officer,
director or employee of Salomon Smith Barney or any of its affiliates a
fee of $42,000 per annum plus $100 per meeting attended and reimburses
them for travel and out-of-pocket expenses. For the fund's fiscal year
ended December 31, 1998, such fees and expenses totaled $13,732.08.
COMPENSATION TABLE
Name of Person
Aggregate
Compensati
on from
Fund
Pension or
Retirement
Benefits
Accrued as
part of Fund
Expenses
Total
Compensat
ion from
Fund
Complex
Number of
Funds for
Which
Person
Serves
Within
Fund
Complex
(as of
4/30/99)
Joseph H. Fleiss@
$1,479
$0
$32,943
10
Donald R. Foley+
$3,116
$0
$57,100
10
Paul Hardin
$2,717
$0
$71,400
12
Heath B. McLendon*
$0
$0
$0
64
Roderick C. Rasmussen
3,117
$0
$57,100
10
Bruce D. Sargent*#
$0
$0
$0
3
John P. Toolan+
$2,817
$0
$54,700
10
________________________
* Designates a Director who is an "interested person".
# Effective October 8, 1998, Mr. Sargent resigned from the fund's Board
of Directors.
+ Pursuant to a deferred compensation plan, the indicated Directors have
elected to defer payment of the following amounts of their compensation
from the fund: Donald R. Foley - $608.00 and John P. Toolan - $2,817.00,
and the following amounts of their compensation from the fund Complex:
Donald R. Foley: $21,000.00 and John P. Toolan: $54,700.00. During the
fund's most recent fiscal year ended December 31, 1998, the estate of a
deceased director was paid his previously deferred compensation, which
totaled $10,262 form the fund and $171,148 from the fund Complex.
@ 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 (other than Mr. Fleiss who is
covered in the above table) by the fund was $618.00.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is a summary of the material United States federal
income tax considerations regarding the purchase, ownership and
disposition of shares of a portfolio of the fund. Each prospective
shareholder is urged to consult his own tax adviser with respect to the
specific federal, state, local and foreign tax consequences of investing
in a portfolio. The summary is based on the laws in effect on the date
of this Statement of Additional Information, which are subject to
change.
The portfolios and Their Investments
Each portfolio intends to qualify to be treated as a regulated
investment company each taxable year under the Internal Revenue Code of
1986, as amended (the "Code"). To so qualify, a portfolio must, among
other things: (a) derive at least 90% of its gross income in each
taxable year from dividends, interest, payments with respect to
securities, loans and gains from the sale or other disposition of stock
or securities or foreign currencies, or other income (including, but not
limited to, gains from options, futures or forward contracts) derived
with respect to its business of investing in such stock, securities or
currencies; and (b) diversify its holdings so that, at the end of each
quarter of a portfolio's taxable year, (i) at least 50% of the market
value of a portfolio's assets is represented by cash, securities of
other regulated investment companies, United States government
securities and other securities, with such other securities limited, in
respect of any one issuer, to an amount not greater than 5% of a
portfolio's assets and not greater than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of its
assets is invested in the securities (other than United States
government securities or securities of other regulated investment
companies) of any one issuer or any two or more issuers that a portfolio
controls and are determined to be engaged in the same or similar trades
or businesses or related trades or businesses.
As a regulated investment company, each portfolio will not be
subject to United States federal income tax on its net investment income
(i.e., income other than its net realized long- and short-term capital
gains) and its net realized long- and short-term capital gains, if any,
that it distributes to its shareholders, provided that an amount equal
to at least 90% of the sum of its investment company taxable income
(i.e., 90% of its taxable income minus the excess, if any, of its net
realized long-term capital gains over its net realized short-term
capital losses (including any capital loss carryovers), plus or minus
certain other adjustments as specified in the Code) and its net tax-
exempt income for the taxable year is distributed, but will be subject
to tax at regular corporate rates on any taxable income or gains that it
does not distribute. Furthermore, each portfolio will be subject to a
United States corporate income tax with respect to such distributed
amounts in any year that it fails to qualify as a regulated investment
company or fails to meet this distribution requirement.
The Code imposes a 4% nondeductible excise tax on each portfolio
to the extent a portfolio does not distribute by the end of any calendar
year at least 98% of its net investment income for that year and 98% of
the net amount of its capital gains (both long-and short-term) for the
one-year period ending, as a general rule, on October 31 of that year.
For this purpose, however, any income or gain retained by a portfolio
that is subject to corporate income tax will be considered to have been
distributed by year-end. In addition, the minimum amounts that must be
distributed in any year to avoid the excise tax will be increased or
decreased to reflect any underdistribution or overdistribution, as the
case may be, from the previous year. Each portfolio anticipates that it
will pay such dividends and will make such distributions as are
necessary in order to avoid the application of this tax.
If, in any taxable year, a portfolio fails to qualify as a
regulated investment company under the Code or fails to meet the
distribution requirement, it would be taxed in the same manner as an
ordinary corporation and distributions to its shareholders would not be
deductible by a portfolio in computing its taxable income. In addition,
in the event of a failure to qualify, a portfolio's distributions, to
the extent derived from a portfolio's current or accumulated earnings
and profits would constitute dividends (eligible for the corporate
dividends-received deduction) which are taxable to shareholders as
ordinary income, even though those distributions might otherwise (at
least in part) have been treated in the shareholders' hands as long-term
capital gains. If a portfolio fails to qualify as a regulated
investment company in any year, it must pay out its earnings and profits
accumulated in that year in order to qualify again as a regulated
investment company. In addition, if a portfolio failed to qualify as a
regulated investment company for a period greater than one taxable year,
a portfolio may be required to recognize any net built-in gains (the
excess of the aggregate gains, including items of income, over aggregate
losses that would have been realized if it had been liquidated) in order
to qualify as a regulated investment company in a subsequent year.
At December 31, 1998 the unused capital loss carryovers of the
portfolios were approximately as follows: Short-Term High Grade Bond
Fund: $5,953,000. 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)
2002
2003
2004
Short-Term High Grade Bond Fund
3,858
1,124
$971
The U.S. Government Securities Fund and the Short-Term High Grade
Bond Fund may invest in zero coupons securities having an original issue
discount (that is, the discount represented by the excess of the stated
redemption price at maturity over the issue price). Each year, each
portfolio will be required to accrue as income a portion of this
original issue discount even though the portfolio will receive no cash
payment of interest with respect to these securities. In addition, if
the portfolio acquires a security after its initial issuance at a
discount that resulted from fluctuations in prevailing interest rates
("market discount"), the portfolio may elect to include in income each
year a portion of this market discount.
Each portfolio will be required to distribute substantially all of
its income (including accrued original issue and recognized market
discount) in order to qualify for "pass-through" federal income tax
treatment and also in order to avoid the imposition of 4% excise tax
referred to above. Therefore, a portfolio may be required in some years
to distribute an amount greater than the total cash income the portfolio
actually receives. In order to make the required distribution in such a
year, a portfolio may be required to borrow or to liquidate securities.
The amount of cash that a portfolio would have to distribute, and thus
the degree to which securities would need to be liquidated or borrowing
made would depend upon the number of shareholders who chose not to have
their dividends reinvested.
A portfolio's transactions in options and futures, will be subject
to special provisions of the Code (including provisions relating to
"hedging transactions" and "straddles") that, among other things, may
affect the character of gains and losses realized by a portfolio (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to a portfolio and defer portfolio losses. These
rules could therefore affect the character, amount and timing of
distributions to shareholders. These provisions also (a) will require a
portfolio to mark-to-market certain types of the positions in its
portfolio (i.e., treat them as if they were closed out) and (b) may
cause a portfolio to recognize income without receiving cash with which
to pay dividends or make distributions in amounts necessary to satisfy
the distribution requirements for avoiding income and excise taxes.
Each portfolio will monitor its transactions, will make the appropriate
tax elections and will make the appropriate entries in its books and
records when it acquires any option, futures contract or hedged
investment in order to mitigate the effect of these rules and prevent
disqualification of a portfolio as a regulated investment company.
A portfolio's investment in Section 1256 contracts, such as
regulated futures contracts and options on most stock indices, are
subject to special tax rules. All section 1256 contracts held by a
portfolio at the end of its taxable year are required to be marked to
their market value, and any unrealized gain or loss on those positions
will be included in the portfolio's income as if each position had been
sold for its fair market value at the end of the taxable year. The
resulting gain or loss will be combined with any gain or loss realized
by the portfolio from positions in section 1256 contracts closed during
the taxable year. Provided such positions were held as capital assets
and were not part of a "hedging transaction" nor part of a "straddle,"
60% of the resulting net gain or loss will be treated as long-term
capital gain or loss, and 40% of such net gain or loss will be treated
as short-term capital gain or loss, regardless of the period of time the
positions were actually held by the portfolio.
Foreign Investments. Dividends or other income (including, in
some cases, capital gains) received by the Large Cap Value Fund from
investments in foreign securities may be subject to withholding and
other taxes imposed by foreign countries. Tax conventions between
certain countries and the United States may reduce or eliminate such
taxes in some cases. The Large Cap Value Fund will not be eligible to
elect to treat any foreign taxes it pays as paid by its shareholders,
who therefore will not be entitled to credits for such taxes on their
own tax returns. Foreign taxes paid by the Large Cap Value Fund will
reduce the return from its investments.
Taxation of United States Shareholders
Dividends and Distributions. Any dividend declared by a portfolio
in October, November or December of any calendar year and payable to
shareholders of record on a specified date in such a month shall be
deemed to have been received by each shareholder on December 31 of such
calendar year and to have been paid by a portfolio not later than such
December 31, provided that such dividend is actually paid by a portfolio
during January of the following calendar year. Each portfolio intends
to distribute annually to its shareholders substantially all of its
investment company taxable income, and any net realized long-term
capital gains in excess of net realized short-term capital losses
(including any capital loss carryovers). Each portfolio currently
expects to distribute any excess annually to its shareholders. However,
if a portfolio retains for investment an amount equal to all or a
portion of its net long-term capital gains in excess of its net short-
term capital losses and capital loss carryovers, it will be subject to a
corporate tax (currently at a rate of 35%) on the amount retained. In
that event, a portfolio will designate such retained amounts as
undistributed capital gains in a notice to its shareholders who (a) will
be required to include in income for United Stares federal income tax
purposes, as long-term capital gains, their proportionate shares of the
undistributed amount, (b) will be entitled to credit their proportionate
shares of the 35% tax paid by the portfolio on the undistributed amount
against their United States federal income tax liabilities, if any, and
to claim refunds to the extent their credits exceed their liabilities,
if any, and (c) will be entitled to increase their tax basis, for United
States federal income tax purposes, in their shares by an amount equal
to 65% of the amount of undistributed capital gains included in the
shareholder's income. Organizations or persons not subject to federal
income tax on such capital gains will be entitled to a refund of their
pro rata share of such taxes paid by a portfolio upon filing appropriate
returns or claims for refund with the Internal Revenue Service (the
"IRS").
Dividends of net investment income and distributions of net
realized short-term capital gains are taxable to a United States
shareholder as ordinary income, whether paid in cash or in shares.
Distributions of net-long-term capital gains, if any, that a portfolio
designates as capital gains dividends are taxable as long-term capital
gains, whether paid in cash or in shares and regardless of how long a
shareholder has held shares of a portfolio. Dividends and distributions
paid by a portfolio (except for the portion thereof, if any,
attributable to dividends on stock of U.S. corporations received by a
portfolio) will not qualify for the deduction for dividends received by
corporations. Distributions in excess of a portfolio's current and
accumulated earnings and profits will, as to each shareholder, be
treated as a tax-free return of capital, to the extent of a
shareholder's basis in his shares of a portfolio, and as a capital gain
thereafter (if the shareholder holds his shares of a portfolio as
capital assets).
Investors considering buying shares just prior to a dividend or
capital gain distribution should be aware that, although the price of
shares just purchased at that time may reflect the amount of the
forthcoming distribution, such dividend or distribution may nevertheless
be taxable to them.
If a portfolio is the holder of record of any stock on the record
date for any dividends payable with respect to such stock, such
dividends are included in a portfolio's gross income not as of the date
received but as of the later of (a) the date such stock became ex-
dividend with respect to such dividends (i.e., the date on which a buyer
of the stock would not be entitled to receive the declared, but unpaid,
dividends) or (b) the date a portfolio acquired such stock.
Accordingly, in order to satisfy its income distribution requirements, a
portfolio may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than
would otherwise be the case.
Sales of Shares. Upon the sale or exchange of his shares, a
shareholder will realize a taxable gain or loss equal to the difference
between the amount realized and his basis in 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, and will be long-term capital gain or
loss if the shares are held for more than one year and short-term
capital gain or loss if the shares are held for one year or less. Any
loss realized on a sale or exchange will be disallowed to the extent the
shares disposed of are replaced, including replacement through the
reinvesting of dividends and capital gains distributions in a portfolio,
within a 61-day period beginning 30 days before and ending 30 days after
the disposition of the shares. In such a case, the basis of the shares
acquired will be increased to reflect the disallowed loss. Any loss
realized by a shareholder on the sale of a portfolio share held by the
shareholder for six months or less will be treated for United States
federal income tax purposes as a long-term capital loss to the extent of
any distributions or deemed distributions of long-term capital gains
received by the shareholder with respect to such share.
Backup Withholding. Each portfolio may be required to withhold,
for United States federal income tax purposes, 31% of the dividends and
distributions payable to shareholders who fail to provide a portfolio
with their correct taxpayer identification number or to make required
certifications, or who have been notified by the IRS that they are
subject to backup withholding. Certain shareholders are exempt from
backup withholding. Backup withholding is not an additional tax and any
amount withheld may be credited against a shareholder's United States
federal income tax liabilities.
Notices. Shareholders will be notified annually by a portfolio as
to the United States federal income tax status of the dividends,
distributions and deemed distributions attributable to undistributed
capital gains (discussed above in "Dividends and Distributions") made by
a portfolio to its shareholders. Furthermore, shareholders will also
receive, if appropriate, various written notices after the close of a
portfolio's taxable year regarding the United States federal income tax
status of certain dividends, distributions and deemed distributions that
were paid (or that are treated as having been paid) by a portfolio to
its shareholders during the preceding taxable year.
Other Taxation
Distributions also may be subject to additional state, local and
foreign taxes depending on each shareholder's particular situation.
The foregoing is only a summary of certain tax consequences affecting
the portfolios and their shareholders. Shareholders are advised to
consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the portfolios.
IRA AND OTHER PROTOTYPE RETIREMENT PLANS
Copies of the following plans with custody or trust agreements
have been approved by the IRS and are available from the fund or Salomon
Smith Barney; investors should consult with their own tax or retirement
planning advisors prior to the establishment of a plan.
IRA, Rollover IRA and Simplified Employee Pension - IRA
The Small Business Job Protection Act of 1996 changed the
eligibility requirements for participants in Individual Retirement
Accounts ("IRAs"). Under these new provisions, if you or your spouse
have earned income, each of you may establish an IRA and make maximum
annual contributions equal to the lesser of earned income or $2,000. As
a result of this legislation, married couples where one spouse is non-
working may now contribute a total of $4,000 annually to their IRAs.
The Taxpayer Relief Act of 1997 has changed the requirements for
determining whether or not you are eligible to make a deductible IRA
contribution. Under the new rules effective January 1, 1998, if you are
considered an active participant in an employer-sponsored retirement
plan, you may still be eligible for a full or partial deduction
depending upon your combined adjusted gross income ("AGI"). For married
couples filing jointly for 1998, a full deduction is permitted if your
combined AGI is $50,000 or less ($30,000 for unmarried individuals); a
partial deduction will be allowed when AGI is between $50,000-$60,000
($30,000-$40,000 for an unmarried individual); and no deduction will be
allowed when AGI is above $60,000 ($40,000 for an unmarried individual).
However, if you are married and your spouse is covered by a employer-
sponsored retirement plan, but you are not, you will be eligible for a
full deduction if your combined AGI is $150,000 or less. A partial
deduction is permitted if your combined AGI is between $150,000-$160,000
and no deduction is permitted after $160,000.
The rules applicable to so-called "Roth IRAs" differ from those
described above.
A Rollover IRA is available to defer taxes on lump sum payments
and other qualifying rollover amounts (no maximum) received from another
retirement plan.
An employer who has established a Simplified Employee Pension -
IRA ("SEP-IRA") on behalf of eligible employees may make a maximum
annual contribution to each participant's account of 15% (up to $24,000)
of each participant's compensation. Compensation is capped at $160,000
for 1998.
Paired Defined Contribution Prototype
Corporations (including Subchapter S corporations) and non-
corporate entities may purchase shares of the 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.
A portfolio's "average annual total return," is computed according
to a formula prescribed by the SEC. The formula can be expressed as
follows:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of
$1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of
a 1-, 5- or 10- year period at the end of
a 1-, 5- or 10-year period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions.
The ERV assumes complete redemption of the hypothetical investment
at the end of the measuring period. A portfolio's net investment income
changes in response to fluctuations in interest rates and the expenses
of the portfolio.
Each portfolio's average annual total return with respect to its
Class A Shares for the one-year period, five-year period, ten-year
period (if applicable), and for the life of the portfolio ended December
31, 1998 is as follows:
One Year
Five Years
Ten Years
Life
Inception
Date
Large Cap Value
8.88%
15.52%
13.92%
11.63%
5/18/67
U.S. Government
1.27%
5.80%
8.29%
8.97%
10/9/84
Short-Term High
Grade
6.07%
5.21%
- --
5.73%
11/11/91
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, 1998 is as follows:
Portfolio One Year Life Inception Date
Large Cap Value 8.71% 20.34% 11/7/94
U.S. Government 1.04% 8.43% 11/7/94
Each portfolio's average annual total return with respect to its
Class L Shares for the one-year period, five-year period and for the
life of such portfolio's Class L shares through December 31, 1998 is as
follows:
Portfolio One Year Five Years Life
Inception Date
Large Cap Value 11.61% 15.60%
15.45% 12/2/92
U.S. Government 3.48% 6.02% 6.08%
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, 1998 is as follows:
Portfolio One Year Five Years Life Inception
Date
Large Cap Value 14.96% -- 19.19%
2/06/96
U.S. Government 6.29% 7.02% 6.81%
1/12/93
Short-Term High Grade 6.56% -- 5.45%
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, 1998 is as
follows:
Portfolio One Year Life Inception Date
Large Cap Value 14.95% 21.89%
11/07/94
If the maximum sales charges or applicable CDSCs had not been
deducted, the average annual total returns would have been as follows:
Each portfolio's average annual total return with respect to its
Class A Shares for the one-year period, five-year period, ten-year
period (if applicable), and for the life of the portfolio ended December
31, 1998 is as follows:
One Year
Five Years
Ten Years
Life
Inception
Date
Large Cap Value
14.61%
16.71%
14.50%
13.00%
5/18/67
U.S. Government
6.04%
6.78%
8.79%
9.33%
10/9/84
Short-Term High
Grade
6.07%
5.21%
- --
5.73%
11/11/91
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, 1998 is as follows:
Portfolio One Year Life Inception Date
Large Cap Value 13.71% 20.48%
11/7/94
U.S. Government 5.47% 8.62% 11/7/94
Each portfolio's average annual total return with respect to its
Class L Shares for the one-year period, five-year period and for the
life of such portfolio's Class L shares through December 31, 1998 is as
follows:
Portfolio One Year Five Years Life
Inception Date
Large Cap Value 13.73% 15.83%
15.64% 12/2/92
U.S. Government 5.53% 6.24% 6.25%
12/2/92
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, 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 Class C shares
were reclassified as Class L shares on June 12, 1998.
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.
Because of the differences in distribution fees and class-specific
expenses, the per share net asset value of each class of a portfolio may
differ.
PURCHASE AND REDEMPTION OF SHARES
PURCHASE OF SHARES
Detailed information about the purchase, redemption and exchange
of fund shares appears in the prospectus.
General
Investors may purchase shares from a Salomon Smith Barney
Financial Consultant or a broker that clears through Salomon Smith
Barney ("Dealer Representative"). In addition, certain investors,
including qualified retirement plans purchasing through certain Dealer
Representatives, may purchase shares directly from the funds. When
purchasing shares of the funds, investors must specify whether the
purchase is for Class A, Class B, Class L or Class Y shares. Salomon
Smith Barney and Dealer Representatives may charge their customers an
annual account maintenance fee in connection with a brokerage account
through which an investor purchases or holds shares. Accounts held
directly at First Data are not subject to a maintenance fee.
Purchases of the Fund's Class Z shares must be made in accordance
with the terms of a Qualified Plan or a Salomon Smith Barney UIT. There
are no minimum investment requirements for Class Z shares; however the
Fund reserves the right to vary this policy at any time. Shareholders
acquiring Class Z shares through a Qualified Plan or a Salomon Smith
Barney UIT should consult the terms of their respective plans for
redemption provisions.
Investors in Class A, Class B and Class L shares may open an
account in the funds, where offered, by making an initial investment of
at least $1,000 for each account, or $250 for an IRA or a Self-Employed
Retirement Plan, in the fund. Investors in Class Y shares may open an
account by making an initial investment of $15,000,000. Subsequent
investments of at least $50 may be made for all Classes. For
participants in retirement plans qualified under Section 403(b)(7) or
Section 401(c) of the Code, the minimum initial investment required for
Class A, Class B and Class L shares and the subsequent investment
requirement for all Classes in the fund is $25. For shareholders
purchasing shares of the funds through the Systematic Investment Plan on
a monthly basis, the minimum initial investment requirement for Class A,
Class B and Class L shares and subsequent investment requirement for all
Classes is $25. For shareholders purchasing shares of the fund through
the Systematic Investment Plan on a quarterly basis, the minimum initial
investment required for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes is $50. There are no
minimum investment requirements for Class A shares for employees of
Citigroup and its subsidiaries, including Salomon Smith Barney,
unitholders who invest distributions from a UIT sponsored by Salomon
Smith Barney, and Directors/Trustees of any of the Smith Barney Mutual
Funds, and their spouses and children. The funds reserve the right to
waive or change minimums, to decline any order to purchase its shares
and to suspend the offering of shares from time to time. Shares
purchased will be held in the shareholder's account by First Data. Share
certificates are issued only upon a shareholder's written request to
First Data.
Purchase orders received by the funds or a Salomon Smith Barney
Financial Consultant prior to the close of regular trading on the NYSE,
on any day the fund calculates its net asset value, are priced according
to the net asset value determined on that day (the ''trade date'').
Orders received by a Dealer Representative prior to the close of regular
trading on the NYSE on any day the fund calculates its net asset value,
are priced according to the net asset value determined on that day,
provided the order is received by the funds or the funds' agent prior to
its close of business. For shares purchased through Salomon Smith Barney
or a Dealer Representative purchasing through Salomon Smith Barney,
payment for shares of the funds is due on the third business day after
the trade date. In all other cases, payment must be made with the
purchase order.
Systematic Investment Plan. Shareholders may make additions to
their accounts at any time by purchasing shares through a service known
as the Systematic Investment Plan. Under the Systematic Investment
Plan, Salomon Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the shareholder's account held with a
bank or other financial institution on a monthly or quarterly basis as
indicated by the shareholder, to provide for systematic additions to the
shareholder's fund account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by Salomon
Smith Barney or First Data. The Systematic Investment Plan also
authorizes Salomon Smith Barney to apply cash held in the shareholder's
Salomon Smith Barney brokerage account or redeem the shareholder's
shares of a Smith Barney money market fund to make additions to the
account. Additional information is available from the fund or a Salomon
Smith Barney Financial Consultant or a Dealer Representative.
Volume Discounts
The schedules of sales charges described in the prospectus apply
to purchases of shares of the U.S. Government Securities Fund or Large
Cap Value Fund made by any "purchaser," which term is defined to include
the following: (a) an individual; (b) an individual's spouse and his or
her children purchasing shares for his or her own account; (c) a trustee
or other fiduciary purchasing shares for a single trust estate or single
fiduciary account; (d) a pension, profit-sharing or other employee
benefit plan qualified under Section 401(a) of the Internal Revenue Code
(the "Code") and qualified employee benefit plans of employers who are
"affiliated persons" of each other within the meaning of the Investment
Company Act of 1940, as amended (the "1940 Act"); (e) tax-exempt
organizations enumerated in Section 501(c)(3) or (13) of the Code; or
(f) any other organized group of persons, provided that the organization
has been in existence for at least six months and was organized for a
purpose other than the purchase of investment company securities at a
discount. Purchasers who wish to combine purchase orders to take
advantage of volume discounts should contact a Salomon Smith Barney
Financial Consultant.
Sales Charge Waivers and Reductions
Initial Sales Charge Waivers. Purchases of Class A shares of the
U.S. Government Securities Fund or Large Cap Value Fund may be made at
net asset value without a sales charge in the following circumstances:
(a) sales to (i) Board Members and employees of Citigroup and its
subsidiaries and any Citigroup affiliated funds including the Smith
Barney Mutual Funds (including retired Board Members and employees); the
immediate families of such persons (including the surviving spouse of a
deceased Board Member or employee); and to a pension, profit-sharing or
other benefit plan for such persons and (ii) employees of members of the
National Association of Securities Dealers, Inc., provided such sales
are made upon the assurance of the purchaser that the purchase is made
for investment purposes and that the securities will not be resold
except through redemption or repurchase; (b) offers of Class A shares to
any other investment company to effect the combination of such company
with the fund by merger, acquisition of assets or otherwise;
(c) purchases of Class A shares by any client of a newly employed
Salomon Smith Barney Financial Consultant (for a period up to 90 days
from the commencement of the Financial Consultant's employment with
Salomon Smith Barney), on the condition the purchase of Class A shares
is made with the proceeds of the redemption of shares of a mutual fund
which (i) was sponsored by the Financial Consultant's prior employer,
(ii) was sold to the client by the Financial Consultant and (iii) was
subject to a sales charge; (d) purchases by shareholders who have
redeemed Class A shares in the fund (or Class A shares of another Smith
Barney Mutual Fund that is offered with a sales charge) and who wish to
reinvest their redemption proceeds in the fund, provided the
reinvestment is made within 60 calendar days of the redemption; (e)
purchases by accounts managed by registered investment advisory
subsidiaries of Citigroup; (f) direct rollovers by plan participants of
distributions from a 401(k) plan offered to employees of Citigroup or
its subsidiaries or a 401(k) plan enrolled in the Smith Barney 401(k)
Program (Note: subsequent investments will be subject to the applicable
sales charge); (g) purchases by a separate account used to fund certain
unregistered variable annuity contracts; (h) investments of
distributions from or proceeds from a sale of a UIT sponsored by Salomon
Smith Barney; (i) purchases by investors participating in a Salomon
Smith Barney fee-based arrangement; and (j) purchases of Class A shares
by Section 403(b) or Section 401(a) or (k) accounts associated with
Copeland Retirement Programs. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to
permit verification that the purchase would qualify for the elimination
of the sales charge.
Right of Accumulation
Class A shares of the U.S. Government Securities Fund and Large
Cap Value Fund may be purchased by "any person," which includes an
individual and his or her immediate family, or a trustee or other
fiduciary of a single trust estate or single fiduciary account, at a
reduced sales charge or at net asset value determined by aggregating the
dollar amount of the new purchase and the total net asset value of all
Class A shares of the portfolio and of portfolios sponsored by Salomon
Smith Barney which are offered with a sales charge listed under
"Exchange Privilege" below then held by such person and applying the
sales charge applicable to such aggregate. In order to obtain such
discount, the purchaser must provide sufficient information at the time
of purchase to permit verification that the purchase qualifies for the
reduced sales charge. The right of accumulation is subject to
modification or discontinuance at any time with respect to all shares
purchased thereafter.
Group Purchases
Upon completion of certain automated systems, a reduced sales
charge or purchase at net asset value will also be available to
employees (and partners) of the same employer purchasing as a group,
provided each participant makes the minimum initial investment required.
The sales charge applicable to purchases by each member of such a group
will be determined in accordance with the schedule in the prospectus and
will be based upon the aggregate sales of Class A shares of the Smith
Barney funds offered with a sales charge to, and share holdings of, all
members of the group. To be eligible for such reduced sales charges or
to purchase at net asset value, all purchases must be pursuant to an
employer- or partnership-sanctioned plan meeting certain requirements.
One such requirement is that the plan must be open to specified partners
or employees of the employer and its subsidiaries, if any. Such plan
may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of
the Code. Salomon Smith Barney may also offer a reduced sales charge or
net asset value purchase for aggregating related fiduciary accounts
under such conditions that Salomon Smith Barney will realize economies
of sales efforts and sales related expenses. An individual who is a
member of a qualified group may also purchase Class A shares at the
reduced sales charge applicable to the group as a whole. The sales
charge is based upon the aggregate dollar value of Class A shares
offered with a sales charge that have been previously purchased and are
still owned by the group, plus the amount of the current purchase. A
"qualified group" is one which (a) has been in existence for more than
six months, (b) has a purpose other than acquiring fund shares at a
discount and (c) satisfies uniform criteria which enable Salomon Smith
Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be
available to arrange for group meetings between representatives of the
portfolio and the members, and must agree to include sales and other
materials related to the fund in its publications and mailing to members
at no cost to Salomon Smith Barney. In order to obtain such reduced
sales charge or to purchase at net asset value, the purchaser must
provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge.
Approval of group purchase reduced sales charge plans is subject to the
discretion of Salomon Smith Barney.
Letter of Intent
Class A Shares. A Letter of Intent for amounts of $50,000 or more
provides an opportunity for an investor to obtain a reduced sales charge
by aggregating investments over a 13 month period, provided that the
investor refers to such Letter when placing orders. For purposes of a
Letter of Intent, the "Amount of Investment" as referred to in the sales
charge table in the prospectus includes purchases of all Class A shares
of a portfolio and other Smith Barney funds offered with a sales charge
over the 13 month period based on the total amount of intended purchases
plus the value of all Class A shares previously purchased and still
owned. An alternative is to compute the 13 month period starting up to
90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge
applicable to the total amount of the investment goal. If the goal is
not achieved within the period, the investor must pay the difference
between the sales charge applicable to the purchases made and the
charges previously paid, or an appropriate number of escrowed shares
will be redeemed. Please contact a Salomon Smith Barney Financial
Consultant or First Data Investors Services Group, Inc. ("First Data" or
the "transfer agent") to obtain a Letter of Intent application.
Class Y Shares. A Letter of Intent may also be used as a way for
investors to meet the minimum investment requirement for Class Y shares.
Such investors must make an initial minimum purchase of $5,000,000 in
Class Y shares of a portfolio and agree to purchase a total of
$15,000,000 of Class Y shares of the portfolio within 6 months from the
date of the Letter. If a total investment of $15,000,000 is not made
within the thirteen-month period, all Class Y shares purchased to date
will be transferred to Class A shares, where they will be subject to all
fees (including a service fee of 0.25%) and expenses applicable to the
fund's Class A shares, which may include a CDSC of 1.00%. Each
portfolio expects that such transfer will not be subject to Federal
income taxes. Please contact a Salomon Smith Barney Financial
Consultant for First Data for further information.
Smith Barney 401(k) Program and ExecChoiceTM Programs
Investors may be eligible to participate in the Smith Barney
401(k) Program or the Smith Barney ExecChoiceTM Program. To the extent
applicable, the same terms and conditions, which are outlined below, are
offered to all plans participating ("Participating Plans") in these
programs.
Each portfolio offers to Participating Plans Class A shares, and
the Large Cap Value Fund and U.S. Government Securities Fund also offers
Class L shares, as investment alternatives under the Smith Barney 401(k)
and ExecChoiceTM Programs. Class A and Class L shares acquired through
the Participating Plans are subject to the same service and/or
distribution fees as the Class A and Class L shares acquired by other
investors; however, they are not subject to any initial sales charge or
CDSC. Once a Participating Plan has made an initial investment in a
portfolio, all of its subsequent investments in the portfolio must be in
the same Class of shares, except as otherwise described below.
Class A Shares. Class A shares of a portfolio are offered without
any sales charge or CDSC to any Participating Plan that purchases
$1,000,000 or more of Class A shares of one or more funds of the Smith
Barney funds.
Class L Shares. Class L shares of a portfolio are offered without
any sales charge or CDSC to any Participating Plan that purchases less
than $1,000,000 of Class L shares of one or more funds of the Smith
Barney funds.
401(k) and ExecChoiceTM Plans Opened On or After June 21, 1996. At
the end of the fifth year after the date of the Participating Plan
enrolled in the Smith Barney 401(k) Program or the Smith Barney
ExecChoiceTM Program, if its total Class L holdings in all non-money
market Smith Barney funds equal at least $1,000,000, it will be offered
the opportunity to exchange all of its Class L shares for Class A shares
of a portfolio. (For Participating Plans that were originally
established through a Salomon Smith Barney retail brokerage account, the
five year period will be calculated from the date of retail brokerage
account was opened.) Such Participating Plans will be notified of the
pending exchange in writing within 30 days after the fifth anniversary
of the enrollment date and, unless the exchange offer has been rejected
in writing, the exchange will occur on or about the 90th day after the
fifth anniversary date. If the Participating Plan does not qualify for
the five year exchange to Class A shares, a review of the Participating
Plan's holdings will be performed each quarter until either the
Participating Plan qualifies or the end of the eighth year.
401(k) Plans Opened Prior to June 21, 1996. In any year after the
date a Participating Plan enrolled in the Smith Barney 401(k) Program,
if its total Class L holdings in all non-money market Smith Barney funds
equal at least $500,000 as of the calendar year-end, the Participating
Plan will be offered the opportunity to exchange all of its Class L
shares for Class A shares of a portfolio. Such Plans will be notified
in writing within 30 days after the last business day of the calendar
year and, unless the exchange offer has been rejected in writing, the
exchange will occur on or about the last business day of the following
March.
Any Participating Plan in the Smith Barney 401(k) Program that has
previously qualified for an exchange into Class A shares will be offered
the opportunity to exchange all of its Class L shares for Class A shares
of a portfolio, regardless of asset size, at the end of the eighth year
after the date the Participating Plan enrolled in the Smith Barney
401(k) Program. Such Plans will be notified of the pending exchange in
writing approximately 60 days before the eighth anniversary of the
enrollment date and, unless the exchange has been rejected in writing,
the exchange will occur on or about the eighth anniversary date. Once
an exchange has occurred, a Participating Plan will not be eligible to
acquire additional Class L shares of the portfolio but instead may
acquire Class A shares of the portfolio. Any Class L shares not
converted will continue to be subject to the distribution fee.
Participating Plans wishing to acquire shares of the portfolio
through the Smith Barney 401(k) Program or the Smith Barney ExecChoiceTM
Program must purchase such shares directly from the Transfer Agent. For
further information regarding these Programs, investors should contact a
Salomon Smith Barney Financial Consultant.
Existing 401(k) Plans Investing in Class B Shares. Class B shares
of the Smith Barney funds are not available for purchase by
Participating Plans opened on or after June 21, 1996, but may continue
to be purchased by Participating Plans in the Smith Barney 401(k)
Program opened prior to such date and originally investing in such
Class. Class B shares acquired are subject to a CDSC of 3.00% of
redemption proceeds, if the Participating Plan terminates within eight
years of the date the Participating Plan first enrolled in the Smith
Barney 401(k) Program.
At the end of the eighth year after the date the Participating
Plan enrolled in the Smith Barney 401(k) Program, the Participating Plan
will be offered the opportunity to exchange all of its Class B shares
for Class A shares of the portfolio. Such Participating Plan will be
notified of the pending exchange in writing approximately 60 days before
the eighth anniversary of the enrollment date and, unless the exchange
has been rejected in writing, the exchange will occur on or about the
eighth anniversary date. Once the exchange has occurred, a
Participating Plan will not be eligible to acquire additional Class B
shares of the portfolio but instead may acquire Class A shares of the
fund. If the Participating Plan elects not to exchange all of its Class
B shares at that time, each Class B share held by the Participating Plan
will have the same conversion feature as Class B shares held by other
investors.
No CDSC is imposed on redemptions of Class B shares to the extent
that the net asset value of the shares redeemed does not exceed the
current net asset value of the shares purchased through reinvestment of
dividends or capital gain distributions, plus the current net asset
value of Class B shares purchased more than eight years prior to the
redemption, plus any increase in the net asset value of the
shareholder's Class B shares above the purchase payments made during the
preceding eight years. Whether or not the CDSC applies to the
redemption by a Participating Plan depends on the number of years since
the Participating Plan first became enrolled in the Smith Barney 401(k)
Program, unlike the applicability of the CDSC to redemptions by other
shareholders, which depends on the number of years since those
shareholders made the purchase payment from which the amount is being
redeemed.
The CDSC will be waived on redemptions of Class B shares in
connection with lump-sum or other distributions made by a Participating
Plan as a result of: (a) the retirement of an employee in the
Participating Plan; (b) the termination of employment of an employee in
the Participating Plan; (c) the death or disability of an employee in
the Participating Plan; (d) the attainment of age 59 by an employee in
the Participating Plan; (e) hardship of an employee in the Participating
Plan to the extent permitted under Section 401(k) of the Code; or (f)
redemptions of shares in connection with a loan made by the
Participating Plan to an employee.
The per share dividends on Class B and Class L shares of the
portfolio may be lower than the per share dividends on Class A and Class
Y shares principally as a result of the distribution fee applicable with
respect to Class B and Class L shares. The per share dividends on Class
A shares of the fund may be lower than the per share dividends on Class
Y shares principally as a result of the service fee applicable to Class
A shares. Distributions of capital gains, if any, will be in the same
amount for Class A, Class B, Class L and Class Y shares.
Determination of Public Offering Price
Each portfolio offers its shares to the public on a continuous
basis. The public offering price for a Class A and Class Y share of
each portfolio is equal to the net asset value per share at the time of
purchase, plus for Class A shares of Large Cap Value Fund and U.S.
Government Securities Fund an initial sales charge based on the
aggregate amount of the investment. The public offering price for a
Class L share (and Class A share purchases, including applicable rights
of accumulation, equaling or exceeding $500,000) is equal to the net
asset value per share at the time of purchase and no sales charge is
imposed at the time of purchase. A contingent deferred sales charge
("CDSC"), however, is imposed on certain redemptions of Class L shares,
and Class A shares of Large Cap Value Fund and U.S. Government
Securities Fund when purchased in amounts exceeding $500,000. The
method of computation of the public offering price is shown in each
fund's financial statements, incorporated by reference in their entirety
into this SAI.
REDEMPTION OF SHARES
The right of redemption of shares of a portfolio may be suspended
or the date of payment postponed (a) for any periods during which the
New York Stock Exchange, Inc. (the "NYSE") is closed (other than for
customary weekend and holiday closings), (b) when trading in the markets
the portfolio normally utilizes is restricted, or an emergency exists,
as determined by the SEC, so that disposal of the portfolio's
investments or determination of its net asset value is not reasonably
practicable or (c) for any other periods as the SEC by order may permit
for the protection of the portfolio's shareholders.
If the shares to be redeemed were issued in certificate form, the
certificates must be endorsed for transfer (or be accompanied by an
endorsed stock power) and must be submitted to First Data together with
the redemption request. Any signature appearing on a share certificate,
stock power or written redemption request in excess of $10,000 must be
guaranteed by an eligible guarantor institution such as a domestic bank,
savings and loan institution, domestic credit union, member bank of the
Federal Reserve System or member firm of a national securities exchange.
Written redemption requests of $10,000 or less do not require a
signature guarantee unless more than one such redemption request is made
in any 10-day period or the redemption proceeds are to be sent to an
address other than the address of record. Unless otherwise directed,
redemption proceeds will be mailed to an investor's address of record.
First Data may require additional supporting documents for redemptions
made by corporations, executors, administrators, trustees or guardians.
A redemption request will not be deemed properly received until First
Data receives all required documents in proper form.
If a shareholder holds shares in more than one Class, any request
for redemption must specify the Class being redeemed. In the event of a
failure to specify which Class, or if the investor owns fewer shares of
the Class than specified, the redemption request will be delayed until
the Transfer Agent receives further instructions from Salomon Smith
Barney, or if the shareholder's account is not with Salomon Smith
Barney, from the shareholder directly. The redemption proceeds will be
remitted on or before the third business day following receipt of proper
tender, except on any days on which the NYSE is closed or as permitted
under the 1940 Act, in extraordinary circumstances. Generally, if the
redemption proceeds are remitted to a Salomon Smith Barney brokerage
account, these funds will not be invested for the shareholder's benefit
without specific instruction and Salomon Smith Barney will benefit from
the use of temporarily uninvested funds. Redemption proceeds for shares
purchased by check, other than a certified or official bank check, will
be remitted upon clearance of the check, which may take up to ten days
or more.
Distribution in Kind
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.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Withdrawal Plan") is
available to shareholders of a portfolio who own shares of the portfolio
with a value of at least $10,000 and who wish to receive specific
amounts of cash monthly or quarterly. Withdrawals of at least $50 may
be made under the Withdrawal Plan by redeeming as many shares of the
fund as may be necessary to cover the stipulated withdrawal payment.
Any applicable CDSC will not be waived on amounts withdrawn by
shareholders that exceed 1.00% per month of the value of a shareholder's
shares at the time the Withdrawal Plan commences. (With respect to
Withdrawal Plans in effect prior to November 7, 1994, any applicable
CDSC will be waived on amounts withdrawn that do not exceed 2.00% per
month of the value of a shareholder's shares at the time the Withdrawal
Plan commences). To the extent that withdrawals exceed dividends,
distributions and appreciation of a shareholder's investment in a
portfolio, continued withdrawal payments will reduce the shareholder's
investment, and may ultimately exhaust it. Withdrawal payments should
not be considered as income from investment in a portfolio.
Furthermore, as it generally would not be advantageous to a shareholder
to make additional investments in the portfolio at the same time he or
she is participating in the Withdrawal Plan, purchases by such
shareholders in amounts of less than $5,000 ordinarily will not be
permitted.
Shareholders of a portfolio who wish to participate in the
Withdrawal Plan and who hold their shares of the portfolio in
certificate form must deposit their share certificates with the transfer
agent as agent for Withdrawal Plan members. All dividends and
distributions on shares in the Withdrawal Plan are reinvested
automatically at net asset value in additional shares of the fund
involved. A shareholder who purchases shares directly through the
transfer agent may continue to do so and applications for participation
in the Withdrawal Plan must be received by the transfer agent no later
than the eighth day of the month to be eligible for participation
beginning with that month's withdrawal. For additional information,
shareholders should contact a Salomon Smith Barney Financial Consultant.
ADDITIONAL INFORMATION REGARDING TELEPHONE REDEMPTION AND EXCHANGE
PROGRAM.
None of the portfolios nor their agents will be liable for
following instructions communicated by telephone that are reasonably
believed to be genuine. Each portfolio 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). Each portfolio
reserves the right to suspend, modify or discontinue the telephone
redemption and exchange program or to impose a charge for this service
at any time following at least seven (7) days prior notice to
shareholders.
Waivers of CDSC
The CDSC for Large Cap Value Fund and U.S. Government Securities Fund
will be waived on: (a) exchanges (see ''Exchange Privilege'' in the
respective prospectus); (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'' in the respective prospectus) (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 established prior to November 7, 1994); (c) redemptions
of shares within 12 months following the death or disability of the
shareholder; (d) redemptions of shares made in connection with qualified
distributions from retirement plans or IRAs upon the attainment of age
59; (e) involuntary redemptions; and (f) redemptions of shares to
effect a combination of the fund with any investment company by merger,
acquisition of assets or otherwise. In addition, a shareholder who has
redeemed shares from other Smith Barney Mutual Funds may, under certain
circumstances, reinvest all or part of the redemption proceeds within 60
days and receive pro rata credit for any CDSC imposed on the prior
redemption. CDSC waivers will be granted subject to confirmation (by
Salomon Smith Barney in the case of shareholders who are also Salomon
Smith Barney clients or by First Data in the case of all other
shareholders) of the shareholder's status or holdings, as the case may
be.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any of the Smith Barney
funds may exchange all or part of their shares for shares of the same
Class of other Smith Barney funds, on the basis of relative net asset
value per share at the time of exchange as follows:
1 Class A and Class Y shares of a portfolio may be exchanged
without a sales charge for the respective shares of any of the Smith
Barney funds.
2 Class B shares of a portfolio may be exchanged without a
sales charge. Class B shares of the portfolio exchanged for Class B
shares of another Smith Barney Mutual fund will be subject to the higher
applicable CDSC of the two funds and, for purposes of calculating CDSC
rates and conversion periods, will be deemed to have been held since the
date the shares being exchanged were deemed to be purchased.
3 Class L shares of any portfolio may be exchanged without a
sales charge. For purposes of CDSC applicability, Class L shares of the
portfolio exchanged for Class C shares of another Smith Barney Mutual
fund will be deemed to have been owned since the date the shares being
exchanged were deemed to be purchased.
Dealers other than Salomon Smith Barney must notify the transfer
agent of the investor's prior ownership of Class A shares of Smith
Barney High Income Fund and the account number in order to accomplish an
exchange of shares of Smith Barney High Income Fund under paragraph 1
above.
The exchange privilege enables shareholders in any Smith Barney
Mutual fund to acquire shares of the same Class in a portfolio with
different investment objectives when they believe a shift between
portfolios is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the portfolio
shares being acquired may legally be sold. Prior to any exchange, the
shareholder should obtain and review a copy of the current prospectus of
each fund into which an exchange is being considered. Prospectuses may
be obtained from a Salomon Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-
current net asset value and, subject to any applicable CDSC, the
proceeds are immediately invested, at a price as described above, in
shares of the fund being acquired. Salomon Smith Barney reserves the
right to reject any exchange request. The exchange privilege may be
modified or terminated at any time after written notice to shareholders.
Additional Information Regarding the Exchange Privilege. Although
the exchange privilege is an important benefit, excessive exchange
transactions can be detrimental to the fund's performance and its
shareholders. The manager may determine that a pattern of frequent
exchanges is excessive and contrary to the best interests of the fund's
other shareholders. In this event, the fund may, at its discretion,
decide to limit additional purchases and/or exchanges by a shareholder.
Upon such a determination, the fund will provide notice in writing or by
telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15 day period the shareholder will be
required to (a) redeem his or her shares in the fund or (b) remain
invested in the fund or exchange into any of the funds of the Smith
Barney Mutual funds ordinarily available, which position the shareholder
would be expected to maintain for a significant period of time. All
relevant factors will be considered in determining what constitutes an
abusive pattern of exchanges.
INVESTMENT MANAGEMENT AGREEMENT AND OTHER SERVICES
Manager
For the fiscal years ended December 31, 1996, 1997 and 1998, the
investment management fees paid by each portfolio were as follows:
Portfolio 1996 1997 1998
U.S. Government $1,770,235 $ 1,571,535 $1,471,185
Large Cap Value $4,622,817 $ 5,536,984 $6,734,520
Short-Term High Grade $ 479,559 $ 538,831 $ 470,058
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 a portfolio are borne by the
portfolio or the fund. Expenses payable by a 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.
DISTRIBUTOR
CFBDS, Inc. ("CFBDS") located at 20 Milk Street, Boston,
Massachusetts 02109-5408 serves as the fund's distributor on a best
efforts basis pursuant to a distribution agreement dated October 8, 1998
(the "Distribution Agreement") which was approved by the fund's Board of
Directors. Prior to the merger of Travelers Group, Inc. and Citicorp
Inc. on October 8, 1998, Salomon Smith Barney served as the fund's
distributor.
To compensate Salomon Smith Barney for the service it provides and for
the expense it bears under the Distribution Agreement, the fund has
adopted a services and distribution plan (the "Plan") pursuant to Rule
12b-1 under the 1940 Act. Under the Plan, the fund pays Salomon Smith
Barney a service fee, accrued daily and paid monthly, calculated at the
annual rate of 0.25% of the value of the fund's average daily net assets
attributable to the Class A, Class B and Class L shares. In addition,
the fund pays Salomon Smith Barney a distribution fee with respect to
Class B and Class L shares , calculated at the annual rate of 0.75% of
the value of the fund's average daily net assets attributable to those
classes primarily intended to compensate Salomon Smith Barney for its
initial expense of paying Financial Consultants a commission upon sales
of those shares. Class B shares that automatically convert to Class A
shares eight years after the date of original purchase will no longer be
subject to a distribution fee.
For the year ended December 31, 1998, the fees which have been
accrued and/or paid to Salomon Smith Barney pursuant to Rule 12b-1 for
the fund are set out in the table below:
Portfolio Class A Class B Class L
Class Y Total
Large Cap Value $1,994,925 $463,656 $525,895 N/A
$2,984,476
U.S. Government $654,267 $99,928 $102,344 N/A
$856,539
Short-Term High Grade $235,372 N/A N/A N/A
$235,372
Commissions on Class A Shares. For the 1996 and 1997 fiscal years, the
aggregate dollar amount of commissions on Class A shares, all of which
was paid to Salomon Smith Barney, is as follows:
Class A
Name of Fund
Fiscal Year
Ended
12/31/96
Fiscal Year
Ended 12/31/97
Large Cap Value
$529,000
$458,000
U.S. Government
$135,000
$105,000
Short-Term High Grade
$0
$0
For the period January 1, 1998 through October 7, 1998 and for the
period October 8, 1998 through December 31, 1998, the aggregate dollar
amounts of commissions on Class A shares, are as follows:
Class A
Name of Fund
01/01/98
through
10/07/98*
10/08/98
through
12/31/98**
Large Cap Value
$591,000
$101,000
U.S. Government
$117,000
$40,000
Short-Term High Grade
$0
$0
*The entire amount was paid to Salomon Smith Barney.
** The following amounts were paid to Salomon Smith Barney: $90,900,
$36,000, and $0, respectively.
Commissions on Class L Shares. For the period June 12, 1998 through
October 7, 1998 and for the period October 8, 1998 through October 31,
1998, the aggregate dollar amounts of commission on Class L shares are
as follows:
Class L
(On June 12, 1998, Class
C shares were renamed
Class L Shares)*
Name of Fund
06/12/98
through
10/07/98*
10/08/98
through
10/31/98**
Large Cap Value
$103,000
$42,000
U.S. Government
$7,000
$9,000
Short-Term High Grade
$0
$0
*The entire amount was paid to Salomon Smith Barney.
** The following amounts were paid to Salomon Smith Barney: $37,800,
$8,100, and $0, respectively.
As set forth in the prospectus, a contingent deferred sales charge
("CDSC") may be imposed on certain redemptions of Class A, Class B and
Class L 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 of 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 L 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, Salomon Smith Barney. Salomon 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 Salomon 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
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 1996, 1997 and 1998. Also shown is the portion paid to
Salomon Smith Barney and the portion paid to other brokers for the
execution of orders allocated in consideration of research and
statistical services or solely for their ability to execute the order.
During fiscal year 1998, the total amount of commissionable transactions
was $1,209,548,409; $327,407,076 (27.1%) of which was directed to
Salomon Smith Barney and executed by unaffiliated brokers and
$882,141,333 (72.9%) of which was directed to other brokers.
Total
For
Execution
Only To
Smith
Barney
To Others
To Others For
Execution,
Research
and Statistical
Services
199
6
$956,742
$441,702*
46.2%
$493,445
51.6
%
$21,595
2.2%
199
7
$892,140
$279,132*
31.3%
$572,298
64.1
%
$40,710
4.6%
199
8
$1,365,675
$346,078*
25.3%
$1,019,597
74.7
%
$0
0%
_________________
*Directed to Salomon 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 Salomon Smith Barney must be "reasonable and fair
compared to the commission, fee or other remuneration received or to be
received by other brokers in connection with comparable transactions
involving similar securities during a comparable period of time." The
Rule and the policy and procedures also contain review requirements and
require the manager to furnish reports to the Board of Directors and to
maintain records in connection with such reviews.
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 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 manager to supplement its own research and analysis with the views
and information of other securities firms. The Fund may utilize Salomon
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 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.
ADDITIONAL INFORMATION ABOUT THE MANAGER
SSBC Fund Management Inc., formerly Mutual Management Corp., 388
Greenwich Street, New York, NY 10013 was incorporated on March 12, 1968
and renders investment management advice to investment companies with
aggregate assets under management in excess of $114 billion as of March
31, 1999. The manager is an affiliate of Salomon Smith Barney Inc.
("Salomon Smith Barney"). The manager and Salomon Smith Barney are
subsidiaries of Citigroup Inc., a financial services company that uses
diverse channels to offer a broad range of financial services to
consumer and corporate customers around the world. Among these
businesses are Citibank, Commercial Credit, Primerica Financial
Services, Salomon Smith Barney, SSB Citi Asset Management, Travelers
Life & Annuity, and Travelers Property Casualty.
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 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, 1999 to examine and report on the fund's financial
statements and highlights.
ADDITIONAL INFORMATION ABOUT THE FUND
The Fund, an open-end, diversified investment company, was
incorporated in Maryland on December 2, 1966. The Fund has an
authorized capital of 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 series of shares in the future.
The assets of each portfolio are segregated and separately managed and a
shareholder's interest is in the assets of the portfolio in which he or
she holds shares. Class A, Class B, Class L, Class Y and Class Z (where
available) shares of any 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 Rule 12b-1 distribution plan which pertain to a
particular Class. Shares do not have cumulative voting rights or
preemptive rights and are fully paid, transferable and nonassessable
when issued for payment as described in this Prospectus.
The 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.
VOTING
As permitted by Maryland law, there will normally be no meetings
of shareholders for the purpose of electing directors unless and until
such time as less than a majority of the directors holding office have
been elected by shareholders. At that time, the directors then in
office will call a shareholders' meeting for the election of directors.
The directors must call a meeting of shareholders for the purpose of
voting upon the question of removal of any director when requested in
writing to do so by the record holders of not less than 10% of the
outstanding shares of the fund. At such a meeting, a director may be
removed after the holders of record of not less than a majority of the
outstanding shares of the fund have declared that the director be
removed either by declaration in writing or by votes cast in person or
by proxy. 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 21, 1999, 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
Holder % of shares
Smith Barney Concert Series, Inc. 49.86%
Growth portfolio
PNC Bank
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113
Short-Term High Grade Bond Fund
Class Y
Holder % of shares
Smith Barney Concert Series, Inc. 49.67%
Balanced portfolio
PNC Bank
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113
Smith Barney Concert Series, Inc. 14.41%
Income portfolio
PNC Bank
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113
Smith Barney Concert Series, Inc. 14.10%
Select Balanced portfolio
PNC Bank
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113
Smith Barney Concert Series, Inc. 13.27%
Conservative portfolio
PNC Bank
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113
Class A
Holder % of shares
Samuel Earl Upchurch Jr. 10.56%
Regions Financial Corp.
PO Box 10247
Birmingham, AL 35202
FINANCIAL STATEMENTS
The Fund's financial information is incorporated by reference to
the fund's Annual Reports to Shareholders for the fiscal year ended
December 31, 1998. The annual reports were filed March 23, 1999 with
the SEC, accession number 91155-99-000188.
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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