As filed with the Securities and
Exchange Commission on May 4, 1995
Registration No. 33-58015
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 2
Post-Effective Amendment No.
SMITH BARNEY INVESTMENT FUNDS, INC.
(Exact name of Registrant as specified in
Charter)
Area Code and Telephone Number: (212)
723-9218
388 Greenwich Street, New York, New York
10013
(Address of principal executive offices)
(Zip Code)
Christina T. Sydor, Esq.
Smith Barney Inc.
388 Greenwich Street New York, New York
10013 (22nd floor)
(Name and address of agent for service)
copies to:
Burton M. Leibert, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, NY 10022
and
John A. Dudley, Esq.
Sullivan & Worcester
Blake Bldg., Suite 1000
Washington D.C. 20036
Approximate date of proposed public offering:
As soon
as possible after the effective date of this
Registration Statement.
Registrant has registered an indefinite amount
of securities pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended;
accordingly, no fee is
payable herewith. Registrant's Rule 24f-2
Notice for the fiscal period ended December
31, 1994 was filed with the
Securities and Exchange Commission on
February 27, 1995.
Registrant hereby amends this Registration
Statement on such date or dates as may be
necessary to delay its
effective date until the Registrant shall file
a further amendment which specifically states
that this Registration Statement shall
thereafter become effective
in accordance with Section 8(a) of the
Securities Act of 1933 or until the
Registration Statement shall become
effective on such date as the Commission,
acting pursuant to said Section 8(a), may
determine.
SMITH BARNEY INVESTMENT FUNDS INC.
CONTENTS OF
REGISTRATION STATEMENT
This Registration Statement contains the
following pages
and documents:
Front Cover
Contents Page
Cross-Reference Sheet
Letter to Shareholders
Notice of Special Meeting
Part A - Prospectus/Proxy Statement
Part B - Statement of Additional
Information
Part C - Other Information
Signature Page
Exhibits
SMITH BARNEY INVESTMENT FUNDS INC.
FORM N-14 CROSS REFERENCE SHEET
Pursuant to Rule 481(a) Under the
Securities Act of 1933
Prospectus/Proxy
Part A Item No. and Caption
Statement Caption
Item 1. Beginning of Registration
Cover Page; Cross Reference
Statement and Outside Front
Sheet
Cover Page of Prospectus
Item 2. Beginning and Outside Back
Table of Contents
Cover Page of Prospectus
Item 3. Synopsis Information and
Summary; Risk Factors
Risk Factors
Item 4. Information About the Transaction
Summary: Reasons for the Reorganization;
Information About
the Reorganization; Comparative
Information on Shareholders' Rights;
Voting Information; Exhibit A
(Agreement and Plan of Reorganization)
Item 5. Information About the Registrant
Cover Page; Summary; Additional
Materials;
Information About the Reorganization;
Information about
the Acquiring Fund; Comparison of
Investment Objectives and Policies;
Comparative
Information on Shareholders' Rights;
Additional Information About the
Acquiring Fund and the Acquired Fund;
Prospectus of the Acquired
Fund dated February 21, 1995
Item 6. Information About the
Summary; Additional Materials;
Company Being Acquired
Information About the Reorganization;
Information about the Acquired Fund;
Comparison of Investment Objectives and
Policies;
Comparative Information on Shareholders'
Rights; Additional Information About the
Acquiring Fund and the Acquired Fund
Item 7. Voting Information
Summary; Information About the
Reorganization; Comparative Information
on Shareholders' Rights; Voting
Information
Item 8. Interest of Certain Persons
and Experts
Not Applicable
Item 9. Additional Information
Not Applicable
Required for Reoffering By
Persons Deemed to be Underwriters
Part B Item No. and Caption
Statement of Additional
Information Caption
Item 10. Cover Page
Cover Page
Item 11. Table of Contents
Not Applicable
Item 12. Additional Information
Cover Page; Statement of Additional
About the Registrant
Information of Smith Barney Investment
Funds Inc. dated April --, 1995
Item 13. Additional Information
Cover Page; Statement of Additional
About the Company Being
Information of the Acquired Fund
dated February 21, 1995
Item 14. Financial Statements
Annual Report of Acquired Funds; Pro
forma Financial Statements
Part C Item No. and Caption
Other Information Caption
Item 15. Indemnification
Incorporated by reference to Part A
caption "Comparative Information on
Shareholders' Rights - Liability of
Directors/Trustees"
Item 16. Exhibits
Exhibits
Item 17. Undertakings
Undertakings
A SPECIAL NOTICE TO SHAREHOLDERS OF
COMMON SENSE TRUST - GROWTH OPPORTUNITY
FUND
3100 Breckenridge Boulevard
Duluth, Georgia 30199
May --, 1995
Dear Growth Opportunity Shareholder,
Your vote is important! Your participation in
the affairs of your Fund does make a
difference.
The attached proxy statement seeks shareholder
approval for the reorganization of the Growth
Opportunity Fund (formerly Common Sense II
Aggressive Opportunity Fund) in to the Smith
Barney Family of Funds. The following two
pages provide important information in
question and Answer format regarding the proxy
which I encourage your to read. Additionally,
the proxy statement contains detailed
information about the proposed reorganization.
The proposal has been approved by the Trustees
of the Fund, who recommend you vote "FOR" the
reorganization. We look forward to your
participation.
PLEASE SIGN AND RETURN YOUR PROXY CARD IN THE
ENCLOSED POSTAGE PAID ENVELOPE.
Sincerely,
Don G. Powell
Chairman of the Board
Common Sense Trust
INFORMATION ABOUT YOUR PROXY STATEMENT
Q. Why am I receiving this Proxy Statement?
A. As a result of a merger on December 20,
1994, between American Capital Management &
Research, Inc. and Van Kampen Merritt
Companies, Inc., it was agreed that the Growth
Opportunity Fund would be advised by an
investment management subsidiary of Smith
Barney Inc. and become part of the Smith
Barney Family of Funds. Accordingly, we are
asking all the Growth Opportunity Fund
shareholders to approve the Fund's
reorganization into the Smith Barney Family of
Funds.
Q. How will the proposed reorganization affect
how my account will be managed?
A. The Fund will continue to be managed by
Harvey Eisen. There will be no change to your
investment objective or advisory fee; however,
the reorganized fund will permit the purchase
of securities issued by companies primarily
engaged in the manufacture of alcohol or
tobacco.
Q. Why do I need to vote?
A. Your vote is intended to ensure that a
quorum of shareholders is represented at the
shareholders meeting so that the proposed
reorganization can take place. We encourage
all shareholders to participate in the
affairs of their Fund.
Q. Has my Fund's Board of Trustees approved
the proposed reorganization?
A. Yes. The Board has approved the proxy issue
and recommends that shareholders vote "FOR"
the proposal.
Q. Who is paying for the proxy solicitation
and shareholder meeting?
A. Smith Barney Inc. is paying all costs for
the proxy solicitation and shareholder
meeting. Your Fund will not bear any expenses.
Q. Will the reorganization result in a taxable
event for Federal income tax reporting?
A. No. This transaction, in the opinion of
counsel, will be a non-taxable event.
Q. Will I be able to exchange or transfer
shares between the Common Sense Trust and
Smith Barney Family of Funds after June 30,
1995?
A. No. The two funds are separate. Please
refer to the exchange Privilege Section in the
enclosed Prospectus for further information.
Q. Can I exchange my Growth Opportunity Fund
into one of the existing Common Sense Trust
Funds before June 30, 1995?
A. Yes. Before June 30, 1995, you may exchange
your shares for other Common Sense II Funds at
no expense. However, If your exchange involves
a non-qualified account, you will be subject
to any capital gain (loss) on the transaction.
Q. Will the sales charge rate for "A" shares
remain the same?
A. No. The new sales charge rate is lower at
every level. Please review the new sales
charge table which is outlined in the Purchase
of Shares Section in the attached Prospectus.
Q. Will assets in my other Common Sense Funds
continue to apply towards Rights of
Accumulation in the Growth Opportunity Fund?
A. No. Once the Growth Opportunity Fund is
reorganized as a Smith Barney Fund, assets in
other Common Sense Trust Funds will not apply
towards Rights of Accumulation discounts.
However, Rights of Accumulation discounts in
the Growth Opportunity Fund may be attained
through additional investments in certain
Smith Barney Funds sold through PFS
Investments Inc.
Q. How will the Letter of Intent ("LOI")
purchases be affected?
A. If you have an LOI on the Growth
Opportunity Fund, all purchases into the
Growth Opportunity Fund and other Common Sense
Trust Funds made before June 30, 1995, will
count towards your LOI. Purchases made after
June 30, 1995 in the Growth Opportunity Fund
or any other Smith Barney Fund sold through
PFS will continue to count toward your Growth
Opportunity Fund LOI; however, any purchases
made into the Common Sense Trust Funds after
June 30, 1995 will not count towards your LOI.
Q. What will happen to the LOI I have on
another Common Sense Fund which is linked to
my Growth Opportunity Fund?
A. Any purchase in the Growth Opportunity Fund
prior to June 30, 1995, will count towards
meeting your LOI; however any purchases made
into your Growth Opportunity Fund after June
30, 1995 will not be credited to your Common
Sense Trust Letter of Intent.
Q. Will the Contingent Deferred Sales Charge
("CDSC") and conversion period on "B" shares
remain the same?
A. No. The new CDSC rate utilized for
redemptions is equal or lower in years one
through six; however, the length of time the
shares are held before conversion to "A"
shares will be eight years instead of six
years. For details, please refer to the
Purchase of Shares Section in the attached
Prospectus.
Q. Will my account servicing features remain
the same?
A. Essentially, all shareholder services that
are currently in effect will remain the same.
However, if you have a Pre-Authorized Check
("PAC") Plan, any drafts returned for
insufficient funds after June 30, 1995 will
have a $25 charge applied.
Q. How will I be notified when the Growth
Opportunity Fund is part of the Smith Barney
Family of Funds?
A. You will receive special notification
shortly after the Fund has been reorganized.
Q. Will my account continue to be serviced by
my PFS Investments Inc. Representative?
A. Yes. Your PFS Investments Inc.
Representative will continue to service your
investment needs.
Q. What if I have other questions?
A. We will be happy to answer your questions
about this proxy solicitation. Please call PFS
Shareholder Services at 1-800-544-5445. Our
Representatives are available Monday through
Friday from 8:00 a.m. to 9:00 p.m., and
Saturday from 10:00 a.m. to 4:00p.m., Eastern
Time to assist you.
COMMON SENSE TRUST-
GROWTH OPPORTUNITY FUND
2800 Post Oak Blvd.
Houston, TX 77056
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On June 23, 1995
___________________
Notice is hereby given that a
Special Meeting of Shareholders (the
"Meeting") of Common Sense
Trust - Growth Opportunity Fund will be held
at Transco Tower, Level 2, 2800 Post Oak
Boulevard, Houston, Texas 77056 on June
23, 1995, at 2:00 p.m. for the following
purposes:
1. To consider and act upon the
Agreement and Plan of Reorganization (the
"Plan") dated as of April -- , 1995 providing
for (i) the acquisition of all
or substantially all of the assets of the
Growth Opportunity Fund (the "Acquired Fund"),
a separate series of the Common Sense Trust,
(the "Trust") by the Smith Barney Growth
Opportunity Fund, ( the "Acquiring Fund") a
separate series of Smith Barney Investment
Funds Inc., in exchange for
Class A and Class B shares of the Acquiring
Fund and the assumption by the Acquiring Fund
of certain liabilities
of the Acquired Fund, (ii) the distribution of
such shares of the Acquiring Fund to
shareholders of the Acquired Fund in
liquidation of the Acquired Fund and
(iii) the subsequent termination of the
Acquired Fund.
2. To transact any other business
which may properly come before the Meeting or
any adjournment thereof.
The Trustees of the Trust have
fixed the close of business on April 26, 1995,
as the record date for the determination of
shareholders of the Acquired Fund entitled to
notice of and to vote at this
Meeting or any adjournment thereof.
IT IS IMPORTANT THAT
PROXIES BE RETURNED PROMPTLY.
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND IN
PERSON ARE URGED TO SIGN AND RETURN WITHOUT
DELAY THE ENCLOSED PROXY IN THE ENCLOSED
ENVELOPE, WHICH REQUIRES
NO POSTAGE, SO THAT THEIR SHARES MAY BE
REPRESENTED AT THE MEETING. PROXIES MAY BE
REVOKED AT ANY TIME BEFORE
THEY ARE EXERCISED BY THE SUBSEQUENT EXECUTION
AND SUBMISSION OF A REVISED PROXY BY GIVING
WRITTEN NOTICE OF REVOCATION TO THE ACQUIRED
FUND AT ANY TIME BEFORE
THE PROXY IS EXERCISED OR BY VOTING IN PERSON
AT THE MEETING.
By order of the Trustees
Nori L. Gabert
Secretary
May --, 1995
YOUR PROMPT ATTENTION TO
THE ENCLOSED PROXY WILL HELP TO AVOID THE
EXPENSE OF FURTHER SOLICITATION.
PROSPECTUS/PROXY STATEMENT DATED MAY __,
1995
Acquisition of the Assets Of
COMMON SENSE TRUST - GROWTH OPPORTUNITY FUND
2800 Post Oak Boulevard
Houston, Texas 77056
(800) 544-5445
By And In Exchange For Shares Of
SMITH BARNEY INVESTMENT FUNDS INC.-- GROWTH
OPPORTUNITY FUND
388 Greenwich Street
New York, New York 10013
(800) 224-7523
This Prospectus/Proxy
Statement, which should be retained for future
reference, sets
forth concisely the information about the
Smith Barney Growth Opportunity Fund that a
prospective investor
should know before investing. A Statement of
Additional Information dated May --, 1995
relating to this Prospectus/Proxy Statement
and the Reorganization, has
been filed with the SEC and is incorporated by
reference into this Prospectus/Proxy
Statement. A copy of such
Statement of Additional Information is
available upon request and without charge by
calling or writing the
Smith Barney Growth Opportunity Fund at the
telephone number or address listed on the
cover page of this Prospectus/Proxy Statement.
THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS/PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This Prospectus/Proxy Statement
is being furnished to shareholders of the
Growth Opportunity Fund (the "Acquired Fund"),
a separate series of the Common Sense Trust
(the "Trust"), in connection with a proposed
plan of reorganization (the
"Plan"), to be submitted to shareholders for
consideration at a Special Meeting of
Shareholders to be held on June 23, 1995, at
2:00 p.m., Texas time, at the offices of the
Trust, located at the Transco Tower, Level 2,
2800 Post Oak Boulevard, Houston, Texas 77056
and any adjournments thereof (collectively,
the "Meeting").
The Plan provides for all
or substantially all of the assets of the
Acquired Fund to be acquired by the Smith
Barney Growth Opportunity Fund
(the "Acquiring Fund"),
a separate series of Smith Barney Investment
Funds Inc. ("Investment Funds") in exchange
for shares of the Acquiring Fund and the
assumption by the Acquiring Fund
of certain liabilities of the Acquired Fund
(hereinafter referred to as the
"Reorganization"). (The Acquired Fund
and the Acquiring Fund are herein referred to
individually as a "Fund" and collectively as
the "Funds"). Following the Reorganization,
shares of the Acquiring Fund will be
distributed to shareholders of
the Acquired Fund in liquidation of the
Acquired Fund and the Acquired Fund will be
terminated. As a result of
the proposed Reorganization, each shareholder
of the Acquired Fund will receive that number
of shares of the Acquiring Fund having an
aggregate net asset value equal
to the aggregate net asset value of such
shareholder's shares of the Acquired Fund.
Holders of Class A shares
in the Acquired Fund will receive Class A
shares of the Acquiring Fund, and no sales
charge will be imposed on
the Class A shares of the Acquiring Fund
received by the Acquired Fund Class A
shareholders. Holders of Class B
shares in the Acquired Fund will receive Class
B shares of the Acquiring Fund; a contingent
deferred sales charge ("CDSC") which is
applicable to a shareholder's
investment will continue to apply, and, in
calculating the applicable CDSC payable upon
the subsequent redemption of shares of the
Acquiring Fund, the period during which an
Acquired Fund shareholder held shares of
the Acquired Fund will be counted.
The Acquiring Fund is an
open-end, management investment company which
was organized for the purpose of acquiring the
assets of the Acquired Fund. The Acquiring
Fund's investment objective is the same as the
Acquired Fund, which is to seek capital
appreciation through investments in
securities believed to have above average
potential for capital appreciation. Smith
Barney Mutual Funds
Management Inc. ("SBMFM") serves as investment
adviser to the Acquiring Fund. Smith Barney
Strategy Advisers Inc., a division of SBMFM
("Strategy Advisers") serves
as investment adviser to the Acquired Fund.
SBMFM is a wholly-owned subsidiary of Smith
Barney Holdings Inc. ("Holdings") which is, in
turn, a wholly-owned subsidiary of The
Travelers Inc. ("Travelers").
The investment policies of
the Acquiring Fund are identical to those of
the Acquired Fund, except for certain
differences which are described
under "Comparison of Investment Objectives and
Policies" in this Prospectus/Proxy Statement.
Certain relevant documents listed below,
which have been filed with the Securities and
Exchange Commission ("SEC"), are incorporated
by reference. A copy of such documents and
the Acquired Fund's Prospectus
referred to below are available upon request
and without charge by calling or writing the
Acquired Fund at the telephone number or
address listed on the cover page of this
Prospectus/Proxy Statement.
1. The Prospectus dated
May 1, 1995 of the Acquiring Fund is
incorporated in its entirety by reference and
a copy is included herewith.
2. The Prospectus dated
February 21, 1995, as supplemented on March 7,
1995 of the Acquired Fund is incorporated
in its entirety by reference.
Also accompanying this
Prospectus/Proxy Statement as Exhibit A is a
copy of the Plan.
TABLE OF CONTENTS
Page
Additional Materials 1
Fee Tables
Summary 1
Risk Factors 5
Reasons for the Reorganization 6
Information about the Reorganization 6
Information about the Acquiring Fund 11
Information about the Acquired Fund 14
Comparison of Investment Objectives and
Policies 19
Comparative Information on Shareholders'
Rights 22
Additional Information About the Acquiring
Fund and the Acquired Fund 24
Other Business 25
Voting Information 25
Financial Statements and Experts 26
Legal Matters 27
Exhibit A: Agreement and Plan of
Reorganization A-1
ADDITIONAL MATERIALS
The following additional
materials, which have been incorporated by
reference into the
Statement of Additional Information dated May
- --, 1995 relating to this Prospectus/Proxy
Statement and the Reorganization, will be sent
to all shareholders
requesting a copy of such Statement of
Additional Information.
1. Statement of Additional
Information of Smith Barney Investment Funds
Inc. dated May 1, 1995.
2. Statement of Additional
Information of the Acquired Fund dated
February 21, 1995.
3. Annual Report of the Acquired
Fund dated October 31, 1994.
FEE TABLE
Following are tables showing the current costs
and expenses of the Acquiring Fund and the
Acquired Fund and the Pro Forma costs and
expenses expected to be incurred
by the Acquiring Fund after giving effect to
the Reorganization, each based on the maximum
sales charge or
maximum CDSC that may be incurred at the time
of purchase or redemption:
CLASS A SHARES
Acquiring Acquired Pro
Fund Fund Forma
Shareholder Transaction
Expenses
Maximum sales charge
imposed
on purchases 5.00% 5.50% 5.00%
(as a percentage of
offering price)
Maximum CDSC None None None*
(as a percentage of
original cost or redemption
proceeds, whichever is lower)
Annual Portfolio Operating Expenses
(as a percentage of average
net assets)
Management fees 1.00% 1.00% 1.00%
12b-1 fees 0.25 0.25 0.25
Other expenses** 0.50 1.39 0.50
Total Portfolio
Operating
Expenses 1.75% 2.64% 1.75%
* Purchases of Class A shares, which when
combined with current holdings of Class A
shares offered with a sales charge equal or
exceed $500,000 in the aggregate, will be made
at net asset value with no sales charge, but
will be subject to a CDSC of 1.00% on
redemptions made within 12 months.
** These expenses for Class A shares of the
Acquiring Fund are based on estimated amounts
for the fiscal year ending December 31, 1995;
for the Acquired Fund on actual
amounts, for the period May 3, 1994 through
October 31, 1994, on an annualized basis; and
for the Pro Forma numbers, on
estimated amounts for the fiscal year ending
December 31, 1995.
CLASS B SHARES
Acquiring Acquired Pro
Fund Fund Forma
Shareholder Transaction
Expenses
Maximum sales charge
imposed
on purchases None None None
(as a percentage of
offering price)
Maximum CDSC
(as a percentage of 5.00% 5.00% 5.00%
original cost or redemption
proceeds, whichever is lower)
Annual Portfolio Operating Expenses
(as a percentage of average
net assets)
Management fees 1.00% 1.00% 1.00%
12b-1 fees* 1.00 1.00 1.00
Other expenses** 0.45 1.40 0.45
Total Portfolio
Operating
Expenses 2.45% 3.40% 2.45%
______________________
* Upon conversion of Class B shares to
Class A shares, such shares will no longer be
subject to a distribution fee, but will
continue to be subject to a 0.25% service fee.
** These expenses for Class B shares of the
Acquiring Fund are based on estimated
amounts for the fiscal year ending December
31, 1995; for the Acquired Fund based on
actual amounts, for the period from May 3,
1994 through October 31, 1994, on annualized
basis; and for the Pro Forma numbers, on
estimated amounts for the fiscal year ending
December 31, 1995.
Examples
The following examples are intended to
assist an investor in understanding the
various costs that an investor will bear
directly or indirectly. The examples
assume payment of operating expenses at the
levels set forth in the tables above.
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return
and (2) redemption at the end of
each time period:
1 Year 3 Years
Class A
Acquiring
Fund
$67 $102
Acquired
Fund 80 133
Pro Forma
67 102
Class B
Acquiring
Fund
$75 $106
Acquired
Fund 84 134
Pro Forma
75 106
An investor would pay the following
expenses on the same investment,
assuming the same annual return
and no redemption:
1 Year 3 Years
Class A
Acquiring
Fund
$67 $102
Acquired
Fund 80 133
Pro Forma
67 102
Class B
Acquiring
Fund $25 $76
Acquired
Fund 34 104
Pro Forma
25 76
________________________
The examples also provide a means for an
investor to compare expense levels of funds
with different fee structures over varying
investment periods. To facilitate
such comparison, all funds are required to
utilize a 5.00% annual return assumption.
However, the Fund's actual
return will vary and may be greater or less
than 5.00%. These examples should not be
considered representations of
past or future expenses and actual expenses
may be greater or less than those shown.
SUMMARY
This summary is qualified in
its entirety by reference to the additional
information contained elsewhere in this
Prospectus/Proxy Statement, the Prospectus of
the Acquiring Fund dated April --, 1995, the
Statement of Additional Information of
Investment Funds dated May 1, 1995, the
Prospectus of the Acquired Fund dated February
21, 1995, the Statement of Additional
Information of the Acquired Fund dated
February 21, 1995 and the Plan, a copy of
which is attached to this Prospectus/Proxy
Statement as Exhibit A.
Proposed Reorganization. The
Plan provides for the transfer of all or
substantially all of the assets of the
Acquired Fund in exchange for shares of
the Acquiring Fund and the assumption by the
Acquiring Fund of certain liabilities of the
Acquired Fund. The Plan also calls for the
distribution of shares of the Acquiring
Fund to the Acquired Fund shareholders in
liquidation of the Acquired Fund. (The
foregoing proposed transaction is
referred to in this Prospectus/Proxy Statement
as the "Reorganization"). As a result of the
Reorganization, each shareholder of the
Acquired Fund will become the owner of that
number of full and fractional shares of the
Acquiring Fund having an aggregate net asset
value equal to the aggregate net asset value
of the shareholder's shares of the Acquired
Fund as of the close of business on the date
that the Acquired Fund's assets are exchanged
for shares of the Acquiring Fund.
(Shareholders of Class A and Class
B shares of the Acquired Fund will receive
Class A and Class B shares, respectively, of
the Acquiring Fund). See "Information About
the Reorganization."
For the reasons set forth below
under "Reasons for the Reorganization," the
Trustees of the Trust, including all of the
"non-interested" Trustees, as that term is
defined in the Investment Company Act of 1940,
as amended (the "1940 Act"), have unanimously
concluded that the Reorganization would be in
the best interests of the shareholders of the
Acquired Fund and that the interests of the
Acquired Fund's existing shareholders would
not be diluted as a result of
the transaction contemplated by the
Reorganization, and therefore has submitted
the Plan for approval by the Acquired Fund's
shareholders. The Trustees of the Trust
recommend approval of the Plan effecting the
Reorganization.
The Board of Directors of the
Investment Funds has also approved the
Reorganization.
Approval of the Reorganization
will require the affirmative vote of a
majority of the outstanding shares of the
Acquired Fund. See "Voting Information."
Tax Consequences. Prior to
completion of the Reorganization, the Acquired
Fund will have received from counsel an
opinion that, upon the Reorganization and the
transfer of the assets of the Acquired Fund,
no gain or loss will be recognized by the
Acquired Fund or its shareholders for Federal
income tax purposes; the holding period and
tax basis of shares of the Acquiring Fund that
are received by each Acquired Fund shareholder
will be the same as the holding period and tax
basis of the shares of the Acquired Fund
previously held by such shareholder; and the
holding period and tax basis of the assets of
the Acquired Fund in the hands of the
Acquiring Fund as a result of the
Reorganization will be the same as in the
hands of the Acquired Fund immediately prior
to the Reorganization.
Investment Objectives, Policies
and Restrictions. The Acquiring Fund was
organized for the purpose of acquiring the
assets of the Acquired Fund, and therefore,has
the same investment objective as the Acquired
Fund, which is to seek capital appreciation
through investments in securities believed to
have above average potential for capital
appreciation.
Although the investment
objectives are identical and the investment
policies of the Acquiring
Fund and the Acquired Fund are substantially
similar, shareholders of the Acquired Fund
should consider certain differences in such
policies. See " Information About the
Acquiring Fund", "Information About the
Acquired Fund" and "Comparison of Investment
Objectives and Policies."
Purchase and Redemption
Procedures. Purchase of shares of the
Acquiring Fund and the Acquired
Fund may be made through both the PFS
Distributors ("PFS", formerly known as Common
Sense Distributors) and Smith Barney Inc.
("Smith Barney"), the distributors of the
Funds at their respective public offering
prices (net asset value next determined plus
any applicable sales charge). Class A shares
of the Acquiring Fund are sold subject to a
maximum initial sales charge of 5.00% of the
public offering price. Class A shares of the
Acquired Fund are sold subject to a maximum
initial sales charge of 5.50% of the offering
price. Class B shares of both Funds are sold
without an initial sales charge but are
subject to higher ongoing expenses than Class
A shares and are subject to a
CDSC payable upon certain redemptions.
Class A shares of both the
Acquiring Fund and the Acquired Fund may be
redeemed at their respective net asset values
per share next determined
without charge. Class B shares of the
Acquiring Fund may be redeemed at their net
asset value per share, subject to
a maximum CDSC of 5.00% of the lower of
original cost or redemption proceeds,
declining by 1.00% each year after
the date of purchase to zero. Class B shares
of the Acquired Fund may be redeemed at their
net asset value per share, subject to a
maximum CDSC of 5.00% of the lesser
of the cost of the shares being redeemed or
the then current market value, declining by
1.00% in the second and third year after
purchase, 0.5% in the fourth year and 1.00% in
the fifth year to zero.
Shares of the Acquired Fund may
be redeemed by sending a written request in
proper form to PFS Shareholder Services ("PFS
Shareholder Services" or the "Sub-Transfer
Agent"), which serves as the transfer agent
for the Acquired Fund and Sub-Transfer Agent
for the Acquiring Fund. See "Redemption of
Shares" in the accompanying Prospectus of the
Acquiring Fund.
Exchange Privileges.
Shareholders of the Acquiring Fund may
exchange at net asset value all or
a portion of their shares for shares of the
same Class in certain funds of the Smith
Barney Mutual Funds. Any
exchange will be a taxable event for which a
shareholder may have to recognize a gain or a
loss under Federal income tax provisions. No
initial sales charge is imposed
on the shares being acquired in an exchange,
and no CDSC is imposed on the shares being
disposed of in the exchange. However, a sales
charge differential may apply
to exchanges of Class A shares with other
Smith Barney Mutual Funds. With respect to
Class B shares of the Acquiring Fund, for
purposes of computing the CDSC that
may be payable upon a disposition, the Class B
shares acquired in the exchange will be deemed
to have been purchased on the same date as the
Class B shares that were exchanged. Class B
shares of the Funds that are exchanged for
Class B shares of other Smith Barney Mutual
Funds imposing a higher CDSC will be subject
to the higher applicable CDSC. Shareholders of
the Acquired Fund are not permitted to
exchange their shares for shares the same
class of any of the funds within the Common
Sense II Family of Funds. After the
Reorganization, shareholders of the Acquiring
Fund may exchange their shares for shares of
the same class of any of the Smith Barney
Mutual Funds offered through PFS.
Dividends. Each Fund's policy
is to declare and pay dividends from net
investment income annually and to make annual
distributions of net realized capital gains,
if any. With respect to both Funds, unless
a shareholder otherwise instructs, dividends
and capital gain distributions will be
reinvested automatically in
additional shares of the same Class at net
asset value,subject to no sales charge or
CDSC. The distribution
option currently in effect for a shareholder
of the Acquired Fund will remain in effect
after the Reorganization. After the
Reorganization, however, the former Acquired
Fund shareholders may change their
distribution option at anytime by contacting
PFS Shareholder Services. See "Dividends,
Distributions and Taxes" in the accompanying
prospectus of the Acquiring Fund.
Shareholder Voting Rights.
Both the Investment Funds and the Trust are
registered with the Securities and Exchange
Commission (the "SEC") as open-end management
investment companies. The Acquiring
Fund is a separate series of Investment Funds,
a Maryland corporation having a Board of
Directors. The Acquired Fund is a separate
series of the Trust, a Massachusetts business
trust, having a Board of Trustees.
Shareholders of both Funds have similar voting
rights. Neither Fund holds an annual meeting
of shareholders, and there is normally no
meeting of shareholders held for the purpose
of electing directors/trustees unless and
until such time as less than a majority of the
directors/trustees holding office have been
elected by shareholders. At that time, the
directors/trustees in each Fund then in office
will call a shareholders' meeting for the
election of directors/trustees.
In addition, under the laws of
the Commonwealth of Massachusetts,
shareholders of the Acquired Fund do not have
appraisal rights in connection
with a combination or acquisition of the
assets of the Fund by another entity.
Shareholders of the Acquired Fund
may, however, redeem their shares at net asset
value (subject to any applicable CDSC) prior
to the date of the Reorganization.
For purposes of voting with
respect to the Reorganization, the Class A and
Class B shares of the Acquired Fund shall vote
together as a single class. See
"Comparative Information on Shareholders'
Rights-Voting Rights."
RISK FACTORS
Due to the fact that the
Acquiring Fund and the Acquired Fund each
invest primarily in common
stock, the investment risks of the Funds are
generally similar. The prices of common
stocks and other securities
fluctuate and, therefore, the value of an
investment in both the Acquiring Fund and the
Acquired Fund will vary
based upon each Fund's investment performance.
Any income from these investments will be
incidental to the goal of
capital appreciation. Both Funds may use
management techniques and strategies involving
options, futures contracts and options on
futures (which are sometimes referred to as
"derivatives"). The utilization of these
techniques may involve greater than ordinary
investment risks and the likelihood of more
volatile price fluctuation. Such risks are
discussed under the caption "Comparison of
Investment Objectives and Policies."
REASONS FOR THE REORGANIZATION
On December 20, 1994, The
Travelers Inc. ("Travelers") agreed to sell
its subsidiary, American Capital Research &
Management, Inc. ("American Capital") to Van
Kampen Merritt Companies, Inc. American
Capital managed the funds comprising the
Trust, except for the Acquired Fund which is
managed by Strategy Advisers. It was agreed
that, since Strategy Advisers, a subsidiary of
Travelers, would continue managing the Fund,
the Acquired Fund would become part of the
Smith Barney Mutual Funds, contingent upon the
approval of the Trustees of the Trust and the
shareholders of the Acquired Fund, and the
Acquiring Fund would be organized to acquire
the assets of the Acquired Fund. The Trustees
of the Trust are recommending that the
shareholders of the Acquired Fund approve the
Plan. In making such a determination, the
Trustees considered, among other things: (i)
the fact that the investment advisory,
distribution and shareholder services would be
provided by entities affiliated with
Travelers, which would ensure a continuity of
management and stability for the Acquired Fund
(ii) the ability of shareholders to exchange
shares of the Acquiring Fund for shares of
certain other funds of the Smith Barney Mutual
Funds; (iii) the terms and conditions of the
Reorganization; and (iv) the fact that the
Reorganization will be effected as a tax-free
reorganization.
In light of the foregoing, the
Trustees of the Trust, including the
non-interested Trustees, have decided that it
is in the best interests of
the Acquired Fund and its shareholders to
combine with the Acquiring Fund. The Trustees
have also determined that a
combination of the Acquired Fund and the
Acquiring Fund would not result in a dilution
of the Acquired Fund's shareholders'
interests. The Board of Directors of
Investment Funds considered the following
factors, among others, in approving the
Reorganization and determining that it is
advantageous to acquire that assets of the
Acquired Fund:(i) the terms and conditions of
the Reorganization; and (ii) the fact that the
Reorganization will result in a significant
inflow of assets to the Acquiring Fund.
The Board of Directors of Smith Barney
Investment Funds considered the following
factors, among others, in approving the
Reorganization and determining that it is
advantageous to acquire the
assets of the Acquired Fund; (i) the terms and
conditions of the Reorganization; (ii) the
fact that the Reorganization will result in a
significant increase in assets and (iii) the
fact that the Reorganization
will be effected as a tax-free reorganization.
Accordingly, the Board of
Directors of the Smith Barney Investment
Funds, including a majority of the
non-interested Directors, has determined that
the Reorganization is in
the best interests of the Acquired Fund's
shareholders and that the
interests of the Acquired Fund's shareholders
will not be diluted as a
result of the Reorganization.
INFORMATION ABOUT THE REORGANIZATION
Plan of Reorganization. The
following summary of the Plan is qualified in
its entirety by reference to the Plan (Exhibit
A hereto). The Plan provides that the
Acquiring Fund will acquire all or
substantially all of the assets of the
Acquired Fund in exchange for shares of the
Acquiring Fund and the
assumption by the Acquiring Fund of certain
liabilities of the Acquired Fund on June 30,
1995, or such later date as
may be agreed upon by the parties (the
"Closing Date"). Prior to the Closing Date,
the Acquired Fund will endeavor
to discharge all of its known liabilities and
obligations. The Acquiring Fund will not
assume any liabilities or
obligations of the Acquired Fund other than
those reflected in an unaudited statement of
assets and liabilities of the Acquired Fund
prepared as of the close of regular trading on
the New York Stock Exchange, Inc.
(the "NYSE"), currently 4:00 p.m. New York
time, on the Closing Date. The number of full
and fractional Class A
and Class B shares of the Acquiring Fund to be
issued to the Acquired Fund shareholders will
be determined on the basis of the Acquiring
Fund's and the Acquired Fund's
relative net asset values per Class A and
Class B shares, respectively, computed as of
the close of regular trading
on the NYSE on the Closing Date. The net asset
value per share of each Class will be
determined by dividing assets, less
liabilities, by the total number of
outstanding shares.
At or prior to the Closing
Date, the Acquired Fund will declare a
dividend or dividends which,
together with all previous such dividends,
shall have the effect of distributing to their
respective shareholders
all taxable income for the period ending on or
prior to the Closing Date. In addition, the
Acquired Fund's dividend will include its net
capital gains realized in the period ending on
or prior to the Closing Date (after reductions
for any capital loss carryforward).
As soon after the Closing Date
as conveniently practicable, the Acquired Fund
will liquidate and distribute pro rata to
shareholders of record as of
the close of business on the Closing Date the
full and fractional shares of the Acquiring
Fund received by the Acquired Fund. Such
liquidation and distribution will be
accomplished by the establishment of accounts
in the names of the Acquired Fund's
shareholders on the share records
of the Acquiring Fund's shareholder servicing
agent. Each account will represent the
respective pro rata number of
full and fractional shares of the Acquiring
Fund due to each of the Acquired Fund's
shareholders. After such
distribution and the winding up of its
affairs, the Acquired Fund will be terminated.
The consummation of the
Reorganization is subject to the conditions
set forth in the Plan. Notwithstanding
approval of the Acquired Fund's
shareholders, the Plan may be terminated at
any time at or prior to the Closing Date: (i)
mutual agreement of the Trust on behalf of the
Acquired Fund and Investment Funds on behalf
of the Acquiring Fund; (ii) by either party to
the Plan upon a material breach by the other
party of any representation, warranty or
agreement contained therein to
be performed at or prior to the Closing Date;
or (iii) by either party, if a condition of
the Plan expressed to be precedent to the
obligations of the terminating party has not
been met and it reasonably appears that it
will not or cannot be met.
Approval of the Plan will
require the affirmative vote of a majority of
the outstanding shares of the Acquired Fund.
If the Reorganization is not approved by
shareholders of the Trust, the
Trustees of the Acquired Fund will consider
other possible courses of action, including
liquidation of the Acquired Fund.
Description of the Acquiring
Fund's Shares. Full and fractional shares of
the respective class of shares of common stock
of the Acquiring Fund will
be issued to the Acquired Fund in accordance
with the procedures detailed in the Plan and
as described in the Acquiring Fund's
Prospectus. Generally, the Acquiring Fund
does not issue share certificates to
shareholders unless a specific request is
submitted to the Acquiring Fund's Sub-Transfer
Agent. The shares of the Acquiring Fund to be
issued to the Acquired Fund shareholders and
registered on the shareholder records of the
Acquiring Fund's shareholder servicing agent
will have no pre-emptive rights.
Federal Income Tax
Consequences. The exchange of assets for
shares of the Acquiring Fund is
intended to qualify for Federal income tax
purposes as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code"). As a condition
to the closing of the Reorganization, the
Acquiring Fund and the Acquired Fund will
receive an opinion from Willkie Farr &
Gallagher, counsel to the Acquiring Fund, to
the effect that, on the basis of the existing
provisions of the Code, U.S. Treasury
regulations issued thereunder, current
administrative rules, pronouncements and court
decisions, for Federal income tax purposes,
upon consummation of the Reorganization:
(1) the transfer of all or
substantially all of the Acquired Fund's
assets in exchange for the Acquiring Fund's
shares and the assumption by the Acquiring
Fund of certain scheduled
liabilities of the Acquired Fund will
constitute a "reorganization" within the
meaning of Section 368 (a)(1)(D) of the Code,
and the Acquiring Fund and the
Acquired Fund are each a "party to a
reorganization" within the meaning of Section
368(b) of the Code;
(2) no gain or loss will
be recognized by the Acquiring Fund upon the
receipt of the assets of the Acquired Fund in
exchange for the Acquiring Fund's shares, and
the assumption by the Acquiring Fund of
certain scheduled liabilities in the Acquired
Fund;
(3) no gain or loss will
be recognized by the Acquired Fund upon the
transfer of the Acquired Fund's assets to the
Acquiring Fund in exchange
for the Acquiring Fund shares and the
assumption by the Acquiring Fund of certain
scheduled liabilities of the
Acquired Fund or upon the distribution
(whether actual or constructive) of the
Acquiring Fund shares to the Acquired
Fund's shareholders;
(4) no gain or loss will
be recognized by shareholders of the Acquired
Fund upon the exchange of their Acquired Fund
shares for the Acquiring
Fund shares and the assumption by the
Acquiring Fund of certain scheduled
liabilities of the Acquired Fund;
(5) the aggregate tax
basis of the Acquiring Fund shares received by
each Acquired Fund shareholder pursuant to
the Reorganization will be the
same as the aggregate tax basis of the
Acquired Fund shares surrendered in exchange
therefor and the holding period of the
Acquiring Fund shares to be received by each
Acquired Fund shareholder will include the
period during which the shares of the Acquired
Fund which are surrendered in exchange
therefor were held by such shareholder
(provided the Acquired Fund shares were held
as capital assets on the date of the
Reorganization);and
(6) the tax basis of the
Acquired Fund's assets acquired by the
Acquiring Fund will be the
same as the tax basis of such assets to the
Acquired Fund immediately prior to the
Reorganization and the holding
period of the assets of the Acquired Fund in
the hands of the Acquiring Fund will include
the period during which such assets were held
by the Acquired Fund.
Shareholders of the Acquired
Fund should consult their tax advisors
regarding the effect, if any,
of the proposed Reorganization in light of
their individual circumstances. Since the
foregoing discussion only relates to the
Federal income tax consequences of the
Reorganization, shareholders of the Acquired
Fund should also consult their tax advisors as
to state and local tax consequences, if any,
of the Reorganization.
Capitalization. The following
table, which is unaudited, shows the
capitalization of the Acquiring Fund and the
Acquired Fund as of January 31, 1995 and on a
pro forma basis as of that date, giving
effect to the proposed acquisition of assets
at net asset value:
(In thousands, except
per share values)
(Unaudited)
Acquiring Acquired ProForma
Fund* Fund
Class A
Shares
Net Assets$-0- $35,491,813 $35,491,813
Net asset
value per
share. $-0- $12.18 $12.18
Shares
outstanding -0- 2,914,493 2,914,493
Acquiring Acquired Proforma
Fund* Fund
Class B
Shares
Net Assets$-0- $17,289,820 $17,289,820
Net asset
value per
share. $-0- $12.18 $12.18
Shares
outstanding-0- 1,419,870 1,419,870
* The Acquiring Fund will not commence
operations until consummation of the
Reorganization, and accordingly, no
financial information is available at this
time.
As of April 26, 1995 (the
"Record Date"), there were --- outstanding
Class A shares and --- outstanding Class B
shares of the Acquired Fund. As of the
Record Date, the officers and Trustees of the
Trust beneficially owned as a group less than
1% of the outstanding shares of the Acquired
Fund ,except that 57.9% of the outstanding
Class A shares of the Acquired
Fund and 50.4% of the outstanding Class B
shares of the Acquired Fund were owned of
record by Van Kampen American Capital Trust
Company, acting as custodian for certain
employee benefit plans and individual
retirement accounts. To the best knowledge of
the Trustees of the Trust, as of the Record
Date, no shareholder or "group" (as that term
is used in Section 13(d) of the
Securities Exchange Act of 1934 (the "Exchange
Act"), except as set forth in the table below,
owned beneficially or of record more than 5%
of the Acquired Fund.
Percentage of Class Owned of Record
or Beneficially
Upon consummation
of the
Name and As of Reorganization
Address Record Date
* The Acquiring Fund will not commence
operations until consummation of the
Reorganization and accordingly, there are no
outstanding shares.
INFORMATION ABOUT THE ACQUIRED FUND
Management's Discussion
and Analysis of Market Conditions and
Portfolio Review.
COMPARISON OF INVESTMENT OBJECTIVES AND
POLICIES
The following discussion
comparing investment objectives, policies and
restrictions of the Acquiring Fund and the
Acquired Fund is based upon and qualified in
its entirety by the respective investment
objectives, policies and restrictions sections
of the Prospectuses of the Acquiring Fund and
the Acquired Fund. There can be no assurance
that either Fund will be able to achieve its
investment objective. For a full discussion of
the investment objectives, policies and
restrictions of the Acquiring Fund, refer to
the Acquiring Fund's Prospectus, which
accompanies this Prospectus/Proxy
Statement, under the caption, "Investment
Objective and Management Policies," and for a
discussion of these issues
as they apply to the Acquired Fund, refer to
the Acquired Fund's Prospectus under the
caption, "Investment Practices
and Risks."
Investment Objective. The
investment objective of the Acquiring Fund is
the same as the investment objective of the
Acquired Fund, which is to seek capital
appreciation by investing in securities
believed to have above average potential for
capital appreciation. The Acquiring Fund's
investment objectives is considered
fundamental and, as such, cannot be changed
without the affirmative vote of a majority, as
defined in the 1940 Act, of the outstanding
voting securities of the Acquiring Fund. The
Acquired Fund's investment objective is
considered non-fundamental and may be amended
by the Trustees of the Trust. Certain of each
Fund's investment policies are considered
non-fundamental and may be changed by the
Board of Directors/Trustees of Investment
Funds or the Trust, as the case may be,
provided such change is not prohibited by the
investment restrictions (which are set forth
in the applicable Statement of Additional
Information) or applicable law, and any such
change will first be disclosed in the then
current prospectus.
Primary Investments. The
Acquiring Fund was organized for the purpose
of acquiring the assets of the Acquired Fund
and, therefore, has the same portfolio manager
as the Acquired Fund. In addition, the
investment policies of the Acquiring Fund were
developed so that the investment policies of
the Funds would be substantially similar. The
Acquiring Fund and the Acquired Fund both
invest primarily in common stocks and the
portfolio manager uses a flexible management
style to select what it believes to be
unusually attractive growth investments on an
individual company basis. Such securities will
typically be issued by small capitalization
companies, larger companies with established
records of growth in sales or earnings, and
companies with new products, new services, or
new processes. Both Funds may also invest in
companies in cyclical industries during
periods when their securities appear overly
depressed and therefore attractive for capital
appreciation. In addition to common stocks of
companies, the Funds may invest in securities
convertible into or exchangeable for common
stocks, such as convertible preferred stocks
or convertible debentures and
warrants. The Acquired Fund may not purchase
securities of companies primarily engaged in
the manufacture of alcohol or tobacco.
The Funds generally hold a
portion of their assets in investment grade
short-term debt securities, investment grade
corporate or government bonds, cash and
cash equivalents in order to provide
liquidity. Such investments may be increased
when deemed appropriate by
the portfolio manager for temporary defensive
purposes. Under such circumstances, the Funds
may invest up to 100% of their assets in
short-term investments which may
include repurchase agreements with domestic
banks or broker-dealers. The Funds may invest
up to 35% of their total assets in securities
of foreign issuers. Both Funds may also engage
in portfolio management strategies and
techniques involving options, futures
contracts and options on futures.
Investments in smaller capitalized
companies may offer greater opportunities for
growth of capital than larger, more
established companies, but may
also involve certain risks because smaller
capitalized companies often have limited
product use, market or financial resources and
may be dependent on one or two
people for management. Both the Acquiring Fund
and the Acquired Fund may purchase restricted
securities (subject to a limit on all illiquid
securities of 15% of total assets), invest in
money market instruments, enter into
repurchase agreements for temporary defensive
purposes, lend portfolio securities and enter
into forward contracts. Currently, due to
various state regulations, each Fund will not
invest more than 10% of its assets in
restricted securities.
Investment Techniques.
Both the Acquiring Fund and the Acquired Fund
may enter into repurchase agreement
transactions with domestic banks or broker-
dealers, whereby the Fund would acquire an
underlying debt obligation for a relatively
short period (usually not more
than one week) subject to an obligation of the
seller to repurchase and the Fund to resell,
the obligation at an agreed upon price and
time, thereby determining the yield
during the Fund's holding period. Repurchase
agreements could involve certain risks in the
event of default or insolvency of the other
party.
Both the Acquiring Fund
and the Acquired Fund expect to utilize
options, futures contracts and options
thereon, (which are sometimes referred to as
"derivatives"). The purchase and sale of
options and futures contracts involve risks
different from those involved with direct
investments in securities. If the
portfolio manager is not successful in
utilizing such instruments, the Funds'
performance could be worse than if
the Funds did not make such investments.
Neither Fund may purchase or sell futures
contracts or related options for
which the aggregate initial margin and
premiums exceed 5% of the fair market value of
the respective Fund's assets.
Both the Acquiring Fund
and the Acquired Fund may also invest in
securities of foreign issuers of developed and
emerging market countries, including non-U.S.
dollar denominated securities,
Eurodollar securities and securities issued,
assumed or guaranteed by foreign governments
or political subdivisions or instrumentalities
thereof and will limit said investment in
foreign securities to 35% of the respective
Fund's total assets. Both Funds may purchase
American Depositary Receipts as well as
European Depositary Receipts.
Both Fund's foreign
currency exchange transactions generally will
be conducted on a spot basis (that is, cash
basis) at the spot rate for
purchasing or selling currency prevailing in
the foreign currency exchange market. Neither
Fund purchases or sells
foreign currencies as an investment. Both
Funds may also enter into contracts with banks
or other foreign currency brokers and dealers
in which the Funds purchase or sell foreign
currencies at a future date ("future
contracts") and purchase and sell foreign
currency futures contracts to hedge against
changes in foreign currency exchange rates.
Both Funds may purchase or sell debt
securities on a "when-issued" or "delayed
delivery" basis ("Forward Commitments").
The Acquiring Fund and the
Acquired Fund may lend their portfolio
securities in amounts up to 33 1/3% of their
total assets to unaffiliated brokers, dealers
and financial institutions,
provided that the borrower, at all times
during the loan, must maintain U.S.
government securities or cash or cash
equivalents of at least 100% of the value of
the securities loaned and pays the Funds any
dividends or interest paid on such securities.
The Funds may invest the cash collateral in
short-term instruments and earn additional
income.
Each Fund has adopted
investment restrictions to protect the
shareholders, which restrictions may not be
changed without the approval of
the holders of a majority, as defined in the
1940 Act, of the voting securities of the
respective Fund. The investment restrictions
for both the Acquiring Fund and
the Acquired Fund are virtually the same, with
the exception that the Acquiring Fund may
purchase securities issued by any company
primarily engaged in the manufacture
of alcohol or tobacco, whereas the Acquired
Fund may not purchase said securities.
Tax Considerations. The
Acquiring Fund and the Acquired Fund both
intend to qualify as "regulated investment
companies" under the Code. By so
qualifying, neither Fund would be required to
pay any federal income tax. Dividends from net
investment income and distributions from any
net realized short-term capital
gains are taxable to shareholders as ordinary
income. Distributions of any net capital gains
designated by the Funds as capital gains
dividends are taxable to shareholders as
long-term capital gains regardless of the
length of time a shareholder may have held
shares of the Funds.
COMPARATIVE INFORMATION ON SHAREHOLDERS'
RIGHTS
General. Investment Funds
and the Trust are open-end, diversified
management investment companies registered
under the 1940 Act, which continuously offer
to sell shares at their current net asset
value. Investment Funds is a Maryland
corporation and is governed by its Articles of
Incorporation, By-Laws and Board of Directors.
The Trust is organized under the laws of
Massachusetts and is a business entity
commonly known as a "Massachusetts business
trust." The Trust is governed by its
Declaration of Trust, By-Laws and Trustees.
Investment Funds and the Trust are also
governed by applicable state and
Federal law. The Acquiring Fund is a separate
series of Investment Funds. Investment Funds
has an authorized capital of 10,000,000,000
shares with a par value of $.001 per share.
The Board of Directors has authorized the
issuance of five series of
shares, each representing shares in separate
portfolios, and 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. The beneficial
interest in the Acquired Fund is divided into
shares, all with a par value of $.001 per
share. The number of authorized
shares that may be issued is unlimited. In
both the Acquired Fund and the Acquiring Fund,
Class A shares and Class B shares represent
interests in the assets of the
respective Fund and have identical voting,
dividend, liquidation, and other rights on the
same terms and conditions except that expenses
related to the distribution of each Class of
shares are borne solely by each Class and each
Class of shares has exclusive voting
rights with respect to provisions of each
Fund's Rule 12b-1 distribution plan which
pertains to a particular Class.
Directors/Trustees. The
By-Laws of the Investment Funds provide that
the term of office of each Director shall be
from the time of his or her election and
qualification until the earlier of his or her
successor is elected and qualified or until
his or her death, resignation or removal. The
Declaration of Trust of the Trust provides
that the term of office of each Trustee shall
be from the time of his or her election until
the termination of the Trust or the earlier of
his or her death, resignation, retirement,
bankruptcy, adjudicated incompetency or other
incapacity or removal, or if not so
terminated, until the election of such
Trustee's successor in office has become
effective. Any Director of Investment Funds
may be removed with or without cause by the
affirmative vote of the holders of a majority
of the votes entitled to be cast thereon, and
such holders may elect a successor or
successors to fill any resulting vacancies for
the unexpired terms of the removed Directors.
A Trustee of the Trust may be removed
with or without cause by written instrument,
signed by at least two-thirds of the Trustees,
by vote of shareholders holding not less than
two-thirds of the shares of each
series then outstanding, cast in person or by
proxy at any meeting called for the purpose or
by a written declaration signed by
shareholders holding not less than two-thirds
of the shares of each series then outstanding
and filed with the Trust's custodian.
Vacancies on the Boards of either
Investment Funds or the Trust
may be filled by the Directors or Trustees, as
the case may be, remaining in office. A
meeting of shareholders
will be required for the purpose of electing
additional Directors or Trustees whenever
fewer than a majority of the Directors or
Trustees then in office were elected by
shareholders.
Voting Rights. Neither
Investment Funds nor the Trust holds an
annual meeting of shareholders, and there
normally is no meeting of shareholders for the
purpose of electing Directors/Trustees unless
and until such time as less than a majority of
the Directors/Trustees holding office have
been elected by shareholders.
Liquidation or
Termination. In the event of the liquidation
or termination of any of the
portfolios of Investment Funds or of a
liquidation or termination of any series of
the Trust, the shareholders of the respective
funds are entitled to receive, when, and as
declared by the Directors or the Trustees, as
the case may be, the excess of the assets
belonging to the respective fund over the
liabilities belonging to the respective fund.
In either case, the assets so distributed to
shareholders will be distributed among the
shareholders in proportion to the
number of shares of a Fund's class held by
them and recorded on the books of the
respective fund.
Liability of
Directors/Trustees. The Articles of
Incorporation of Investment Funds provide that
the Directors and officers shall not be liable
for monetary damages for breach of fiduciary
duty as a Director or officer, except to the
extent such exemption is not permitted by law.
The By-Laws of Investment Funds further
provide that Investment Funds shall indemnify
each Director and officer to the fullest
extent permitted by Maryland General
Corporation Law. Under the Declaration of
Trust of the Trust, a Trustee will be
personally liable only for his or her own
willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties
involved in the conduct of the office of
Trustee. The Declaration of Trust
further provides that Trustees and officers
will be indemnified for the expenses of
litigation against them unless it is
determined that the person did not act in
good faith in the reasonable belief that the
person's actions were in or not opposed to the
best interest of the Trust or the person's
conduct is determined to constitute willful
misfeasance, bad faith, gross negligence or
reckless disregard of the person's duties.
Rights of Inspection.
Maryland law permits any shareholder of
Investment Funds or any agent of such
shareholder to inspect and copy
during the Investment Fund's usual business
hours the Investment Funds' By-laws, minutes
of shareholder proceedings, annual statements
of the Investment Funds' affairs and voting
trust agreements on file at its principal
office. Shareholders of the Trust have the
same inspection rights as are permitted
shareholders of a Massachusetts corporation
under Massachusetts corporate law. Currently,
each shareholder of a Massachusetts
corporation is permitted to inspect the
records, accounts and books of a corporation
for any legitimate business purpose.
Shareholder Liability.
Under Maryland law, Investment Funds'
shareholders do not have personal liability
for the Investment Funds' corporate acts and
obligations. Shares of the Acquiring
Fund issued to the shareholders of the
Acquired Fund in the Reorganization will be
fully paid and nonassessable
when issued with no personal liability
attaching to the ownership thereof and
transferable without restrictions
and will have no pre-emptive rights. Under
Massachusetts law, shareholders of the
Acquired Fund may, under certain circumstances
be held personally liable for
the obligations of the Acquired Fund. The
Declaration of Trust of the Trust, however,
disclaims shareholder liability for acts or
obligations of the Trust and
requires that notice of such disclaimer be
given in each agreement, obligation or
instrument entered into or
executed by the Trust. The Declaration of
Trust of the Trust also provides for
indemnification out of the property of the
Acquired Fund for all losses and expenses of
any shareholder held personally liable for the
obligations of the Acquired Fund.
The foregoing is only a
summary of certain characteristics of the
operations of the Acquiring Fund and the
Acquired Fund. The foregoing is not a
complete description of the documents cited.
Shareholders should refer to the provisions of
the corporate documents or trust documents and
state laws governing each Fund for a more
thorough description.
ADDITIONAL INFORMATION ABOUT
THE ACQUIRING FUND
AND THE ACQUIRED FUND
The Acquiring Fund.
Information concerning the operation and
management of the Acquiring Fund is
incorporated herein by reference from the
Prospectus dated May 1, 1995, a copy of which
is included herewith, and in the Statement of
Additional Information of Investment Funds
dated May 1, 1995, which has been filed with
the SEC. A copy of such Statement of
Additional Information is available upon
request and without charge by writing
Investment Funds at 388 Greenwich Street, New
York, New York 10013 or by calling (800)
224-7523.
The Acquired Fund.
Information about the Acquired Fund is
incorporated herein by reference from its
current Prospectus dated February 21,
1995, as amended on March 7, 1995 and in the
Statement of Additional Information dated
February 21, 1995, which has been filed with
the SEC. A copy of the Prospectus and the
Statement of Additional Information is
available upon request and without charge
by writing the Acquired Fund at 3100
Breckenridge Boulevard, Duluth, Georgia 30199
or by calling (800)544-5445.
Both the Acquiring Fund
and the Acquired Fund are subject to the
informational requirements of the 1940 Act and
in accordance therewith file reports and other
information including proxy material, reports
and charter documents with the
SEC. These reports can be inspected and copies
obtained at the Public Reference Facilities
maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the
New York Regional Office of the SEC, Seven
Hanover Square, New York, New York 10007.
Copies of such material can also be obtained
from the Public Reference Branch, Office of
Consumer Affairs and Information Services,
SEC, Washington, D.C. 20549 at prescribed
rates.
OTHER BUSINESS
The Trustees of the Trust
do not intend to present any other business at
the Meeting. If, however, any other matters
are properly brought before the Meeting, the
persons named in the accompanying form of
proxy will vote thereon in accordance
with their judgment.
VOTING INFORMATION
This Prospectus/Proxy
Statement is furnished in connection with a
solicitation of proxies by the Trustees of the
Trust on behalf of the Acquired Fund to be
used at the Special Meeting of Shareholders to
be held at 2:00 p.m. on June 23, 1995, at
Transco Towers, Level 2, 2800 Post Oak
Boulevard, Houston, Texas, 77056 and at any
adjournments thereof. This Prospectus/Proxy
Statement, along with a Notice of the Meeting
and a proxy card, is first being mailed to
shareholders of the Acquired Fund on or about
May --, 1995. Only shareholders
of record as of the close of business on the
Record Date will be entitled to notice of, and
to vote at, the Meeting or any adjournment
thereof. The holders of a majority of
the shares of the Acquired Fund outstanding at
the close of business on the Record Date
present in person or represented by proxy will
constitute a quorum for the
Meeting. For purposes of determining a quorum
for transacting business at the Meeting,
abstentions and broker "non-votes" (that is,
proxies from brokers or nominees indicating
that such persons have not received
instructions from the beneficial owner or
other persons entitled to vote shares on a
particular matter with respect to which the
brokers or nominees do not have
discretionary power) will be treated as shares
that are present but which have not been
voted. For this reason,
abstentions and broker non-votes will have the
effect of a "no" vote for purposes of
obtaining the requisite approval
of the Plan. If the enclosed form of proxy is
properly executed and returned in time to be
voted at the Meeting, the proxies named
therein will vote the shares represented by
the proxy in accordance with the instructions
marked thereon. Unmarked proxies will be voted
FOR the proposed Reorganization and FOR any
other matters deemed appropriate. A proxy may
be revoked at any time on or
before the Meeting by written notice to the
Acquired Fund, [3100 Breckenridge Boulevard,
Duluth, Georgia 30199] c/o the Corporate
Secretary. Unless revoked, all valid proxies
will be voted in accordance with the
specifications thereon or, in the absence of
such specifications, FOR approval of the Plan
and the Reorganization contemplated
thereby.
Approval of the Plan will
require the affirmative vote of a majority of
the outstanding shares of the Acquired Fund.
Shareholders of Class A and B shares of the
Acquiring Fund shall vote together as a single
Class. Shareholders of the Acquired Fund are
entitled to one vote for each share.
Proxies are solicited by
mail. Additional solicitations may be made by
telephone, telegraph or personal contact by
officers or employees of PFS, Smith Barney and
its affiliates, PFS Shareholder Services
and/or by The Shareholder Services Group,
Inc., a subsidiary of First Data Corporation
(the Acquiring Fund's co-transfer agent).
Expenses of the Reorganization, including the
costs of proxy solicitation, the preparation
of this Prospectus/Proxy Statement and
enclosures attached hereto and reimbursement
of expenses for forwarding solicitation
material to beneficial owner of shares of the
Acquired Fund will be borne by Smith Barney
In the event that
sufficient votes to approve the Reorganization
are not received by June 30, 1995, the persons
named as proxies may propose one or more
adjournments of the Meeting to permit further
solicitation of proxies. In determining
whether to adjourn the Meeting,
the following factors may be considered: the
percentage of votes actually cast, the
percentage of negative votes actually cast,
the nature of any further solicitation and the
information to be provided to shareholders
with respect to the reasons for the
solicitation. Any such adjournment will
require an affirmative vote by the holders of
a majority of the shares present in person or
by proxy and entitled to vote at the Meeting.
The persons named as proxies will vote upon
such adjournment after consideration of the
best interests of all shareholders.
The votes of the
shareholders of the Acquiring Fund are not
being solicited by this Prospectus/Proxy
Statement.
FINANCIAL STATEMENTS AND EXPERTS
The audited statements of
assets and liabilities of the Acquired Fund as
of October 31, 1994, and the related
statements of operations for the
periods then ended and changes in net assets
for the two periods then ended and financial
highlights, have been incorporated by
reference into the Statement of Additional
Information relating to this Prospectus/Proxy
Statement in reliance on the reports of Ernst
& Young LLP, independent auditors for the
Acquired Fund, given on the authority of
such firm as experts in accounting and
auditing. There is no financial information
available at this time for the Acquiring Fund,
since it has not yet had operations.
LEGAL MATTERS
The validity of the shares
of the Acquiring Fund to be issued in the
Reorganization will be passed upon by Willkie
Farr & Gallagher, One Citicorp Center, 153
East 53rd Street, New York, New York 10022. In
rendering such opinion, Willkie Farr &
Gallagher may rely on an opinion of Venable,
Baetjer and Howard, LLP, Baltimore, Maryland,
as to certain matters under Maryland law.
THE TRUSTEES OF THE TRUST,
INCLUDING THE "NON-INTERESTED" TRUSTEES,
UNANIMOUSLY RECOMMEND APPROVAL OF THE PLAN,
AND ANY UNMARKED PROXIES
WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE
VOTED IN FAVOR OF APPROVAL OF THE PLAN.
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF
REORGANIZATION (the "Agreement") is made as of
this day of March, 1995, by and between Smith
Barney Investment Funds Inc. ("Smith Barney
Investment Funds"), a Maryland corporation
with its principal place of business at 388
Greenwich Street, New York, New York 10013, on
behalf of the Growth Opportunity Fund (the
"Acquiring Fund"), an investment portfolio of
Smith Barney Investment Funds and Common Sense
Trust, a business trust organized under the
laws of The Commonwealth of Massachusetts with
its principal place of business at [
], on behalf of the Growth Opportunity
Fund (the "Acquired Fund"), an investment fund
of Common Sense Trust.
This Agreement is intended to be and
is adopted as a plan of reorganization and
liquidation within the meaning of Section
368(a)(1)(D) of the United States Internal
Revenue Code of 1986, as amended (the "Code").
The reorganization (the "Reorganization") will
consist of the transfer of all or
substantially all of the assets of the
Acquired Fund in exchange for Class A and
Class B shares of common stock of the
Acquiring Fund (collectively, the "Acquiring
Fund Shares" and each, an "Acquiring Fund
Share") and the assumption by the Acquiring
Fund of certain scheduled liabilities of the
Acquired Fund and the distribution, after the
Closing Date herein referred to, of Acquiring
Fund Shares to the shareholders of the
Acquired Fund in liquidation of the Acquired
Fund and the termination of the Acquired Fund,
all upon the terms and conditions hereinafter
set forth in this Agreement.
WHEREAS, Smith Barney Investment
Funds and Common Sense Trust are registered
investment companies of the management type
and the Acquired Fund owns securities that
generally are assets of the character in which
the Acquiring Fund is permitted to invest;
WHEREAS, Smith Barney Investment
Funds is authorized to issue shares of common
stock and Common Sense Trust is authorized to
issue shares of beneficial interest;
WHEREAS, the Trustees of Common
Sense Trust has determined that the exchange
of all or substantially all of the assets and
certain of the liabilities of the Acquired
Fund for Acquiring Fund Shares and the
assumption of such liabilities by Smith Barney
Investment Funds on behalf of the Acquiring
Fund is in the best interests of the Acquired
Fund's shareholders and that the interests of
the existing shareholders of the Acquired Fund
would not be diluted as a result of this
transaction;
WHEREAS, the Board of Directors of
Smith Barney Investment Funds has determined
that the exchange of all or substantially all
of the assets of the Acquired Fund for
Acquiring Fund Shares is in the best interests
of the Acquiring Fund's shareholders and that
the interests of the existing shareholders of
the Acquiring Fund would not be diluted as a
result of this transaction;
NOW, THEREFORE, in consideration of
the premises and of the covenants and
agreements hereinafter set forth, the parties
hereto covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND
IN EXCHANGE FOR THE ACQUIRING FUND SHARES
AND ASSUMPTION OF THE ACQUIRED FUND'S
SCHEDULED LIABILITIES AND LIQUIDATION AND
TERMINATION OF THE ACQUIRED FUND
1.1. Subject to the terms and
conditions herein set forth and on the basis
of the representations and warranties
contained herein, Common Sense Trust, on
behalf of the Acquired Fund agrees to transfer
the Acquired Fund's assets as set forth in
paragraph 1.2 to Smith Barney Investment Funds
on behalf of the Acquiring Fund, and Smith
Barney Investment Funds on behalf of the
Acquiring Fund agrees in exchange therefor:
(i) to deliver to the Acquired Fund the number
of Class A Acquiring Fund Shares, including
fractional Class A Acquiring Fund Shares,
determined by dividing the value of the
Acquired Fund's net assets attributable to its
Class A shares, computed in the manner and as
of the time and date set forth in paragraph
2.1, by the net asset value of one Class A
Acquiring Fund Share, computed in the manner
and as of the time and date set forth in
paragraph 2.2; (ii) to deliver to the Acquired
Fund the number of Class B Acquiring Fund
Shares, including fractional Class B Acquiring
Fund Shares, determined by dividing the value
of the Acquired Fund's net assets attributable
to its Class B shares, computed in the manner
and as of the time and date set forth in
paragraph 2.1, by the net asset value of one
Class B Acquiring Fund Share, computed in the
manner and as of the time and date set forth
in paragraph 2.2; and (iii) to assume certain
scheduled liabilities of the Acquired Fund, as
set forth in paragraph 1.3. Such transactions
shall take place at the closing provided for
in paragraph 3.1 (the "Closing").
1.2. (a) The assets of the Acquired
Fund to be acquired by Smith Barney World
Funds on behalf of the Acquiring Fund shall
consist of all or substantially all of its
property, including, without limitation, all
cash, securities and dividends or interest
receivables which are owned by the Acquired
Fund and any deferred or prepaid expenses
shown as an asset on the books of the Acquired
Fund on the closing date provided in paragraph
3.1 (the "Closing Date").
(b) The Acquired Fund has
provided the Acquiring Fund with a list of all
of the Acquired Fund's assets as of the date
of execution of this Agreement. The Acquired
Fund reserves the right to sell any of the
securities but will not, without the prior
approval of the Acquiring Fund, acquire any
additional securities other than securities of
the type in which the Acquiring Fund is
permitted to invest. The Acquiring Fund will,
within a reasonable time prior to the Closing
Date, furnish the Acquired Fund with a
statement of the Acquiring Fund's investment
objectives, policies and restrictions and a
list of the securities, if any, on the
Acquired Fund's list referred to in the first
sentence of this paragraph which do not
conform to the Acquiring Fund's investment
objectives, policies and restrictions. In the
event that the Acquired Fund holds any
investments which the Acquiring Fund may not
hold, the Acquired Fund will dispose of such
securities prior to the Closing Date. In
addition, if it is determined that the
portfolios of the Acquired Fund and the
Acquiring Fund, when aggregated, would contain
investments exceeding certain percentage
limitations imposed upon the Acquiring Fund
with respect to such investments, the Acquired
Fund, if requested by the Acquiring Fund, will
dispose of and/or reinvest a sufficient amount
of such investments as may be necessary to
avoid violating such limitations as of the
Closing Date.
1.3. Common Sense Trust, on behalf
of the Acquired Fund will endeavor to
discharge all the Acquired Fund's known
liabilities and obligations prior to the
Closing Date. Smith Barney Investment Funds
on behalf of the Acquiring Fund shall assume
all liabilities, expenses, costs, charges and
reserves reflected on an unaudited Statement
of Assets and Liabilities of the Acquired Fund
prepared by the Acquired Fund's auditors, as
of the Valuation Date (as defined in paragraph
2.1), in accordance with generally accepted
accounting principles consistently applied
from the prior audited period. Smith Barney
Investment Funds on behalf of the Acquiring
Fund shall assume only those liabilities of
the Acquired Fund reflected in that unaudited
Statement of Assets and Liabilities and shall
not assume any other liabilities, whether
absolute or contingent, not reflected therein.
1.4. As provided in paragraph 3.4,
as soon after the Closing Date as is
conveniently practicable (the "Liquidation
Date"), the Acquired Fund will liquidate and
distribute pro rata to the Acquired Fund's
shareholders of record determined as of the
close of business on the Closing Date (the
"Acquired Fund Shareholders"), the Acquiring
Fund Shares it receives pursuant to paragraph
1.1. Shareholders of Class A and Class B
shares of the Acquired Fund shall receive
Class A and Class B shares, respectively, of
the Acquiring Fund. Such liquidation and
distribution will be accomplished by the
transfer of the Acquiring Fund Shares then
credited to the account of the Acquired Fund
on the books of the Acquiring Fund to open
accounts on the share records of the Acquiring
Fund in the name of the Acquired Fund's
shareholders and representing the respective
pro rata number of the Acquiring Fund Shares
due such shareholders. All issued and
outstanding shares of the Acquired Fund will
simultaneously be cancelled on the books of
the Acquired Fund, although share certificates
representing interests in the Acquired Fund
will represent a number of Acquiring Fund
Shares after the Closing Date as determined in
accordance with paragraph 1.1. The Acquiring
Fund shall not issue certificates representing
the Acquiring Fund Shares in connection with
such exchange.
1.5. Ownership of Acquiring Fund
Shares will be shown on the books of the
Acquiring Fund's transfer agent. Acquiring
Fund Shares will be issued in the manner
described in the Acquiring Fund's current
prospectus and statement of additional
information.
1.6. Any transfer taxes payable
upon issuance of the Acquiring Fund Shares in
a name other than the registered holder of the
Acquired Fund Shares on the books of the
Acquired Fund as of that time shall, as a
condition of such issuance and transfer, be
paid by the person to whom such Acquiring Fund
Shares are to be issued and transferred.
1.7. Any reporting responsibility
of the Acquired Fund is and shall remain the
responsibility of the Acquired Fund up to and
including the Closing Date and such later
dates on which the Acquired Fund is terminated
and deregistered.
1.8. The Acquired Fund shall,
following the Closing Date and the making of
all distributions pursuant to paragraph 1.4,
be terminated under the laws of The
Commonwealth of Massachusetts and in
accordance with its governing documents and
shall apply for an order of the Commission
under Section 8(f) of the 1940 Act declaring
that it has ceased to be an investment
company.
2. VALUATION
2.1. The value of the Acquired
Fund's assets to be acquired by the Acquiring
Fund hereunder shall be the value of such
assets computed as of the close of regular
trading on the New York Stock Exchange, Inc.
(the "NYSE") on the Closing Date (such time
and date being hereinafter called the
"Valuation Date"), using the valuation
procedures set forth in the Acquiring Fund's
then current prospectus or statement of
additional information.
2.2. The net asset value of
Acquiring Fund Shares shall be the net asset
value per share computed as of the close of
regular trading on the NYSE on the Valuation
Date, using the valuation procedures set forth
in the Acquiring Fund's then current
prospectus or statement of additional
information.
2.3. All computations of value
shall be made by [ ] and Smith Barney
Mutual Funds Management Inc. in accordance
with its regular practice as pricing agent for
the Acquired Fund and the Acquiring Fund,
respectively.
3. CLOSING AND CLOSING DATE
3.1. The Closing Date shall be June
30, 1995, or such later date as the parties
may agree to in writing. All acts taking
place at the Closing shall be deemed to take
place simultaneously as of the close of
business on the Closing Date unless otherwise
provided. The Closing shall be held as of
5:00 p.m. at the offices of Smith Barney Inc.,
388 Greenwich Street, New York, New York
10013, or at such other time and/or place as
the parties may agree.
3.2. In the event that on the
Valuation Date (a) the NYSE or another primary
trading market for portfolio securities of the
Acquiring Fund or the Acquired Fund shall be
closed to trading or trading thereon shall be
restricted or (b) trading or the reporting of
trading on the NYSE or elsewhere shall be
disrupted so that accurate appraisal of the
value of the net assets of the Acquiring Fund
or the Acquired Fund is impracticable, the
Closing Date shall be postponed until the
first business day after the day when trading
shall have been fully resumed and reporting
shall have been restored.
3.3. The Acquired Fund shall
deliver at the Closing a list of the names and
addresses of the Acquired Fund's shareholders
and the number and percentage ownership of
outstanding shares owned by each such
shareholder immediately prior to the Closing,
certified on behalf of the Acquired Fund by
its President. The Acquiring Fund shall issue
and deliver a confirmation evidencing the
Acquiring Fund Shares to be credited to the
Acquired Fund's account on the Closing Date to
the Secretary of the Acquired Fund, or provide
evidence satisfactory to the Acquired Fund
that such Acquiring Fund Shares have been
credited to the Acquired Fund's account on the
books of the Acquiring Fund. At the Closing,
each party shall deliver to the other such
bills of sale, checks, assignments, share
certificates, if any, receipts or other
documents as such other party or its counsel
may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1. Common Sense Trust and the
Acquired Fund represent and warrant to Smith
Barney Investment Funds and the Acquiring Fund
as follows:
(a) Common Sense Trust is a
business trust, duly organized, validly
existing and in good standing under the laws
of The Commonwealth of Massachusetts;
(b) Common Sense Trust is a
registered investment company classified as a
management company of the open-end type, and
its registration with the Securities and
Exchange Commission (the "Commission") as an
investment company under the Investment
Company Act of 1940, as amended (the "1940
Act") is in full force and effect;
(c) Common Sense Trust is not, and
the execution, delivery and performance of
this Agreement will not result, in a material
violation of its Master Trust Agreement or
By-laws or of any agreement, indenture,
instrument, contract, lease or other
undertaking to which the Acquired Fund is a
party or by which it is bound;
(d) Common Sense Trust has no
material contracts or other commitments (other
than this Agreement) which will be terminated
with liability to the Acquired Fund prior to
the Closing Date;
(e) No material litigation or
administrative proceeding or investigation of
or before any court or governmental body is
presently pending or to its knowledge
threatened against Common Sense Trust or the
Acquired Fund or any of the Acquired Fund's
properties or assets, except as previously
disclosed to the Acquiring Fund. The Acquired
Fund knows of no facts which might form the
basis for the institution of such proceedings
and is not party to or subject to the
provisions of any order, decree or judgment of
any court or governmental body which
materially and adversely affects its business
or its ability to consummate the transactions
herein contemplated;
(f) The Statements of Assets and
Liabilities of the Acquired Fund for the
period ended [ ] have been audited by
Ernst & Young, independent certified public
accountants, and are in accordance with
generally accepted accounting principles
consistently applied, and such statements
(copies of which have been furnished to the
Acquiring Fund) fairly reflect the financial
condition of the Acquired Fund as of such
date, and there are no known contingent
liabilities of the Acquired Fund as of such
dates not disclosed therein;
(g) The Acquired Fund will file its
final federal and other tax returns for the
period ending on the Closing Date in
accordance with the Code. At the Closing
Date, all federal and other tax returns and
reports of the Acquired Fund required by law
then to have been filed prior to the Closing
Date shall have been filed, and all federal
and other taxes shown as due on such returns
shall have been paid so far as due, or
provision shall have been made for the payment
thereof and, to the best of the Acquired
Fund's knowledge, no such return is currently
under audit and no assessment has been
asserted with respect to such returns;
(h) For the most recent fiscal year
of its operation, the Acquired Fund has met
the requirements of Subchapter M of the Code
for qualification and treatment as a regulated
investment company;
(i) All issued and outstanding
shares of the Acquired Fund are, and at the
Closing Date will be, duly and validly issued
and outstanding, fully paid and
non-assessable. All of the issued and
outstanding shares of the Acquired Fund will,
at the time of Closing, be held by the persons
and in the amounts set forth in the records of
the transfer agent as provided in paragraph
3.4. The Acquired Fund does not have
outstanding any options, warrants or other
rights to subscribe for or purchase any shares
of the Acquired Fund, nor is there outstanding
any security convertible into any shares of
the Acquired Fund;
(j) At the Closing Date, the
Acquired Fund will have good and marketable
title to its assets to be transferred to the
Acquiring Fund pursuant to paragraph 1.2 and
full right, power and authority to sell,
assign, transfer and deliver such assets
hereunder and, upon delivery and payment for
such assets, the Acquiring Fund will acquire
good and marketable title thereto, subject to
no restrictions on the full transfer thereof,
including such restrictions as might arise
under the Securities Act of 1933, as amended
(the "1933 Act"), other than as disclosed to
the Acquiring Fund;
(k) The execution, delivery and
performance of this Agreement has been duly
authorized by all necessary action on the part
of Common Sense Trust's Board of Trustees, and
subject to the approval of the Acquired Fund's
shareholders, this Agreement, assuming due
authorization, execution and delivery by the
Acquiring Fund, will constitute a valid and
binding obligation of the Acquired Fund,
enforceable in accordance with its terms,
subject as to enforcement, to bankruptcy,
insolvency, reorganization, moratorium and
other laws relating to or affecting creditors'
rights and to general equity principles;
(l) The information to be furnished
by the Acquired Fund for use in no-action
letters, applications for exemptive orders,
registration statements, proxy materials and
other documents which may be necessary in
connection with the transactions contemplated
hereby shall be accurate and complete in all
material respects and shall comply in all
material respects with federal securities and
other laws and regulations thereunder
applicable thereto; and
(m) The proxy statement of the
Acquired Fund (the "Proxy Statement") to be
included in the Registration Statement
referred to in paragraph 5.7 (other than
information therein that relates to the
Acquiring Fund) will, on the effective date of
the Registration Statement and on the Closing
Date, not contain any untrue statement of a
material fact or omit to state a material fact
required to be stated therein or necessary to
make the statements therein, in light of the
circumstances under which such statements were
made, not materially misleading.
4.2. Smith Barney Investment Funds
and the Acquiring Fund represent and warrant
to Common Sense Trust and the Acquired Fund as
follows:
(a) The Acquiring Fund is a
portfolio of Smith Barney Investment Funds,
which is a corporation, duly organized,
validly existing and in good standing under
the laws of the State of Maryland;
(b) Smith Barney Investment Funds
is a registered investment company classified
as a management company of the open-end type
and its registration with the Commission as an
investment company under the 1940 Act is in
full force and effect;
(c) The current prospectus of the
Acquiring Fund and the statement of additional
information of Smith Barney Investment Funds
conform in all material respects to the
applicable requirements of the 1933 Act and
the 1940 Act and the rules and regulations of
the Commission thereunder and do not include
any untrue statement of a material fact or
omit to state any material fact required to be
stated therein or necessary to make the
statements therein, in light of the
circumstances under which they were made, not
materially misleading;
(d) At the Closing Date, Smith
Barney Investment Funds will have good and
marketable title to the Acquiring Fund's
assets;
(e) Smith Barney Investment Funds
is not, and the execution, delivery and
performance of this Agreement on behalf of the
Acquiring Fund will not result, in a material
violation of its Articles of Incorporation or
By-laws or of any agreement, indenture,
instrument, contract, lease or other
undertaking with respect to the Acquiring Fund
to which Smith Barney World Funds is a party
or by which it is bound;
(f) No material litigation or
administrative proceeding or investigation of
or before any court or governmental body is
presently pending or threatened against Smith
Barney Investment Funds with respect to the
Acquiring Fund or any of the Acquiring Fund's
properties or assets, except as previously
disclosed in writing to the Acquired Fund.
Smith Barney Investment Funds and the
Acquiring Fund know of no facts which might
form the basis for the institution of such
proceedings and neither Smith Barney
Investment Funds nor the Acquiring Fund is a
party to or subject to the provisions of any
order, decree or judgment of any court or
governmental body which materially and
adversely affects the Acquiring Fund's
business or Smith Barney Investment Funds'
ability on behalf of the Acquiring Fund to
consummate the transactions contemplated
herein;
(g) At the Closing Date, all
federal and other tax returns and reports of
the Acquiring Fund required by law then to
have been filed by such dates shall have been
filed, and all federal and other taxes shown
as due on said returns and reports shall have
been paid so far as due, or provision shall
have been made for the payment thereof and, to
the best of the Acquiring Fund's knowledge, no
such return is currently under audit and no
assessment has been asserted with respect to
such returns;
(h) For the most recent fiscal year
of its operation, the Acquiring Fund has met
the requirements of Subchapter M of the Code
for qualification and treatment as a regulated
investment company and the Acquiring Fund
intends to do so in the future;
(i) At the date hereof, all issued
and outstanding shares of the Acquiring Fund
are, and at the Closing Date will be, duly and
validly issued and outstanding, fully paid and
non-assessable, with no personal liability
attaching to the ownership thereof. The
Acquiring Fund does not have outstanding any
options, warrants or other rights to subscribe
for or purchase any shares of the Acquiring
Fund, nor is there outstanding any security
convertible into shares of the Acquiring Fund;
(j) The execution, delivery and
performance of this Agreement has been duly
authorized by all necessary action, if any, on
the part of Smith Barney Investment Funds'
Board of Directors and assuming due
authorization, execution and delivery by
Common Sense Trust, this Agreement constitutes
a valid and binding obligation of Smith Barney
Investment Funds on behalf of the Acquiring
Fund, enforceable in accordance with its
terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or
affecting creditors' rights and to general
equity principles;
(k) The Acquiring Fund Shares to be
issued and delivered to the Acquired Fund, for
the account of the Acquired Fund Shareholders,
pursuant to the terms of this Agreement, will
at the Closing Date have been duly authorized
and, when so issued and delivered, will be
duly and validly issued Acquiring Fund Shares,
and will be fully paid and non-assessable with
no personal liability attaching to the
ownership thereof;
(l) The information to be furnished
by the Acquiring Fund for use in no-action
letters, applications for exemptive orders,
registration statements, proxy materials and
other documents which may be necessary in
connection with the transactions contemplated
hereby shall be accurate and complete in all
material respects and shall comply in all
material respects with federal securities and
other laws and regulations applicable thereto;
(m) The Proxy Statement to be
included in the Registration Statement (only
insofar as it relates to the Acquiring Fund
and Smith Barney Investment Funds) will, on
the effective date of the Registration
Statement and on the Closing Date, not contain
any untrue statement of a material fact or
omit to state a material fact required to be
stated therein or necessary to make the
statements therein, in light of the
circumstances under which such statements were
made, not materially misleading; and
(n) Smith Barney Investment Funds,
on behalf of the Acquiring Fund, agrees to use
all reasonable efforts to obtain the approvals
and authorizations required by the 1933 Act,
the 1940 Act and such of the state Blue Sky or
securities laws as it may deem appropriate in
order to continue the Acquiring Fund's
operations after the Closing Date.
5. COVENANTS OF COMMON SENSE TRUST, THE
ACQUIRED FUND, THE ACQUIRING FUND AND
SMITH BARNEY INVESTMENT FUNDS
5.1. Smith Barney Investment Funds
on behalf of the Acquiring Fund and Common
Sense Trust on behalf of the Acquired Fund
each will operate its business in the ordinary
course between the date hereof and the Closing
Date. It is understood that such ordinary
course of business will include the
declaration and payment of customary dividends
and distributions and any other dividends and
distributions deemed advisable, in each case
payable either in cash or in additional
shares.
5.2. Common Sense Trust on behalf
of the Acquired Fund will call a meeting of
its shareholders to consider and act upon this
Agreement and to take all other action
necessary to obtain approval of the
transactions contemplated herein.
5.3. Common Sense Trust on behalf
of the Acquired Fund covenants that the
Acquiring Fund Shares to be issued hereunder
are not being acquired for the purpose of
making any distribution thereof other than in
accordance with the terms of this Agreement.
5.4. The Acquired Fund will assist
the Acquiring Fund in obtaining such
information as the Acquiring Fund reasonably
requests concerning the beneficial ownership
of the Acquired Fund's shares.
5.5. Subject to the provisions of
this Agreement, Common Sense Trust on behalf
of the Acquired Fund and Smith Barney
Investment Funds on behalf of the Acquiring
Fund, each will take, or cause to be taken,
all action, and do or cause to be done, all
things reasonably necessary, proper or
advisable to consummate and make effective the
transactions contemplated by this Agreement.
5.6. As promptly as practicable,
but in any case within sixty days after the
Closing Date, the Acquired Fund shall furnish
the Acquiring Fund, in such form as is
reasonably satisfactory to the Acquiring Fund,
a statement of the earnings and profits of the
Acquired Fund for federal income tax purposes
which will be carried over to the Acquiring
Fund as a result of Section 381 of the Code,
and which will be certified by the President
and Treasurer of the Acquired Fund.
5.7. The Acquired Fund will provide
the Acquiring Fund with information reasonably
necessary for the preparation of a prospectus
(the "Prospectus") which will include the
Proxy Statement, referred to in paragraph
4.1(m), all to be included in a Registration
Statement on Form N-14 of Smith Barney
Investment Funds (the "Registration
Statement"), in compliance with the 1933 Act,
the Securities Exchange Act of 1934 (the "1934
Act") and the 1940 Act in connection with the
meeting of the Acquired Fund's shareholders to
consider approval of this Agreement and the
transactions contemplated herein.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF
COMMON SENSE TRUST IN RESPECT OF THE
ACQUIRED FUND
The obligations of Common Sense
Trust and the Acquired Fund to consummate the
transactions provided for herein shall be
subject, at its election, to the performance
by Smith Barney Investment Funds and the
Acquiring Fund of all of the obligations to be
performed by them hereunder on or before the
Closing Date and, in addition thereto, the
following further conditions:
6.1. All representations and
warranties of Smith Barney Investment Funds
and the Acquiring Fund contained in this
Agreement shall be true and correct in all
material respects as of the date hereof and,
except as they may be affected by the
transactions contemplated by this Agreement,
as of the Closing Date with the same force and
effect as if made on and as of the Closing
Date;
6.2. Smith Barney Investment Funds
on behalf of the Acquiring Fund shall have
delivered to Common Sense Trust a certificate
executed in its name by its President or Vice
President and its Treasurer or Assistant
Treasurer, in a form reasonably satisfactory
to Common Sense Trust and dated as of the
Closing Date, to the effect that the
representations and warranties of Smith Barney
Investment Funds and the Acquiring Fund made
in this Agreement are true and correct at and
as of the Closing Date, except as they may be
affected by the transactions contemplated by
this Agreement; and
6.3. Common Sense Trust shall have
received on the Closing Date a favorable
opinion from Willkie Farr & Gallagher, counsel
to the Acquiring Fund, dated as of the Closing
Date, in a form reasonably satisfactory to
Nori L. Gabert, Esq., Secretary of Common
Sense Trust, covering the following points:
That (a) Smith Barney Investment Funds is
duly organized and validly existing under
the laws of the State of Maryland; (b)
Smith Barney Investment Funds is an
open-end management investment company
registered under the 1940 Act; (c) this
Agreement, the reorganization provided
for hereunder and the execution of this
Agreement have been duly authorized and
approved by all requisite action of Smith
Barney Investment Funds, and this
Agreement has been duly executed and
delivered by Smith Barney Investment
Funds and is a valid and binding
obligation of Smith Barney Investment
Funds with respect to the Acquiring Fund
enforceable in accordance with its terms
against the assets of the Acquiring Fund;
and (d) the Class A and Class B Acquiring
Fund Shares to be issued to the Acquired
Fund for distribution to its shareholders
pursuant to this Agreement have been, to
the extent of the number of Acquiring
Fund Shares authorized to be issued by
the Acquiring Fund in the Articles of
Incorporation of Smith Barney Investment
Funds and then unissued, duly authorized
and, subject to the receipt by Smith
Barney Investment Funds of consideration
equal to the net asset value thereof (but
in no event less than the par value
thereof), such Class A and Class B
Acquiring Fund Shares, when issued in
accordance with this Agreement, will be
validly issued and fully paid and
non-assessable. Such opinion may state
that it is solely for the benefit of
Common Sense Trust and the Acquired Fund,
its Trustees and its officers. Such
counsel may rely, as to matters governed
by the laws of the State of Maryland, on
an opinion of Maryland counsel.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF
SMITH BARNEY INVESTMENT FUNDS IN RESPECT
OF THE ACQUIRING FUND
The obligations of Smith Barney
Investment Funds on behalf of the Acquiring
Fund to complete the transactions provided for
herein shall be subject, at its election, to
the performance by Common Sense Trust and the
Acquired Fund of all the obligations to be
performed by it hereunder on or before the
Closing Date and, in addition thereto, the
following conditions:
7.1. All representations and
warranties of Common Sense Trust and the
Acquired Fund contained in this Agreement
shall be true and correct in all material
respects as of the date hereof and, except as
they may be affected by the transactions
contemplated by this Agreement, as of the
Closing Date with the same force and effect as
if made on and as of the Closing Date;
7.2. The Acquired Fund shall have
delivered to the Acquiring Fund a statement of
the Acquired Fund's assets and liabilities,
together with a list of the Acquired Fund's
portfolio securities showing the tax costs of
such securities by lot and the holding periods
of such securities, as of the Closing Date,
certified by the Treasurer or Assistant
Treasurer of the Acquired Fund;
7.3. Common Sense Trust shall have
delivered to the Acquiring Fund on the Closing
Date a certificate executed in its name by its
President or Vice President and its Treasurer
or Assistant Treasurer, in form and substance
satisfactory to the Acquiring Fund and dated
as of the Closing Date, to the effect that the
representations and warranties of Common Sense
Trust and the Acquired Fund made in this
Agreement are true and correct at and as of
the Closing Date, except as they may be
affected by the transactions contemplated by
this Agreement; and
7.4. The Acquiring Fund shall have
received on the Closing Date a favorable
opinion of Sullivan & Worcester, counsel to
the Acquired Fund, in a form satisfactory to
Christina T. Sydor, Esq., Secretary of the
Acquiring Fund, covering the following points:
That (a) Common Sense Trust is duly
organized and validly existing under the
laws of The Commonwealth of
Massachusetts; (b) Common Sense Trust is
an open-end management investment company
registered under the 1940 Act; and (c)
this Agreement, the reorganization
provided for hereunder and the execution
of this Agreement have been duly
authorized and approved by all requisite
action of Common Sense Trust, and this
Agreement has been duly executed and
delivered by Common Sense Trust and is a
valid and binding obligation of Common
Sense Trust and the Acquired Fund
enforceable in accordance with its terms
against the assets of the Acquired Fund.
Such opinion may state that it is solely
for the benefit of Smith Barney
Investment Funds, its Directors and its
officers. Such counsel may rely, as to
matters governed by the laws of The
Commonwealth of Massachusetts, on an
opinion of Massachusetts counsel.
8. FURTHER CONDITIONS PRECEDENT TO
OBLIGATIONS OF COMMON SENSE TRUST, THE
ACQUIRED FUND, THE ACQUIRING FUND AND
SMITH BARNEY INVESTMENT FUNDS
If any of the conditions set forth
below do not exist on or before the Closing
Date with respect to Smith Barney Investment
Funds on behalf of the Acquiring Fund, or
Common Sense Trust on behalf of the Acquired
Fund, the other party to this Agreement shall,
at its option, not be required to consummate
the transactions contemplated by this
Agreement:
8.1. This Agreement and the
transactions contemplated herein shall have
been approved by the requisite vote of the
holders of the outstanding shares of the
Acquired Fund in accordance with the
provisions of Common Sense Trust's Master
Trust Agreement and By-laws and certified
copies of the votes evidencing such approval
shall have been delivered to the Acquiring
Fund. Notwithstanding anything herein to the
contrary, neither Smith Barney Investment
Funds on behalf of the Acquiring Fund nor
Common Sense Trust on behalf of the Acquired
Fund may waive the conditions set forth in
this paragraph 8.1;
8.2. On the Closing Date, no
action, suit or other proceeding shall be
pending before any court or governmental
agency in which it is sought to restrain or
prohibit, or obtain damages or other relief in
connection with, this Agreement or the
transactions contemplated herein;
8.3. All consents of other parties
and all other consents, orders and permits of
federal, state and local regulatory
authorities (including those of the Commission
and of state Blue Sky and securities
authorities, including "no-action" positions
of and exemptive orders from such federal and
state authorities) deemed necessary by the
Acquiring Fund or the Acquired Fund to permit
consummation, in all material respects, of the
transactions contemplated hereby shall have
been obtained, except where failure to obtain
any such consent, order or permit would not
involve a risk of a material adverse effect on
the assets or properties of the Acquiring Fund
or the Acquired Fund, provided that either
party hereto may for itself waive any of such
conditions;
8.4. The Registration Statement
shall have become effective under the 1933 Act
and no stop orders suspending the
effectiveness thereof shall have been issued
and, to the best knowledge of the parties
hereto, no investigation or proceeding for
that purpose shall have been instituted or be
pending, threatened or contemplated under the
1933 Act;
[8.5. The Acquired Fund shall have
declared and paid a dividend or dividends on
the outstanding shares of the Acquired Fund,
which, together with all previous such
dividends, shall have the effect of
distributing to the shareholders of the
Acquired Fund all of the investment company
taxable income and exempt-interest income of
the Acquired Fund for all taxable years ending
on or prior to the Closing Date. The dividend
declared and paid by the Acquired Fund shall
also include all of such fund's net capital
gain realized in all taxable years ending on
or prior to the Closing Date (after reduction
for any capital loss carryforward)];
8.6. The parties shall have
received a favorable opinion of Willkie Farr &
Gallagher, addressed to Smith Barney
Investment Funds in respect of the Acquiring
Fund and Common Sense Trust in respect of the
Acquired Fund and satisfactory to Christina T.
Sydor, Esq. and Nori L. Gabert, Esq., as
Secretary of the Acquiring Fund and the
Acquired Fund, respectively, substantially to
the effect that for federal income tax
purposes:
(a) the transfer of all or substantially
all of the Acquired Fund's assets in
exchange for the Acquiring Fund Shares
and the assumption by the Acquiring Fund
of certain scheduled liabilities of the
Acquired Fund will constitute a
"reorganization" within the meaning of
Section 368(a)(1)(D) of the Code, and the
Acquiring Fund and the Acquired Fund are
each a "party to a reorganization" within
the meaning of Section 368(b) of the
Code; (b) no gain or loss will be
recognized by the Acquiring Fund upon the
receipt of the assets of the Acquired
Fund in exchange for the Acquiring Fund
Shares and the assumption by the
Acquiring Fund of certain scheduled
liabilities of the Acquired Fund; (c) no
gain or loss will be recognized by the
Acquired Fund upon the transfer of the
Acquired Fund's assets to the Acquiring
Fund in exchange for the Acquiring Fund
Shares and the assumption by the
Acquiring Fund of certain scheduled
liabilities of the Acquired Fund or upon
the distribution (whether actual or
constructive) of the Acquiring Fund
Shares to the Acquired Fund's
shareholders; (d) no gain or loss will be
recognized by shareholders of the
Acquired Fund upon the exchange of their
Acquired Fund shares for the Acquiring
Fund Shares and the assumption by the
Acquiring Fund of certain scheduled
liabilities of the Acquired Fund; (e) the
aggregate tax basis for the Acquiring
Fund Shares received by each of the
Acquired Fund's shareholders pursuant to
the Reorganization will be the same as
the aggregate tax basis of the Acquired
Fund shares held by such shareholder
immediately prior to the Reorganization,
and the holding period of the Acquiring
Fund Shares to be received by each
Acquired Fund shareholder will include
the period during which the Acquired Fund
shares exchanged therefor were held by
such shareholder (provided that the
Acquired Fund shares were held as capital
assets on the date of the
Reorganization); and (f) the tax basis of
the Acquired Fund's assets acquired by
the Acquiring Fund will be the same as
the tax basis of such assets to the
Acquired Fund immediately prior to the
Reorganization, and the holding period of
the assets of the Acquired Fund in the
hands of the Acquiring Fund will include
the period during which those assets were
held by the Acquired Fund.
Notwithstanding anything herein to
the contrary, neither Smith Barney Investment
Funds on behalf of the Acquiring Fund nor
Common Sense Trust on behalf of the Acquired
Fund may waive the conditions set forth in
this paragraph 8.6.
9. BROKERAGE FEES AND EXPENSES
9.1. Smith Barney Investment Funds
on behalf of the Acquiring Fund represents and
warrants to Common Sense Trust and the
Acquired Fund, and Common Sense Trust on
behalf of the Acquired Fund hereby represents
and warrants to Smith Barney Investment Funds
on behalf of the Acquiring Fund, that there
are no brokers or finders entitled to receive
any payments in connection with the
transactions provided for herein.
9.2. (a) Except as may be
otherwise provided herein, the Acquiring Fund
and the Acquired Fund shall each be liable, in
proportion to their assets, for the expenses
incurred in connection with entering into and
carrying out the provisions of this Agreement,
including the expenses of: (i) counsel and
independent accountants associated with the
Reorganization; (ii) printing and mailing the
Prospectus/Proxy Statement and soliciting
proxies in connection with the meeting of
shareholders of the Acquired Fund referred to
in paragraph 5.2 hereof; (iii) any special
pricing fees associated with the valuation of
the Acquired Fund's of the Acquiring Fund's
portfolio on the Closing Date; (iv) expenses
associated with preparing this Agreement and
preparing and filing the Registration
Statement under the 1933 Act covering the
Acquiring Fund Shares to be issued in the
Reorganization; (v) registration or
qualification fees and expenses of preparing
and filing such forms, if any, necessary under
applicable state securities laws to qualify
the Acquiring Fund Shares to be issued in
connection with the Reorganization. The
Acquired Fund shall be liable for: (i) all
fees and expenses related to the liquidation
and termination of the Acquired Fund; and (ii)
fees and expenses of the Acquired Fund's
custodian and transfer agent incurred in
connection with the Reorganization. The
Acquiring Fund shall be liable for any fees
and expenses of the Acquiring Fund's custodian
and transfer agent incurred in connection with
the Reorganization.
(b) Consistent with the provisions
of paragraph 1.3, the Acquired Fund, prior to
the Closing, shall pay for or include in the
unaudited Statement of Assets and Liabilities
prepared pursuant to paragraph 1.3 all of its
known and reasonably estimated expenses
associated with the transactions contemplated
by this Agreement.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1. The parties hereto agree that
no party has made any representation, warranty
or covenant not set forth herein and that this
Agreement constitutes the entire agreement
between the parties.
10.2. The representations,
warranties and covenants contained in this
Agreement or in any document delivered
pursuant hereto or in connection herewith
shall survive the consummation of the
transactions contemplated hereunder.
11. TERMINATION
11.1. This Agreement may be
terminated at any time prior to the Closing
Date by: (1) the mutual agreement of Common
Sense Trust on behalf of the Acquired Fund and
Smith Barney Investment Funds on behalf of the
Acquiring Fund; (2) Common Sense Trust in
respect of the Acquired Fund in the event that
Smith Barney Investment Funds in respect of
the Acquiring Fund shall, or Smith Barney
Investment Funds in respect of the Acquiring
Fund in the event that Common Sense Trust or
the Acquired Fund shall, materially breach any
representation, warranty or agreement
contained herein to be performed at or prior
to the Closing Date; or (3) a condition herein
expressed to be precedent to the obligations
of the terminating party has not been met and
it reasonably appears that it will not or
cannot be met.
11.2. In the event of any such
termination, there shall be no liability for
damages on the part of either Common Sense
Trust on behalf of the Acquired Fund or Smith
Barney Investment Funds on behalf of the
Acquiring Fund or their respective
Trustees/Directors or officers to the other
party, but each shall bear the expenses
incurred by it incidental to the preparation
and carrying out of this Agreement as provided
in paragraph 9.
12. AMENDMENTS; WAIVERS
12.1. This Agreement may be
amended, modified or supplemented in such
manner as may be mutually agreed upon in
writing by the authorized officers of Common
Sense Trust and Smith Barney Investment Funds;
provided, however, that following the meeting
of the Acquired Fund shareholders called by
the Acquired Fund pursuant to paragraph 5.2 of
this Agreement, no such amendment may have the
effect of changing the provisions for
determining the number of the Acquiring Fund
Shares to be issued to the Acquired Fund's
shareholders under this Agreement to the
detriment of such shareholders without their
further approval.
12.2. At any time prior to the
Closing Date either party hereto may by
written instrument signed by it (i) waive any
inaccuracies in the representations and
warranties made to it contained herein and
(ii) waive compliance with any of the
covenants or conditions made for its benefit
contained herein.
13. NOTICES
Any notice, report, statement or
demand required or permitted by any provisions
of this Agreement shall be in writing and
shall be given by prepaid telegraph, telecopy
or certified mail addressed to Common Sense
Trust, [ ], Attention: [
]; or to Smith Barney Investment
Funds, 388 Greenwich Street, 22nd Floor, New
York, New York 10013, Attention: Heath B.
McLendon.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW;
ASSIGNMENT; LIMITATION OF LIABILITY
14.1 The article and paragraph
headings contained in this Agreement are for
reference purposes only and shall not affect
in any way the meaning or interpretation of
this Agreement.
14.2 This Agreement may be executed
in any number of counterparts, each of which
shall be deemed an original.
14.3 This Agreement shall be
governed by and construed in accordance with
the laws of the State of New York.
14.4 This Agreement shall bind and
inure to the benefit of the parties hereto and
their respective successors and assigns, but
no assignment or transfer hereof or of any
rights or obligations hereunder shall be made
by any party without the written consent of
the other party. Nothing herein expressed or
implied is intended or shall be construed to
confer upon or give any person, firm,
corporation or other entity, other than the
parties hereto and their respective successors
and assigns, any rights or remedies under or
by reason of this Agreement.
14.5 It is expressly agreed that
the obligations of Common Sense Trust in
respect of the Acquired Fund shall not be
binding upon any of its Trustees,
shareholders, nominees, officers, agents or
employees personally, but bind only the trust
property of the Acquired Fund as provided in
the trust instruments of Common Sense Trust.
The execution and delivery of this Agreement
have been authorized by the Trustees of Common
Sense Trust and this Agreement has been
executed by authorized officers of Common
Sense Trust, acting as such, and neither such
authorization by such Trustees nor such
execution and delivery by such officers shall
be deemed to have been made by any of them
individually or to impose any liability on
any of them personally, but shall bind only
the trust property of the Acquired Fund
provided in Common Sense Trust's Master Trust
Agreement.
IN WITNESS WHEREOF, each of the
parties hereto has caused this Agreement to be
executed by its Chairman of the Board,
President or Vice President and attested by
its Secretary or Assistant Secretary.
SMITH BARNEY INVESTMENT FUNDS INC.
on behalf of the GROWTH OPPORTUNITY
FUND
Name: Jessica Bibliowicz
Title: President
Attest: By:
Name: Christina T. Sydor
Title: Secretary
COMMON SENSE TRUST on behalf
of the GROWTH OPPORTUNITY FUND
Name:
Title: Chariman of the Board
Attest:By:
Name:
Title: Secretary
STATEMENT OF ADDITIONAL INFORMATION DATED
MAY __, 1995
Acquisition Of The Assets Of
GROWTH OPPORTUNITY FUND
a separate investment portfolio of Common
Sense Trust
2800 Post Oak Boulevard
Houston, Texas 77056
(800) 554-5445
By And In Exchange For Class A and Class
B Shares of
SMITH BARNEY GROWTH OPPORTUNITY FUND
a separate investment portfolio of
SMITH BARNEY INVESTMENT FUNDS INC.
388 Greenwich Street
New York, New York 10013
(800) 224-7523
This Statement of Additional
Information, relating specifically to the
proposed transfer of all or substantially all
of the assets of Common Sense Trust, on behalf
of the Growth Opportunity Fund (the "Acquired
Fund") to Smith Barney Investment Funds Inc.
("Smith Barney Investment Funds") on behalf of
its Growth Opportunity Fund (the "Acquiring
Fund") in exchange for Class A and Class B
shares of the Acquiring Fund and the
assumption by Smith Barney Investment funds on
behalf of the Acquiring Fund of certain
scheduled liabilities of the
Acquired Fund, consists of this cover page and
the following described documents, each of
which accompanies this Statement of Additional
Information and is incorporated herein by
reference.
1. Statement of Additional Information
of Smith Barney Investment Funds Inc. dated
May 1, 1995.
2. Statement of Additional Information
of the Acquired Fund dated February 21, 1995.
3. Annual Report of the Acquired Fund
for the fiscal year ended October 31, 1994.
4. Pro Forma Financial Statements.
This Statement of Additional
information is not a prospectus. A
Prospectus/Proxy Statement, dated May
- --, 1995, relating to the above-referenced
matter may be obtained without charge by
calling or writing either the
Acquiring Fund or the Acquired Fund at the
telephone numbers or addresses set forth
above. This Statement of Additional
Information should be read in conjunction with
the Prospectus/Proxy Statement dated May __,
1995.
The date of this Statement of
Additional Information is May --, 1995.
STATEMENT OF ADDITIONAL INFORMATION
OF SMITH BARNEY INVESTMENT FUNDS INC.
DATED MAY 1, 1995
Smith Barney
INVESTMENT FUNDS INC.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
STATEMENT OF ADDITIONAL INFORMATION
APRIL --, 1995
This Statement of Additional Information
expands upon and supplements the
information contained in the current
Prospectuses of Smith Barney Investment Funds
Inc. (the "Company"), dated March 1, 1995 and
April --, 1995, as amended or supplemented
from time to time, and should be read in
conjunction with the
Company's Prospectuses. The Company issues a
Prospectus for each of the
investment funds offered by the Company (the
"Funds"). The Company's Prospectuses may be
obtained from a Smith Barney Financial
Consultant, or by
writing or calling the Company at the address
or telephone number listed
above. This Statement of Additional
Information, although not in itself a
prospectus, is incorporated by reference into
the Prospectuses in its entirety.
CONTENTS
For ease of reference, the same section
headings are used in the Prospectuses and this
Statement of Additional Information, except
where shown
below:
Management of the Company (see in the
Prospectuses "Management of the Company
and the Fund")
1
Investment Objectives and Management Policies
6
Purchase of Shares
21
Redemption of Shares
22
Distributor
23
Valuation of Shares
25
Exchange Privilege
26
Performance Data (See in the Prospectuses
"Performance") 27
Taxes (See in the Prospectuses "Dividends,
Distributions and Taxes") 31
Additional Information
35
Financial Statements
35
Appendix
A-1
MANAGEMENT OF THE COMPANY
The executive officers of the Company are
employees of certain of the organizations that
provide services to the Company. These
organizations are
the following:
NAME
SERVICE
Smith Barney Inc.
Distributor
("Smith Barney")
Smith Barney Mutual Funds Management Inc.
Investment Adviser and Administrator
("SBMFM")
The Boston Company Advisors, Inc.
Sub-Administrator
("Boston Advisors")
PNC Bank, National Association
Custodian
("PNC Bank")
The Shareholder Services Group, Inc. ("TSSG"),
Transfer Agent
a subsidiary of First Data Corporation
These organizations and the functions they
perform for the Company are
discussed in the Prospectuses and in this
Statement of Additional Information.
DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY
The names of the Directors and executive
officers of the Company, together
with information as to their principal
business occupations during the
past five years, are shown below. Each
Director who is an "interested per-
son" of the Company, as defined in the
Investment Company Act of 1940, as
amended (the "1940 Act"), is indicated by an
asterisk.
Paul R. Ades, Director (age 56). Partner in
the law firm of Murov & Ades.
His address is 272 South Wellwood Avenue,
Lindenhurst, New York 11757.
Herbert Barg, Director (age 71). Private
investor. His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania
19004.
Alger B. Chapman, Director (age 65). Chairman
and Chief Executive Officer
of the Chicago Board of Options Exchange. His
address is Chicago Board of
Options Exchange, 400 South LaSalle Street,
Chicago, Illinois 60605.
Dwight B. Crane, Director (age 59). Professor,
Graduate School of Business
Administration, Harvard University; a Director
of Peer Review Analysis,
Inc. His address is Graduate School of
Business Administration, Harvard
University, Boston, Massachusetts 02163.
Frank G. Hubbard, Director (age 59). Corporate
Vice President, Materials
of Huls America, Inc. His address is 80
Centennial Avenue P.O. Box 456,
Piscataway, New Jersey 08855-0456.
Allan R. Johnson, Director (age 80). Retired;
Former Chairman, Retail Division of BATUS,
Inc., and Chairman and Chief Executive Officer
of Saks
Fifth Avenue, Inc. His address is 2 Sutton
Place South, New York, New York
10022.
*Heath B. McLendon, Chairman of the Board and
Investment Officer (age 63).
Managing Director of Smith Barney, Chairman of
Smith Barney Strategy Advisers Inc. ("SBSA");
prior to July 1993, Senior Executive Vice
President of Shearson Lehman Brothers
Inc. ("Shearson Lehman Brothers"); Vice
Chairman of Shearson Asset Management, a
Director of PanAgora Asset Management, Inc.
and PanAgora Asset
Management Limited. His address is 388
Greenwich Street, New York, New
York 10013.
Ken Miller, Director (age 54). President of
Young Stuff Apparel Group,
Inc. His address is 1407 Broadway, 6th Floor,
New York, New York 10018.
John F. White, Director (age 79). President
Emeritus of The Cooper Union
for the Advancement of Science and Art;
President of Emily D. and Joseph
S. Kornfeld Foundation. His address is Crows
Nest Road, Tuxedo Park, New
York 10987.
Jessica M. Bibliowicz, President (age 35).
Executive Vice President of Smith Barney;
prior to 1994, Director of Sales and
Marketing for Prudential Mutual Funds; prior
to 1990, First Vice President, Asset
Management Division of Shearson Lehman
Brothers. Her address
is 388 Greenwich Street, New York, New York
10013.
James E. Conroy, First Vice President and
Investment Officer. Managing Director of
SBMFM; prior to July 1993, Man-
aging Director of Shearson Lehman Advisors.
His address is 388 Greenwich
Street, New York, New York 10013.
Kenneth A. Egan, First Vice President.
Managing Director of SBMFM; prior to July
1993, Managing Director of
Shearson Lehman Advisors. His address is 388
Greenwich Street, New York,
New York 10013.
Harvey Eisen, Vice President. Vice President
of Smith Barney Advisers Inc. Senior Vice
President of Investment Operations of The
Travelers Inc. His address is 388 Greenwich
Street, New York 10013.
Douglas H. Johnson, Vice President. Director
of Mutual Fund Division of Smith Barney. Prior
to January, 1995, Vice President of SafeCo
Asset Management Company. His address is 500
108th Avenue, North E. Bellevue, Washington
38004.
George E. Mueller, Jr., Investment Officer.
Managing Director of SBMFM; prior to July
1993, Managing Director of Shearson Lehman
Advisors. His address is 388 Greenwich Street,
New York, New York 10013.
George V. Novello, Investment Officer.
Managing Director of SBMFM; prior to July
1993, Managing Director of Shearson Lehman
Advisors. Prior to September 1990, Mr. Novello
was a Managing Director at McKinley-
Allsopp where he served as Head of Research.
His address is 388 Greenwich
Street, New York, New York 10013.
Jeffrey Russell, Investment Officer. Managing
Director, Senior International Equity
Portfolio Manager, SBMFM; prior to 1990 Vice
President of Drexel Burham, Lambert. His
address is 388 Greenwich Street, New
York, New York 10013.
Lewis E. Daidone, Senior Vice President and
Treasurer. Managing Director of Smith Barney
and Director and Senior Vice President of
SBMFM. His address is 388 Greenwich Street,
New York, New York 10013.
Christina T. Sydor, Secretary. Managing
Director of Smith Barney and Secretary of
SBMFM. Her address is 388 Greenwich Street,
New York, New York 10013.
Each Director also serves as a director,
trustee and/or general partner of
certain other mutual funds for which Smith
Barney serves as distributor.
As of January 31, 1995, the Directors and
officers of the Company, as a
group, owned less than 1.00% of the
outstanding common stock of the Company.
No officer, director or employee of Smith
Barney or any parent or subsidiary receives
any compensation from the Company for serving
as an officer
or Director of the Company. The Company pays
each Director who is not an
officer, director or employee of Smith Barney
or any of its affiliates a
fee of $16,000 per annum plus $2,500 per
meeting attended and reimburses
travel and out-of-pocket expenses. For the
fiscal year ended December 31,
1994, the Directors of the Company were paid
the following compensation:
AGGREGATE
COMPENSATION
AGGREGATE COMPENSATION FROM THE SMITH BARNEY
DIRECTOR(*)
FROM THE COMPANY MUTUAL FUNDS
Paul R. Ades(4)
$ 9,500 $ 42,750
Herbert Barg(13)
9,500 77,850
Alger B. Chapman(4)
29,000 57,675
Dwight B. Crane(18)
32,000 125,975
Frank G. Hubbard(3)
32,000 37,125
Allan G. Johnson(4)
32,000 72,750
Ken Miller(4)
9,500 49,250
John F. White(4)
32,000 72,250
<FN>
(*) Number of director/trusteeships held with
other mutual funds in the
Smith Barney Mutual Funds family.
INVESTMENT ADVISER AND ADMINISTRATOR -- SBMFM
SBMFM serves as investment adviser to
Investment Grade Bond Fund, Government
Securities Fund and Special Equities Fund
pursuant to a transfer of the investment
advisory agreements effective November 7, 1994
from its affiliate, Mutual Management Corp.
Mutual Management Corp. and SBMFM are
both wholly owned subsidiaries of Smith Barney
Holdings Inc. ("Holdings").
Holdings is a wholly owned subsidiary of The
Travelers Inc. ("Travelers").
The advisory agreements with these Funds (the
"Advisory Agreements") were most recently
approved by the Board of Directors, including
a majority of the Directors who are not
"interested persons" of the Company or the in-
vestment advisers (the "Independent
Directors"), on April 7, 1993 and by
shareholders of the respective Funds on June
9, 1993. Each of the investment advisers bears
all expenses in connection with the
performance of its services. The services
provided by the investment advisers under the
Advisory Agreements are described in the
Prospectuses under "Management of the
Company and the Fund." SBMFM provides
investment advisory and management
services to investment companies affiliated
with Smith Barney.
As compensation for investment advisory
services rendered to Investment
Grade Bond Fund, Special Equities Fund,
Managed Growth Fund and Growth Opportunity
Fund, each Fund pays SBMFM a fee computed
daily and paid monthly at the annual rates of
0.45%, 0.55%, 0.85% and 1.00%, respectively,
of the value of their average daily net
assets.
As compensation for investment advisory
services rendered to Government
Securities Fund, the Fund pays SBMFM a fee
computed daily and paid monthly
at the following annual rates of average daily
net assets: 0.35% up to $2 billion; 0.30% on
the next $2 billion; 0.25% on the next $2
billion; 0.20% on the next $2 billion; and
0.15% on net assets thereafter.
For the fiscal years ended December 31, 1992,
1993 and 1994, the Funds accrued approximate
advisory fees as follows:
FUND
1992 1993 1994
Investment Grade Bond Fund
$1,879,000 $2,157,373 $1,926,359
Government Securities Fund
3,926,000 3,357,123 2,578,209
Special Equities Fund
385,000 548,764 1,052,635
SBMFM also serves as administrator to
Investment Grade Bond Fund, Government
Securities Fund and Special Equities Fund
pursuant to a written agreement dated May 5,
1994 (the "Administration Agreement") which
was first approved by the Board of Directors,
including a majority of the Independent
Directors, on May 5, 1994. The services
provided by SBMFM under the Administration
Agreement are described in the Prospectuses
under "Management of the Company and the
Fund." SBMFM pays the salary of any officer
and employee who is employed by both it and
the Fund and bears all expenses in connection
with the performance of its services. Prior to
May 5, 1994, Boston Advisors served as the
Company's sub-investment adviser
and/or administrator. SBMFM serves as
investment adviser and administrator to the
Managed Growth Fund and Growth Opportunity
Fund pursuant to an Investment Advisory
Agreement dated April --, 1995 and April --,
1995, respectively.
As compensation for administrative services
rendered to Investment Grade Bond Fund,
Government Securities Fund and Special
Equities Fund, SBMFM receives a fee computed
daily and paid monthly at the annual rate of
0.20% of the value of its average daily net
assets. For the fiscal years ended
December 31, 1992, 1993 and 1994, these Funds
paid administrative fees to Boston Advisors or
SBMFM as follows:
BOSTON ADVISORS SBMFM
FOR THE FISCAL FOR THE
FISCAL
PERIOD FROM 1/1/94 PERIOD FROM
5/5/94
FUND 1992
1993 THROUGH 5/4/94 THROUGH
12/31/94
Investment Grade Bond Fund $ 835,000 $
958,700 $290,859 $565,300
Government Securities Fund 2,243,000
1,918,367 500,505
972,757
Special Equities Fund 140,000
199,551 130,039 252,737
SUB-ADMINISTRATOR -- BOSTON ADVISORS
Boston Advisors serves as sub-administrator to
Investment Grade Bond Fund, Government
Securities Fund and Special Equities Fund
pursuant to a written agreement (the "Sub-
Administration Agreement") dated May 5, 1994,
which was first approved by the Company's
Board of Directors, including a majority of
the Independent Directors of the Company or
Boston Advisors on May 5, 1994. Under the
Sub-Administration Agreement, Boston Advisors
is paid a portion of the administration fee
paid by these Funds to SBMFM at a rate agreed
upon from time to time between Boston Advisors
and SBMFM. Boston Advisors is a wholly owned
subsidiary of The Boston Company, Inc.
("TBC"), a financial services holding company,
which is in turn an indirect wholly owned
subsidiary of Mellon Bank Corporation
("Mellon").
Certain of the services provided to the
Company by Boston Advisors pursuant to the
Sub-Administration Agreement are described in
these Funds Prospectuses under "Management of
the Company and the Fund." In addition to
those services, Boston Advisors pays the
salaries of all officers and employees who are
employed by both it and the Company, maintains
office facilities for the Company, furnishes
the Company with statistical and research
data, clerical help and accounting, data
processing, bookkeeping, internal auditing and
legal services and certain other services
required by the Company, prepares reports to
the Company's shareholders and prepares tax
returns, reports to and filings with the
Securities and Exchange Commission (the "SEC")
and state Blue Sky authorities. Boston
Advisors bears all expenses in connection with
the performance of its services.
The Company bears expenses incurred in its
operation, including taxes, interest,
brokerage fees and commissions, if any; fees
of Directors who are not officers, directors,
shareholders or employees of Smith Barney,
SBMFM or Boston Advisors; SEC fees and state
Blue Sky qualification fees; charges of
custodians; transfer and dividend disbursing
agent's fees; certain insurance premiums;
outside auditing and legal expenses; costs of
maintenance of corporate existence; investor
services (including allocated telephone and
personnel expenses); and costs of preparation
and printing of prospectuses for regulatory
purposes and for distribution to existing
shareholders; cost of shareholders' reports
and shareholder meetings and meetings of the
officers or Board of Directors of the Company.
SBMFM and Boston Advisors have agreed that if
in any fiscal year the aggregate expenses of a
Fund (including fees paid pursuant to the
Advisory, Administration and
Sub-Administration Agreements, but excluding
interest, taxes, brokerage fees paid pursuant
to the Fund's services and distribution plan,
and, with the prior written consent of the
necessary state securities commissions,
extraordinary expenses) exceed the expense
limitation of any state having jurisdiction
over the Fund, SBMFM and Boston Advisors will,
to the extent required by law, reduce their
fees by the amount of such excess expense,
such amount to be allocated between them in
the proportion that their respective fees bear
to the aggregate of such fees paid by the
Fund. Such a fee reduction, if any, will be
estimated and reconciled on a monthly basis.
The most restrictive state limitation
applicable to the Company would require SBMFM
and Boston Advisors to reduce their fees in
any year that such excess expenses exceed 2.5%
of the first $30 million of average net
assets, 2% of the next $70 million of average
net assets and 1.5% of the remaining average
net assets. No fee reduction was required for
the 1994, 1993 and 1992 fiscal years.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as counsel to
the Company. The Directors who are not
"interested persons" of the Company have
selected Stroock & Stroock & Lavan as their
legal counsel.
KPMG Peat Marwick, LLP, independent
accountants, 345 Park Avenue, New
York, New York 10154, serve as auditors of the
Fund and will render an opinion on the Fund's
financial statements annually. Prior to
October 19, 1994, Coopers & Lybrand L.L.P.,
independent auditors, served as auditors
of the Fund and rendered an opinion on the
Fund's financial statements for the fiscal
year ended December 31, 1994.
INVESTMENT OBJECTIVES AND
MANAGEMENT POLICIES
The Prospectuses discuss the investment
objectives of each Fund and the
policies they employ to achieve such
objectives. The following discussion
supplements the description of the Funds'
investment objectives and management policies
contained in the Prospectuses.
INVESTMENT GRADE BOND FUND
The investment objective of Investment Grade
Bond Fund is to provide as high a level of
current income as is consistent with prudent
investment management and preservation of
capital. The Fund seeks to achieve its
objective by investing in the following
securities: corporate bonds which
are rated Aaa, Aa, A, or Baa by Moody's
Investors Service, Inc. ("Moody's") or AAA,
AA, A, or BBB by Standard & Poor's Corporation
("S&P") (See Appendix for a description of
these ratings); U.S. government securities
(See below); commercial paper issued by
domestic corporations rated Prime-1 or Prime-2
by Moody's or A-1+, A-1 or A-2 by S&P or, if
not rated by Moody's or S&P, issued by a
corporation having an outstanding debt
issue rated Aa or better by Moody's or AA or
better by S&P; negotiable bank certificates of
deposit or bankers' acceptances issued by
domestic banks (but not their foreign
branches) having together with branches or
subsidiaries, total assets in excess of $1
billion; high-yielding common stocks (which
may be purchased directly or acquired through
the exercise of warrants or the conversion of
fixed-income securities); and warrants.
The ratings of Moody's and S&P generally
represent the opinions of those
organizations as to the quality of the
securities that they rate. Such
ratings, however, are relative and subjective,
are not absolute standards of quality and do
not evaluate the market risk of the
securities. Although SBMFM uses these ratings
as a criterion for the selection of securities
for the Fund, SBMFM also relies on its
independent analysis to evaluate potential
investments for the Fund. The Fund's
achievement of its investment objective may be
more dependent on SBMFM's credit analysis of
low-rated and unrated securities than would be
the case for a portfolio of higher-rated
securities.
Subsequent to its purchase by the Fund, an
issue of securities may cease to be rated or
its rating may be reduced below the minimum
required for purchase by the Fund. In
addition, it is possible that Moody's and S&P
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 the Fund, although SBMFM
will consider these events in determining
whether the Fund should continue to hold the
securities. To the extent that the ratings
given by Moody's or S&P for securities may
change as a result of changes in the rating
systems or due to a corporate reorganization
of Moody's and/or S&P, the Fund will attempt
to use comparable ratings as standards for its
investments in accordance with the investment
objective and policies of the Fund.
As a condition of its continuing registration
in a state, Investment Grade Bond Fund has
undertaken that its investments in warrants,
valued at the lower of cost or market, will
not exceed 5% of the value of its net as-
sets. Included within that amount, but not to
exceed 2% of the Fund's net assets, may be
warrants which are not listed on either the
New York Stock Exchange, Inc. (the "NYSE") or
the American Stock Exchange. Warrants acquired
by the Fund in units or attached to securities
will be deemed to be without value for
purposes of this restriction. These limits are
not fundamental policies of the Fund and may
be changed by the Board of Directors
without shareholder approval.
Investment Grade Bond Fund may enter into
repurchase agreements, reverse
repurchase agreements and firm commitment
agreements and may lend its portfolio
securities, in each case in accordance with
the description of those techniques (and
subject to the same risks) set forth below.
The Fund may purchase American Depositary
Receipts ("ADRs"), which are dollar-
denominated receipts issued generally by
domestic banks and representing the deposit
with the bank of a security of a foreign
issuer. ADRs are publicly traded on exchanges
or over-the-counter in the United States.
Investment Grade Bond Fund may also sell
securities "short against the box." While a
short sale is the sale of a security the Fund
does not own, it is "against the box" if at
all times when the short position is open,
the Fund owns an equal amount of the
securities or securities convertible
into, or exchangeable without further
consideration for, securities of the
same issue as the securities sold short. Short
sales against the box are used to defer
recognition of capital gains or losses or to
extend the holding period of securities for
certain Federal income tax purposes.
It is the Fund's policy that at least 65% of
its assets will be invested in bonds, except
during times when SBMFM believes that adoption
of a temporary defensive position by investing
more heavily in cash or money market
instruments (such as short-term U.S.
government securities, commercial
paper, and negotiable bank certificates of
deposit) is desirable due to prevailing market
or economic conditions. This policy was
adopted in accordance with SEC guidelines
which require that any investment company
whose name implies that it invests primarily
in a particular type of security have a policy
of investing at least 65% of its total assets
in that type of security under normal market
conditions. This policy may be changed without
shareholder approval in the event the SEC
guidelines are modified.
Repurchase Agreements. The Fund may purchase
securities and concurrently enter into
repurchase agreements with certain member
banks which are the issuers of instruments
acceptable for purchase by the Fund and with
certain dealers on the Federal Reserve Bank of
New York's list of reporting dealers.
Repurchase agreements are contracts under
which the buyer of a security simultaneously
commits to resell the security to the seller
at an agreed-upon price and date. Under each
repurchase agreement, the selling institution
will be required to maintain the value of the
securities subject to the repurchase agreement
at not less than their repurchase price.
Repurchase agreements could involve certain
risks in the event of default
or insolvency of the other party, including
possible delays or restrictions upon a Fund's
ability to dispose of the underlying
securities, the risk of a possible decline in
the value of the underlying securities during
the period in which the Fund seeks to assert
its rights to them, the risk of incurring
expenses associated with asserting those
rights and the risk of losing all or part of
the income from the repurchase agreement.
SBMFM or Boston Advisors, acting under the
supervision of the Company's Board of
Directors, review on an ongoing basis the
value of the collateral and the
creditworthiness of those banks and dealers
with which the Fund enters into repurchase
agreements to evaluate potential risks. The
Fund will not enter into repurchase agreements
that would cause more than 10% of its total
assets to be invested in "illiquid"
securities.
Reverse Repurchase Agreements. A reverse
repurchase agreement involves the sale of a
money market instrument held by the Fund
coupled with an agreement by the Fund to
repurchase the instrument at a stated price,
date and interest payment. The Fund will use
the proceeds of a reverse repurchase agreement
to purchase other money market instruments
which either mature at a date simultaneous
with or prior to the expiration of the re-
verse repurchase agreement or which are held
under an agreement to resell maturing as of
that time.
The Fund will enter into a reverse repurchase
agreement only when the interest income to be
earned from the investment of the proceeds of
the transaction is greater than the interest
expense of the transaction. Under the 1940
Act, reverse repurchase agreements may be
considered to be borrowings by the seller. The
Fund may not enter into a reverse repurchase
agreement if, as a result, its current
obligations under such agreements
would exceed one-third of the current market
value of the Fund's total assets (less all of
its liabilities other than obligations under
such agreements).
The Fund may enter into reverse repurchase
agreements with banks or
broker-dealers. Entry into such agreements
with broker-dealers requires
the creation and maintenance of a segregated
account with the Company's custodian
consisting of U.S. government securities, cash
or cash equivalents.
Firm Commitment Agreements. The Fund may enter
into firm commitment agreements (when-issued
purchases) for the purchase of securities at
an agreed-upon price on a specified future
date. Such agreements might be entered into,
for example, when a decline in the yield of
securities of a given issuer is anticipated
and a more advantageous yield may be obtained
by committing currently to purchase securities
to be issued later.
The Fund will not enter into such agreements
for the purpose of investment
leverage. Liability for the purchase price,
and all the rights and risks of ownership of
the securities, accrue to the Fund at the time
it becomes obligated to purchase such
securities, although delivery and payment
occur at a later date. Accordingly, if the
market price of the security should
decline, the effect of the agreement would be
to obligate the Fund to purchase the security
at a price above the current market price on
the date of delivery and payment. During the
time the Fund is obligated to purchase
such securities, it will maintain in a
segregated account with the Company's
custodian, U.S. government securities, cash or
cash equivalents of an aggregate current value
sufficient to make payment for the securities.
Lending of Portfolio Securities. The Fund has
the ability to lend securities from its
portfolio to brokers, dealers and other
financial organizations. Such loans, if and
when made, may not exceed 33 1/3 % of the
Fund's total assets taken at value. The Fund
will not lend portfolio securities
to Smith Barney or its affiliates unless it
has applied for and received specific
authority to do so from the SEC. Loans of
portfolio securities will be collateralized by
cash, letters of credit or U.S. government
securities which are maintained at all times
in an amount at least equal to the current
market value of the loaned securities. From
time to time, the Fund may return a part of
the interest earned from the investment of
collateral received for securities loaned to
the borrower and/or a third party, which is
unaffiliated with the Fund or with Smith
Barney, and which is acting as a "finder."
In lending its securities, the Fund can
increase its income by continuing
to receive interest on the loaned securities
as well as by either investing the cash
collateral in short-term instruments or
obtaining yield in the form of interest paid
by the borrower when U.S. government
securities are used as collateral.
Requirements of the SEC, which may be subject
to future modifications, currently provide
that the following conditions must
be met whenever the Fund's portfolio
securities are loaned: (a) the Fund
must receive at least 100% cash collateral or
equivalent securities from the borrower; (b)
the borrower must increase such collateral
whenever the market value of the securities
loaned rises above the level of such col-
lateral; (c) the Fund must be able to
terminate the loan at any time; (d)
the Fund must receive reasonable interest on
the loan, as well as an amount equal to
dividends, interest or other distributions on
the loaned securities, and any increase in
market value; (e) the Fund may pay only
reasonable custodian fees in connection with
the loan; and (f) voting rights on the loaned
securities may pass to the borrower; provided,
however, that if a material event adversely
affecting the investment in the loaned
securities occurs, the Board of Directors must
terminate the loan and regain the right to
vote the securities. The risks in lending
portfolio securities, as with other extensions
of secured credit, consist of possible delay
in receiving additional collateral or in the
recovery of the securities or possible loss of
rights in the collateral should the borrower
fail financially. Loans will be made to firms
deemed by SBMFM to be of good standing and
will not be made unless, in the judgment of
SBMFM, the consideration to be earned from
such loans would justify the risk.
GOVERNMENT SECURITIES FUND
The investment objective of Government
Securities Fund is high current re-
turn. It seeks to achieve its objective by
investing in U.S. government securities and by
writing covered call options and secured put
options and by purchasing put options on U.S.
government securities. The Fund also may
purchase and sell interest rate futures
contracts, and purchase and sell
put and call options on futures contracts, as
a means of hedging against changes in interest
rates.
U.S. Government Securities. Direct obligations
of the United States Treasury include a
variety of securities, which differ in their
interest rates, maturities and dates of
issuance. Treasury Bills have maturities of
one year or less; Treasury Notes have
maturities of one to ten years and
Treasury Bonds generally have maturities of
greater than ten years at the
date of issuance.
In addition to direct obligations of the
United States Treasury, securities issued or
guaranteed by the United States government,
its agencies or instrumentalities include
securities issued or guaranteed by the Federal
Housing Administration, Federal Financing
Bank, Export-Import Bank of the
United States, Small Business Administration,
Government National Mortgage
Association ("GNMA"), General Services
Administration, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation,
Federal National Mortgage
Association ("FNMA"), Federal Maritime
Administration, Tennessee Valley
Authority, Resolution Trust Corporation,
District of Columbia Armory
Board, Student Loan Marketing Association and
various institutions that previously were or
currently are part of the Farm Credit System
(which has been undergoing a reorganization
since 1987). Because the United States
government is not obligated by law to provide
support to an instrumentality that it
sponsors, the Fund will invest in obligations
of an instrumentality to which the United
States government is not obligated by law to
provide support only if SBMFM determines that
the credit risk with respect
to the instrumentality does not make its
securities unsuitable for investment by the
Fund.
It is the Fund's policy that at least 65% of
its total assets will be invested in U.S.
government securities, including options and
futures contracts thereon, except during times
when SBMFM believes that adoption of a
temporary defensive position by investing more
heavily in cash or money market instruments is
desirable due to prevailing market or economic
conditions. This policy was adopted in
accordance with SEC guidelines which
require that any investment company whose name
implies that it invests primarily in a
particular type of security have a policy of
investing at least 65% of its total assets in
that type of security under normal market
conditions. This policy may be changed without
shareholder approval in the event that the
SEC's guidelines are modified.
The Fund's current investment income consists
generally of interest income from U.S.
government securities, premiums from expired
put and call options written by the Fund, net
gains from closing purchase and sale trans-
actions, and net gains from sales of portfolio
securities pursuant to options or otherwise.
Exchange Rate-Related U.S. Government
Securities. The Fund may invest up
to 5% of its net assets in U.S. government
securities for which the principal repayment
at maturity, while paid in U.S. dollars, is
determined by reference to the exchange rate
between the U.S. dollar and the currency of
one or more foreign countries ("Exchange
Rate-Related Securities"). The
interest payable on these securities is
denominated in U.S. dollars, is
not subject to foreign currency risk and, in
most cases, is paid at rates higher than most
other U.S. government securities in
recognition of the foreign currency risk
component of Exchange Rate-Related Securities.
Exchange Rate-Related Securities are issued in
a variety of forms, depending on the structure
of the principal repayment formula. The
principal repayment formula may be structured
so that the security holder will benefit
if a particular foreign currency to which the
security is linked is stable or appreciates
against the U.S. dollar. In the alternative,
the principal repayment formula may be
structured so that the security holder
benefits if the U.S. dollar is stable or
appreciates against the linked foreign
currency. Finally, the principal repayment
formula can be a function of more than one
currency and, therefore, be designed in either
of the aforementioned forms or a combination
of those forms.
Investments in Exchange Rate-Related
Securities entail special risks. There is the
possibility of significant changes in rates of
exchange between the U.S. dollar and any
foreign currency to which an Exchange Rate-
Related Security is linked. If currency
exchange rates do not move in the direction or
to the extent anticipated at the time of
purchase of the security, the amount of
principal repaid at maturity might be
significantly below the par value of the
security, which might not be offset by the
interest earned by the Fund over the term of
the security. The rate of exchange between the
U.S. dollar and other currencies is determined
by the forces of supply and demand in the
foreign exchange markets. These forces
are affected by the international balance of
payments and other economic and financial
conditions, government intervention,
speculation and other factors. The imposition
or modification of foreign exchange controls
by the United States or foreign governments or
intervention by central banks also could
affect exchange rates. Finally, there is no
assurance that sufficient trading interest to
create a liquid secondary market will exist
for particular Exchange Rate-Related
Securities due to conditions in the
debt and foreign currency markets. Illiquidity
in the forward foreign exchange market and the
high volatility of the foreign exchange market
may from time to time combine to make it
difficult to sell an Exchange Rate-
Related Security prior to maturity without
incurring a significant price loss.
Options Activities. Government Securities Fund
may write (i.e., sell) call options on U.S.
government securities ("calls"). The Fund
writes only "covered" call options, which
means that so long as the Fund is obligated
as the writer of a call option, it will own
the underlying securities subject to the
option, or, in the case of options on certain
U.S. government securities as described
further below, it will maintain in a
segregated account with the Company's
custodian, cash or cash equivalents or U.S.
government securities with a value sufficient
to meet its obligations under the call.
When the Fund writes a call, it receives a
premium and gives the purchaser
the right to buy the underlying U.S.
government security at any time during the
call period (usually between three and nine
months, but not more than fifteen months) at a
fixed exercise price regardless of market
price changes during the call period. If the
call is exercised, the Fund forgoes any gain
from an increase in the market price of the
underlying security over the exercise price.
The Fund may purchase a call on securities
only to effect a "closing purchase
transaction," which is the purchase of a call
covering the same underlying security and
having the same exercise price and expiration
date as the call previously written by the
Fund on which it wishes to terminate
its obligation. Government Securities Fund
also may purchase call options on futures
contracts, as described below. If the Fund is
unable to effect a closing purchase
transaction, it will not be able to sell the
underlying security until the call previously
written by the Fund expires (or until
the call is exercised and the Fund delivers
the underlying security).
The Fund will realize a gain (or loss) on a
closing purchase transaction with respect to a
call or put previously written by the Fund if
the premium, plus commission costs, paid to
purchase the call or put is less (or
greater) than the premium, less commission
costs, received on the sale of the call or
put. A gain also will be realized if a call or
put which the Fund has written lapses
unexercised, because the Fund would retain the
premium. See "Taxes."
Government Securities Fund also may write and
purchase put options ("puts") on U.S.
government securities. When the Fund writes a
put, it receives a premium and gives the
purchaser of the put the right to sell the
underlying U.S. government security to the
Fund at the exercise price at any time during
the option period. When the Fund purchases a
put, it pays a premium in return for the right
to sell the underlying U.S. government
security at the exercise price at any time
during the option period. If any put is not
exercised or sold, it will become worthless on
its expiration date. The Fund will not
purchase puts if more than 10% of its net as-
sets would be invested in premiums on puts.
The Fund may write puts only if they are
"secured." A put is "secured" if
the Fund maintains cash, cash equivalents or
U.S. government securities with a value equal
to the exercise price in a segregated account
or holds a put on the same underlying security
at an equal or greater exercise price. The
aggregate value of the obligations underlying
puts written by a Fund will not exceed 50% of
its net assets. The Fund also may write
"straddles," which are combinations of secured
puts and covered calls on the same underlying
U.S. government security.
There can be no assurance that a liquid
secondary market will exist at a
given time for any particular option. In this
regard, trading in options on U.S. government
securities is relatively new, so that it is
impossible to predict to what extent liquid
markets will develop or continue. The
Fund has undertaken with a state securities
commission that it will limit losses from all
options transactions to 5% of its average net
assets per year, or cease options transactions
until in compliance with the 5% limitation,
but there can be no absolute assurance that
these limits can be complied with.
The Company's custodian, or a securities
depository acting for it, will act as escrow
agent as to the securities on which the Fund
has written puts or calls, or as to other
securities acceptable for such escrow, so
that no margin deposit will be required of the
Fund. Until the underlying
securities are released from escrow, they
cannot be sold by the Fund.
SPECIAL CONSIDERATIONS RELATING TO OPTIONS ON
CERTAIN U.S. GOVERNMENT SECURITIES
Treasury Bonds and Notes. Because trading
interest in U.S. Treasury bonds and notes
tends to center on the most recently auctioned
issues, the exchanges will not continue
indefinitely to introduce new expirations to
replace expiring options on particular issues.
The expirations introduced at the commencement
of options trading on a particular issue will
be allowed to run, with the possible addition
of a limited number of new expirations
as the original expirations expire. Options
trading on each issue of bonds or notes will
thus be phased out as new options are listed
on more recent issues, and a full range of
expirations will not ordinarily be available
for every issue on which options are traded.
Treasury Bills. Because the deliverable U.S.
Treasury bill changes from week to week,
writers of U.S. Treasury bill calls cannot
provide in advance for their potential
exercise settlement obligations by acquiring
and holding the underlying security. However,
if the Fund holds a long position in U.S.
Treasury bills with a principal amount
corresponding to the contract size of the
option, it may be hedged from a risk
standpoint. In addition, the Fund will
maintain U.S. Treasury bills maturing no later
than those which would be deliverable in the
event of the exercise of a call option it has
written in a segregated account with its
custodian so that it will be treated as being
covered for margin purposes.
GNMA Certificates. GNMA Certificates are
mortgage-backed securities representing part
ownership of a pool of mortgage loans. These
loans are made by private lenders and are
either insured by the Federal Housing
Administration or guaranteed by the Veterans
Administration. Once approved by GNMA, the
timely payment of interest and principal on
each mortgage in a "pool" of such mortgages is
guaranteed by the full faith and credit of the
U.S. government. Unlike most debt securities,
GNMA Certificates provide for repayment of
principal over the term of the loan rather
than in a lump sum at maturity. GNMA
Certificates are called "pass-through"
securities because both interest and principal
payments on the mortgages are passed
through to the holder.
Since the remaining principal balance of GNMA
Certificates declines each month as mortgage
payments are made, the Fund as a writer of a
GNMA call may find that the GNMA Certificates
it holds no longer have a sufficient
remaining principal balance to satisfy its
delivery obligation in the event of exercise
of the call option it has written. Should this
occur, additional GNMA Certificates from the
same pool (if obtainable) or replacement GNMA
Certificates will have to be purchased in the
cash market to meet delivery obligations.
The Fund will either replace GNMA Certificates
representing cover for call options it has
written or will maintain in a segregated
account with its custodian cash, cash
equivalents or U.S. government securities
having an aggregate value equal to the market
value of the GNMA Certificates under-
lying the call options it has written.
Other Risks. In the event of a shortage of the
underlying securities deliverable on exercise
of an option, the Options Clearing Corporation
has the authority to permit other, generally
comparable securities to be delivered in
fulfillment of option exercise obligations. If
the Options Clearing Corporation exercises its
discretionary authority to allow such other
securities to be delivered it may also adjust
the exercise prices of the affected options by
setting different prices at which otherwise
ineligible securities may be delivered. As an
alternative to permitting such substitute
deliveries, the Options Clearing Corporation
may impose special exercise settlement
procedures.
The hours of trading for options on U.S.
government securities may not
conform to the hours during which the
underlying securities are traded. To
the extent that the options markets close
before the markets for the underlying
securities, significant price and rate
movements can take place in the underlying
markets that cannot be reflected in the
options markets.
Options are traded on exchanges on only a
limited number of U.S. government securities,
and exchange regulations limit the maximum
number of options which may be written or
purchased by a single investor or a group of
investors acting in concert. The Company and
other clients advised by affiliates of Smith
Barney may be deemed to constitute a group for
these purposes. In light of these limits, the
Board of Directors may determine
at any time to restrict or terminate the
public offering of the Fund's shares
(including through exchanges from the other
Funds).
Exchange markets in options on U.S. government
securities are a relatively new and untested
concept. It is impossible to predict the
amount of trading interest that may exist in
such options, and there can be no assurance
that viable exchange markets will develop or
continue.
Interest Rate Futures Transactions. The Fund
may purchase and sell interest rate futures
contracts ("futures contracts") as a hedge
against changes in interest rates. 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.
Currently there are futures contracts based on
securities such as long-term U.S. Treasury
bonds, U.S. Treasury notes, GNMA Certificates
and three-month U.S. 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 sale of the futures
contract might be accomplished more easily and
quickly. For example, if the Fund holds
long-term U.S. government securities and SBMFM
anticipates a rise in long-term interest
rates, it could, in lieu of disposing of its
portfolio securities, enter into futures
contracts for the sale of similar long-term
securities. If rates increased and the value
of the Fund's securities declined, the value
of the Fund's futures contracts would
increase, thereby protecting the Fund by
preventing net asset value from declining as
much as it otherwise would have. Similarly,
entering into a futures contract for the
purchase of securities has an effect similar
to the actual purchase of the underlying
securities, but permits the continued holding
of securities other than the underlying
securities. For example, if SBMFM expects
long-term interest rates to decline, the Fund
might enter into futures contracts for the
purchase of long-term securities, so that it
could gain rapid market exposure that may
offset anticipated increases in the cost of
securities it intends to purchase, while
continuing to hold higher-yield short-term
securities or waiting for the long-term market
to stabilize. See "Taxes."
The Appendix contains additional information
on the characteristics and risks of interest
rate futures contracts.
Options on Futures Contracts. 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 Fund may purchase put options on interest
rate futures contracts in lieu of, and for the
same purpose as, 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. See
"Options Activities."
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 Fund will set aside
cash and cash equivalents sufficient
to purchase the amount of portfolio securities
represented by the underlying futures
contracts. The Fund generally would purchase
call options on interest rate futures
contracts in anticipation of a market advance
when it is not fully invested.
The Fund would write a call option on a
futures contract in order to hedge
against a decline in the prices of the debt
securities underlying the futures contracts.
If the price of the futures contract at
expiration is below the exercise price, the
Fund would retain the option premium, which
would offset, in part, any decline in the
value of its portfolio securities.
The writing of a put option on a futures
contract is similar to the purchase of the
futures contract, except that, if the market
price declines, the Fund would pay more than
the market price for the underlying
securities. The net cost to the Fund will be
reduced, however, by the premium on
the sale of the put, less any transaction
costs. See "Taxes."
Limitations on Transactions in Futures and
Options on Futures. Government
Securities Fund will not engage in
transactions in futures contracts or
related options for speculation but only as a
hedge against changes in the market values of
debt securities held, or intended to be
purchased by, the Fund, and where the
transactions are appropriate to reduce the
Fund's risks. The Fund may not purchase
futures contracts or related options if,
immediately thereafter, more than 30% of the
Fund's total assets would be so invested. In
purchasing and selling futures contracts and
related options, the Fund will comply with
rules and interpretations of the Commodity
Futures Trading Commissions ("CFTC"), under
which the Fund is excluded from regulation as
a "commodity pool." In order to prevent
leverage in connection with the purchase of
futures contracts by the Fund, an amount of
cash, cash equivalents and/or U.S. government
securities equal to the
market value of futures contracts purchased
will be maintained in a segregated account
with the custodian (or broker).
The Fund's futures transactions will be
entered into for traditional hedging purposes
- -- that is, futures contracts will be sold (or
related put options purchased) to protect
against a decline in the price of securities
that the Fund owns, or futures contracts (or
related call options) will be purchased to
protect the Fund against an increase in the
price of securities it is committed to
purchase. See Appendix, "Supplementary
Description of Interest Rate Futures Contracts
and Related Options."
Leverage Through Borrowing. Government
Securities Fund may borrow up to
25% of the value of its net assets on an
unsecured basis from banks to increase its
holdings of portfolio securities or to acquire
securities to be placed in a segregated
account with its custodian for various
purposes (e.g., to secure puts written by the
Fund). The Fund is required to maintain
continuous asset coverage of 300% with respect
to such borrowings,
and to sell (within three days) sufficient
portfolio holdings to restore such coverage,
if it should decline to less than 300% due to
market fluctuations or otherwise, even if
disadvantageous from an investment stand-
point. Leveraging will exaggerate the effect
of any increase or decrease in the value of
portfolio securities on the Fund's net asset
value, and money borrowed will be subject to
interest costs (which may include commitment
fees and/or the cost of maintaining minimum
average balances) which may or may not exceed
the interest and option premiums received from
the securities purchased with borrowed funds.
SPECIAL EQUITIES FUND
The investment objective of Special Equities
Fund is long-term capital appreciation. It
seeks to achieve this objective by investing
in common stocks, or securities convertible
into or exchangeable for common stocks
(such as convertible preferred stocks,
convertible debentures or warrants), which
SBMFM believes to have superior appreciation
potential.
The Fund invests primarily in equity
securities of secondary companies
that have yet to reach a fully mature stage of
earnings growth. These companies may still be
in the developmental stage or may be older
companies that appear to be entering a new
stage of more rapid earnings progress due
to factors such as management change or
development of new technology, products or
markets. A significant number of these
companies may be in technology areas and may
have annual sales less than $300 million.
Some of the securities in which the Fund
invests may not be listed on a national
securities exchange, but such securities will
usually have an established over-the-counter
market. However, some of the securities in
which the Fund invests may have limited
marketability, and the Fund may invest up to
10% of its total assets in securities the
disposition of which would be subject to legal
restrictions ("restricted securities"). It
may be difficult to sell restricted securities
at a price which represents SBMFM's opinion of
their fair value until they may be sold
publicly. The Fund ordinarily will acquire the
right to have such securities registered
at the expense of the issuer within some
specified period of time. Where
registration is required prior to sale, a
considerable period of time may
elapse between a decision to sell the
restricted securities and the time
when the Fund could sell them, during which
period the price may change. The Fund may not
invest in restricted securities of public
utilities.
The Fund may also acquire securities subject
to contractual restrictions on its right to
resell them. These restrictions might prevent
their sale at a time when sale would otherwise
be desirable. No restricted securities
and no securities for which there is no
readily available market ("illiquid
securities") will be acquired if such
acquisition would cause the aggregate value of
illiquid and restricted securities to exceed
10% of the Fund's total assets. The Fund may
not invest more than 5% of its total as-
sets in securities of issuers which, together
with any predecessor, have been in operation
for less than three years.
Special Equities Fund also may invest in, or
enter into repurchase agreements with respect
to, corporate bonds, U.S. government
securities, commercial paper, certificates of
deposit or other money market securities
during periods when SBMFM believes that
adoption of a temporary defensive
position is desirable due to prevailing market
or economic conditions.
Special Equities Fund may lend its portfolio
securities, in accordance with the description
set forth under "Investment Grade Bond Fund --
Lending of Portfolio Securities" above.
Special Equities Fund's investments in
warrants are subject to the same undertaking
applicable to Investment Grade Bond Fund, as
described above. The limits contained in that
undertaking are not fundamental policies of
the Fund and may be changed by the
Board of Directors without the vote of
shareholders. Special Equities Fund may also
sell securities "short against the box," in
accordance with the description set forth
above. The Fund may also purchase ADRs.
Investors should realize that the very nature
of investing in smaller, newer companies
involves greater risk than is customarily
associated with investing in larger, more
established companies. Smaller, newer
companies often have limited product lines,
markets or financial resources, and they
may be dependent for management upon one of a
few key persons. The securities of such
companies may be subject to more abrupt or
erratic market movements than securities of
larger, more established companies or than
the market averages in general. In accordance
with its investment objective of long-term
capital appreciation, securities purchased for
Special Equities Fund will not generally be
traded for short-term profits, but will be
retained for their longer-term appreciation
potential. This general practice limits the
Fund's ability to adopt a defensive position
by investing in money market instruments
during periods of market downturn.
Accordingly, while in periods of market upturn
the Fund may outperform the market averages,
in periods of downturn, it is likely to
underperform the market averages. Thus,
investing in Special Equities Fund may involve
greater risk than investing in other Funds.
Growth Opportunity Fund
The investment objective of the Growth
Opportunity Fund is achieving capital
appreciation. It seeks to achieve this
objective by investing in securities believed
to have above average potential for capital
appreciation.
The Fund invests principally in common stocks
and SBMFM uses a flexible management style to
select what it believes to be usually
attractive growth investments on an individual
company basis. Such securities will typically
be issued by small capitalization companies,
larger companies with established records of
growth in sales or earnings, and companies
with new products, new services or new
processes. The Fund may also invest in
companies in cyclical industries during
periods when their securities appear overly
depressed and therefore attractive for capital
appreciation. In addition to common stocks of
companies, the Fund may invest in securities
convertible into or exchangeable for common
stocks, such as convertible preferred stocks
or convertible debentures, and warrants.
Repurchase Agreements. The Fund may enter
into repurchase agreement transactions with
domestic banks or broker-dealers. Under the
terms of a typical repurchase agreement, the
Fund would acquire an underlying debt
obligation for a relatively short period
(usually not more than one week) subject to an
obligation of the seller to repurchase, and
the Fund to resell, the obligation at an
agreed-upon price and time, thereby
determining the yield during the Fund's
holding period. This arrangement results in a
fixed rate of return that is not subject to
market nauseate during the Fund's holding
period. Under each repurchase agreement, the
selling institution will be required to
maintain the value of the securities subject
to the repurchase agreement at not less than
their repurchase price. Repurchase agreements
could involve certain risks in the event of
default or insolvency of the other party
including possible delays or restrictions upon
the Fund's ability to dispose of the
underlying securities, the risk of a possible
decline in the value of the underlying
securities during the period in which the Fund
seeks to assert its rights to them, the risk
of incurring expenses associated with
asserting those rights and the risk of losing
all or part of the income from the agreement.
SBMFM, acting under the supervision of the
Board of Directors, reviews, on an ongoing
basis to evaluate potential risks, the value
of the collateral and the creditworthiness of
those banks and dealers with which the Fund
enters into repurchase agreements.
Options, Futures Contracts and Related
Options. The Fund expects to utilize options,
futures contracts and options thereon in
several different ways, depending upon the
status of the Fund's portfolio and SBMFM's
expectations concerning the securities
markets. The purchase and sale of options and
futures contracts involve risks different from
those involved with direct investments in
securities. If SBMFM is not successful in
utilizing options, futures contracts and
similar instruments, which may be advantageous
to the Fund, the Fund's performance will be
worse than if the Fund did not make such
investments. The Fund may write or purchase
options in privately negotiated transactions
("OTC Options") as well as listed options. OTC
Options can be closed out only by agreement
with the other party to the transactions. Any
OTC Option written by the Fund will be with a
qualified dealer pursuant to an agreement
under which the Fund may repurchase the option
at a formula price. Such options will be
considered illiquid to the extent that the
formula price exceeds the intrinsic value of
the option. The Fund may not purchase or sell
futures contracts or related options for which
the aggregate initial margin and premiums
exceed 5% of the fair market value of the
Fund's assets. In order to prevent leverage in
connection with the purchase of futures
contracts thereon by the Fund, an amount of
cash, cash equivalents of liquid high grade
debt securities equal to the market value of
the obligation under the futures contracts
(less any related margin deposits) will be
maintained in a segregated account with the
Fund's custodian. The Fund may not invest more
than 15% of its net assets in illiquid
securities and repurchase agreements which
have a maturity of longer than seven days.
There are several risks connected with the use
of futures contracts. Such risks include the
imperfect correlation between movements in the
price of the futures contracts and of the
underlying securities, the risk or market
distortion, the illiquidity risk and the risk
of error in anticipating price movement. The
Fund may not purchase or sell futures
contracts or related options for which the
aggregate initial margin and premiums exceed
5% of the fair market value of the Fund's
assets.
The Fund may lend its portfolio securities in
accordance with the description set forth
under "Investment Grade Bond Fund - Lending of
Portfolio Securities" above. The Fund's
investment in warrants are subject to the same
undertaking applicable to Investment Grade
Bond Fund, as described above.
Managed Growth Fund
The investment objective of the Managed Growth
Fund is growth of capital. Dividend income is
a secondary objective of the Fund. The Fund
attempts to achieve its objective by investing
primarily in common stock and securities,
including debt securities which are
convertible into common stock and which are
currently out of favor. Such securities might
typically be valued at the low end of their 52
week trading range.
Covered Option Writing. The Fund may write
covered call options with respect to its
portfolio securities. The Fund realizes a fee
(referred to as a "premium") for granting the
rights evidenced by the options. A call option
embodies the right of its purchaser to compel
the writer of the option to sell to the option
holder an underlying security at a specified
price at any time during the option period.
Thus, the purchaser of a call option written
by the Fund has the right to purchase from the
Fund the underlying security owned by the Fund
at the agreed-upon price for a specified time
period.
Upon the exercise of a call option written by
the Fund, the Fund may suffer a loss equal to
the excess of the security's market value at
the time of the option exercise over the
Fund's cost of the security, less the premium
received for writing the option.
The Fund will write only covered options with
respect to its portfolio securities.
Accordingly, whenever the Fund writes a call
option on its securities, it will continue to
own or have the present right to acquire the
underlying security for as long as it remains
obligated as the writer of the option. To
support its obligation to purchase the
underlying security if a call option is
exercised, the Fund will either (a) deposit
with its custodian in a segregated account,
cash, government securities or other high
grade debt obligations having a value at least
equal to the exercise price of the underlying
securities or (b) continue to own an
equivalent number of puts of the same "series"
(that is, puts on the same underlying
security) with exercise prices greater than
those that it has written (or, if the exercise
prices of the puts that it holds are less than
the exercise prices of those that it has
written, it will deposit the difference with
its custodian in a segregated account).
The Fund may engage in a closing purchase
transaction to realize a profit, to prevent an
underlying security from being called or to
unfreeze an underlying security (thereby
permitting its sale or the writing of a new
option on the security prior to the
outstanding option's expiration). To effect a
closing purchase transaction, the Fund would
purchases, prior to the holder's exercise of
an option that the Fund has written, an option
of the same series as that on which the Fund
desires to terminate its obligation. The
obligation of the Fund under an option that it
has written would be terminated by a closing
purchase transaction, but the Fund would not
be deemed to own an option as a result of the
transaction. There can be no assurances that
the Fund will be able to effect closing
purchase transactions at a time when it wishes
to do so. To facilitate closing purchase
transactions, however, the Fund ordinarily
will write options only if a secondary market
for the options exists on domestic securities
exchanged or in the over-the-counter market.
Options on Broad-Based Domestic Stock Indexes.
The Fund may write call options and purchase
put options on broad-based domestic stock
indexes and enter into closing transitions
with respect to such options. Options on stock
indexes are similar to options on securities
except that, rather than having the right to
take or make delivery of stock at the
specified exercise price, an option on a stock
index gives the holder the right to receive,
upon exercise of the option, an amount of cash
if the closing level of the stock index upon
which the option is based is "in the money".
This amount of cash is equal to the difference
be tween the closing level of the index and
the exercise price of the option, expressed in
dollars times a specified multiple. The writer
of the option is obligated, in return for the
premium received, to make delivery of this
amount. Unlike stock options, all settlements
are in cash, and the gain or loss depends on
price movements in the stock market generally
rather than price movements in the individual
stocks.
The effectiveness of purchasing and writing
puts and calls on stock index options depends
to a large extent on the ability of SBMFM to
predict the price movement of the stock index
selected. Therefore, whether the Fund realizes
a gain or loss from the purchase of options on
an index depends upon movements in the level
of stock prices ins the stock market
generally. Additionally, because exercises of
index options are settled in cash, a call
writer such as the Fund cannot determine the
amount of the settlement obligations in
advance and it cannot provide in advance for,
or cover, its potential settlement obligations
by acquiring and holding the underlying
securities. When the Fund has written the
call, there is also a risk that the market may
decline between the time the Fund has a call
exercised against it, at a price which is
fixed as of the closing level of the index on
the date of exercise, and the time the Fund is
able to exercise the closing transaction with
respect to the long call position it holds.
Restricted and Illiquid Securities. The Fund
may invest in securities which are not readily
marketable as well as restricted securities
not registered under the Securities Act of
1933, OTC Options and securities that are
otherwise considered illiquid as a result of
market or other factors. Although it may
invest up to 15% of its assets in such
securities, the Fund does not currently
anticipate investing more than 5% of its
assets in restricted or illiquid securities.
The Fund may invest in securities eligible for
resale under Rule 144A of the Securities Act
("Rule 144A securities"). The Board of
Directors of the Fund may determine that
specific Rule 144A securities held by the Fund
may be deemed illiquid. Nevertheless, due to
changing market or other factors, Rule 144A
securities may be subject to a greater
possibility of becoming illiquid than
registered securities.
The Fund may enter into repurchase agreements,
lend its portfolio securities, invest in
warrants and enter into futures contracts and
purchase options on futures contracts all in
accordance with the description of the
Investment Grade Bond Fund set forth above.
INVESTMENT RESTRICTIONS
The Funds' investment objectives and the
investment restrictions set forth below are
fundamental policies of each Fund, i.e., they
may not be changed with respect to a Fund
without a majority vote of the outstanding
shares of that Fund. (All other investment
practices described in the Prospectuses and
the Statement of Additional Information may be
changed by the Board of Directors without the
approval of shareholders.)
Unless otherwise indicated, all percentage
limitations apply to each Fund
on an individual basis, and apply only at the
time a transaction is entered into.
(Accordingly, if a percentage restriction is
complied with at the time of investment, a
later increase or decrease in the percentage
which results from a relative change in values
or from a change in the Fund's net assets will
not be considered a violation.)
Restrictions Applicable to All Funds. No Fund
may:
1. Purchase the securities of any one issuer,
other than the U.S. government or its agencies
or instrumentalities, if immediately after
such purchase more than 5% of the value of the
total assets of the Fund would be invested in
securities of such issuer;
2. Invest in real estate (including real
estate limited partnerships), real estate
mortgage loans, or interests in oil, gas
and/or mineral exploration, mineral leases or
development programs, provided that this
limitation shall not prohibit the purchase of
securities issued by companies, including real
estate investment trusts, which invest in real
estate or interests therein;
3. Purchase securities of any other investment
company, except in connection with a merger,
consolidation, reorganization, or acquisition
or assets. (For purposes of this limitation,
foreign banks or their agencies or
subsidiaries are not considered "investment
companies") (the Managed Growth Fund may
purchase the securities of closed-end
investment companies to the extent permitted
by law);
4. Make investments in securities for the
purpose of exercising control over or
management of the issuer;
5. Participate on a joint or a joint and
several basis in any trading account in
securities. (The "bunching" of orders of two
or more Funds -- or of one or more Funds and
of other accounts -- for the sale or purchase
of portfolio securities shall not be
considered participation in a joint securities
trading account);
6. Purchase the securities of any one issuer
if, immediately after such purchase, the Fund
would own more than 10% of the outstanding
voting securities of such issuer;
7. Purchase securities on margin, except such
short-term credits as are necessary for the
clearance of transactions. (For this purpose,
the deposit or payment by Government
Securities Fund of initial or maintenance
margin in connection with futures contracts
and related options is not considered to be
the purchase of a security on margin.
Additionally, borrowing by Government
Securities Fund to increase its holdings of
portfolio securities is not considered to be
the purchase of securities on margin);
8. Make loans, except that this restriction
shall not prohibit (a) the purchase and
holding of a portion of an issue of publicly
distributed debt securities, (b) the lending
of portfolio securities, or (c) entry into re-
purchase agreements;
9. Invest in securities of an issuer which,
together with any predecessor, has been in
operation for less than three years if, as a
result, more than 5% of the total assets of
the Fund would then be invested in such
securities (for purposes of this restriction,
issuers include predecessors, sponsors,
controlling persons, general guarantors and
originators of underlying assets);
10. Purchase the securities of an issuer if,
to the Company's knowledge, one or more of the
Directors or officers of the Company
individually own beneficially more than 1/2 of
1% of the outstanding securities of such
issuer or together own beneficially more than
5% of such securities;
11. Purchase a security which is not readily
marketable if, as a result, more than 10% of
the Fund's total assets would consist of such
securities. If permitted by the laws of
certain states, the Growth Opportunity Fund
may invest up to 15% of its assets in
securities not readily marketable.
(For purposes of this limitation, restricted
securities and repurchase agreements having
more than seven days remaining to maturity are
considered not readily marketable);
12. Purchase the securities of issuers
conducting their principal business activities
in the same industry, if immediately after
such purchase the value of its investments in
such industry would exceed 25% of the value of
the total assets of the Fund, provided that
(a) neither all utility companies (including
telephone companies), as a group, nor all
banks, savings and loan associations and
savings banks, as a group, will be considered
a single industry for purposes of this
limitation, and (b) there is no such
limitation with respect to repurchase
agreements or to investments in U.S.
government securities or certificates of
deposit or bankers' acceptances issued by
domestic institutions (but not their foreign
branches).
Restrictions Applicable to All Funds Except
Government Securities
Fund. The Funds may not:
1. Invest in commodities or commodity futures
contracts;
2. Borrow amounts in excess of 5% (33 1/3% in
the case of the Managed Growth Fund and the
Growth Opportunity Fund) of their total assets
taken at cost or at market value, whichever is
lower, and then only from banks as a temporary
measure for extraordinary or emergency
purposes. A Fund may not mortgage, pledge or
in any other manner transfer any of its assets
as security for any indebtedness. This
restriction shall not prohibit entry into
reverse repurchase agreements, provided that a
Fund may not enter into a reverse repurchase
agreement if, as a result, its current
obligations under such agreements would exceed
one-third of the current market value of the
Fund's total assets (less its liabilities
other than obligations under
such agreements); or
3. Write, purchase or sell puts, calls,
straddles, spreads or any combinations thereof
(the Managed Growth Fund and the Growth
Opportunity Fund each may purchase puts,
calls, straddles, spreads and any combination
thereof, up to 5% of its total assets).
Restrictions Applicable to All Funds Except
Special Equities Fund, Growth Opportunity Fund
and Managed Growth Fund. The Funds may not:
1. Purchase securities which may not be resold
to the public without registration under the
Securities Act of 1933, as amended (the "1933
Act"); or
2. Act as an underwriter of securities.
Restrictions Applicable to Special Equities
Fund. The Funds may not act as an underwriter
of securities, except that each Fund may
invest up to 10% of its total assets in
securities which it may not be free to resell
without registration under the 1933 Act, in
which registration the Fund may technically be
deemed an underwriter for purposes of the 1933
Act.
Restrictions Applicable to All Funds. The
Funds may not:
Sell securities short, unless at all times
when a short position is open, it owns an
equal amount of the securities or securities
convertible into or exchangeable without
payment of any further consideration for
securities of the same issue as the securities
sold short.
Restrictions Applicable to Investment Grade
Bond Fund Only. Investment Grade Bond Fund may
not purchase corporate bonds unless rated at
the time of purchase Baa or better by Moody's
or BBB or better by S&P, or purchase
commercial paper unless issued by a U.S.
corporation and rated at the time
of purchase Prime-1 or Prime-2 by Moody's or
A-1 or A-2 by S&P (or, if not rated, issued by
a corporation having outstanding debt rated Aa
or better by Moody's or AA or better by S&P),
although it may continue to hold a security if
its quality rating is reduced by a rating
service below those specified.
BROKERAGE
In selecting brokers or dealers to execute
securities transactions on behalf of a Fund,
SBMFM seeks the best overall terms available.
In assessing the best overall terms available
for any transaction, SBMFM will consider
the factors that it deems relevant, including
the breadth of the market in the security, the
price of the security, the financial condition
and execution capability of the broker or
dealer and the reasonableness of the
commission, if any, for the specific
transaction and on a continuing basis. In
addition, each investment advisory agreement
authorizes SBMFM, in selecting brokers or
dealers to execute a particular transaction
and in evaluating the best overall terms
available, to consider the brokerage and
research services (as those terms are defined
in Section 28(e) of the Securities Exchange
Act of 1934) provided to the Company, the
other Funds and other accounts over which
SBMFM or its affiliates exercise investment
discretion. The fees under the investment
advisory agreements and the administration
agreement between the Company and SBMFM are
not reduced by reason of their receiving such
brokerage and research services. The Board
of Directors periodically will review the
commissions paid by the Funds to determine if
the commissions paid over representative
periods of time were reasonable in relation to
the benefits inuring to the Company. SEC rules
require that commissions paid to Smith Barney
by a Fund on exchange transactions not exceed
"usual and customary brokerage commissions."
The rules define "usual and customary"
commissions to include amounts which are
"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 being purchased
or sold on a securities exchange during a
comparable period of time." The Board of
Directors, particularly the Independent
Directors of the Company, has adopted
procedures for evaluating the reasonableness
of commissions paid to Smith Barney and
reviews these procedures periodically. In
addition, under rules adopted by the SEC,
Smith Barney may directly execute transactions
for a Fund on the floor of any national
securities exchange, provided: (a) the
Board of Directors has expressly authorized
Smith Barney to effect such transactions; and
(b) Smith Barney annually advises the Fund of
the aggregate compensation it earned on such
transactions.
To the extent consistent with applicable
provisions of the 1940 Act and the rules and
exemptions adopted by the SEC thereunder, the
Board of Directors has determined that
transactions for a Fund may be executed
through Smith Barney and other affiliated
broker-dealers if, in the judgment of SBMFM
the use of such broker-dealer is likely to
result in price and execution at least as
favorable as those of other qualified broker-
dealers, and if, in the transaction, such
broker-dealer charges the Fund a rate
consistent with that charged to comparable
unaffiliated customers in similar
transactions.
Portfolio securities are not purchased from or
through Smith Barney or any
affiliated person (as defined in the 1940 Act)
of Smith Barney where such entities are acting
as principal, except pursuant to the terms and
conditions of exemptive rules or orders
promulgated by the SEC. Pursuant to conditions
set forth in rules of the SEC, the Company may
purchase securities from an underwriting
syndicate of which Smith Barney is a member
(but not from Smith Barney). Such conditions
relate to the price and amount of the
securities purchased, the commission or spread
paid, and the quality of the issuer. The rules
further require that such purchases take place
in accordance with procedures adopted and
reviewed periodically by the Board of
Directors, particularly those Directors who
are not interested persons of the Company.
The Funds may use Smith Barney as a
commodities broker in connection with
entering into futures contracts and commodity
options. Smith Barney has agreed to charge the
Funds commodity commissions at rates
comparable to those charged by Smith Barney to
its most favored clients for comparable
trades in comparable accounts.
The following table sets forth certain
information regarding each Fund's
payment of brokerage commissions to Smith
Barney:
FISCAL YEAR GOVERNMENT SPECIAL
ENDED SECURITIES EQUITIES
DECEMBER 31, FUND FUND
Total Brokerage Commissions
1992 $238,425 $267,089
1993 $717,340 $139,427
1994 $686,000 $217,269
Commissions paid to
1992 $ 0 $ 56,498
Smith Barney*
1993 $ 87,550 $ 16,614
1994 $ 0 $ 14,280
% of Total Brokerage
1994 %** 6.8%
Commissions paid to
Smith Barney*
% of Total Transactions
1994 %** 7.5%
involving Commissions paid
to Smith Barney*
<FN>
* Includes commissions paid to Shearson
Lehman Brothers, the Company's
distributor prior to Smith Barney.
** The disproportional amount between the
percentage of total brokerage commissions paid
to Smith Barney and the percentage of total
transactions involving commissions paid to
Smith Barney for the Government Securities
Fund, resulted from higher brokerage
commissions for options and futures
transactions which were the only commission
transactions involving Smith Barney.
PORTFOLIO TURNOVER
For reporting purposes, a Fund's portfolio
turnover rate is calculated by dividing the
lesser of purchases or sales of portfolio
securities for the fiscal year by the monthly
average of the value of the portfolio
securities owned by the Fund during the fiscal
year. In determining such portfolio turnover,
all securities whose maturities at the time of
acquisition were one year or less are
excluded. A 100% portfolio turnover rate would
occur, for example, if all of the securities
in the Fund's investment portfolio (other than
short-term money market securities) were
replaced once during the fiscal year.
Investment Grade Bond Fund will not normally
engage in the trading of securities for the
purpose of realizing short-term profits, but
it will adjust its portfolio as considered
advisable in view of prevailing or anticipated
market conditions. Portfolio turnover will not
be a limiting factor should SBMFM deem it
advisable to purchase or sell securities.
Special Equities Fund invests for long-term
capital appreciation and will not generally
trade for short-term profits. However, its
portfolio will be adjusted as deemed advisable
by the investment adviser, and portfolio
turnover will not be a limiting factor should
SBMFM deem it advisable to purchase or sell
securities.
The options activities of Government
Securities Fund may affect its portfolio
turnover rate and the amount of brokerage
commissions paid by the Fund. The exercise of
calls written by the Fund may cause the Fund
to sell portfolio securities, thus increasing
its turnover rate. The exercise of puts also
may cause the sale of securities and increase
turnover; although such exercise is within the
Fund's control, holding a protective put might
cause the Fund to sell the underlying
securities for reasons which would not exist
in the absence of the put. The Fund will pay a
brokerage commission each time it buys or
sells a security in connection with the
exercise of a put or call. Some commissions
may be higher than those which would apply to
direct purchases or sales of portfolio
securities. High portfolio turnover involves
correspondingly greater commission expenses
and transaction costs.
For the fiscal years ended December 31, 1993
and 1994, the portfolio turnover rates were as
follows:
FUND
1993 1994
Investment Grade Bond Fund
65% 18%
Government Securities Fund
540% 276%
Special Equities Fund
112% 123%
Increased portfolio turnover necessarily
results in correspondingly greater brokerage
commissions which must be paid by the Fund. To
the extent that portfolio trading results in
realization of net short-term capital gains,
shareholders will be taxed on such gains at
ordinary income tax rates (except shareholders
who invest through IRAs and other retirement
plans which are not taxed currently on
accumulations in their accounts).
SBMFM manages a number of private investment
accounts on a discretionary basis and it is
not bound by the recommendations of the Smith
Barney research department in managing the
Funds. Although investment decisions are
made individually for each client, at times
decisions may be made to purchase or sell the
same securities for one or more of the Funds
and/or for one or more of the other accounts
managed by SBMFM or the fund manager.
When two or more such accounts simultaneously
are engaged in the purchase or sale of the
same security, transactions are allocated in a
manner considered equitable to each, with
emphasis on purchasing or selling entire
orders wherever possible. In some cases, this
procedure may adversely affect the price paid
or received by a Fund or the size of the
position obtained or disposed of by the Fund.
PURCHASE OF SHARES
VOLUME DISCOUNTS
The schedules of sales charges on Class A
shares described in the Prospectuses apply to
purchases made by any "purchaser," which 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 of 1986, as amended
(the "Code"), and qualified employee benefit
plans of employers who are "affiliated
persons" of each other within the meaning of
the 1940 Act; (e) tax-exempt organizations
enumerated in Section 501(c)(3) or (13) of the
Code; and (f) a trustee or other professional
fiduciary (including a bank, or an investment
adviser registered with the SEC under the
Investment Advisers Act of 1940, as amended)
purchasing shares of a Fund for one or more
trust estates or fiduciary accounts.
Purchasers who wish to combine purchase orders
to take advantage of volume discounts on
Class A shares should contact a Smith Barney
Financial Consultant.
COMBINED RIGHT OF ACCUMULATION
Reduced sales charges, in accordance with the
schedule in the Prospectuses, apply to any
purchase of Class A shares if the aggregate
investment in Class A shares of a Fund and in
Class A shares of the other funds in
the Company and of other funds of the Smith
Barney Mutual Funds that are offered with a
sales charge, including the purchase being
made, of any purchaser, is $25,000 or more.
The reduced sales charge is subject to
confirmation of the shareholder's holdings
through a check of appropriate records. Each
Fund reserves the right to terminate or amend
the combined right of accumulation at any time
after written notice to shareholders. For
further information regarding the right of
accumulation, shareholders should contact a
Smith Barney Financial Consultant.
DETERMINATION OF PUBLIC OFFERING PRICE
Each Fund offers its shares to the public on a
continuous basis. The public offering price
for a Class A and Class Y share of each Fund
is equal to the net asset value per share at
the time of purchase plus, for Class A
shares, an initial sales charge based on the
aggregate amount of the investment. The public
offering price for a Class B share and Class C
share, and Class A share purchases, including
applicable right of accumulation, equalling 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 B shares, Class C shares,
and Class A shares when purchased in amounts
equalling or 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 Statement of Additional Information.
REDEMPTION OF
SHARES
The right of redemption may be suspended or
the date of payment postponed (a) for any
period during which the NYSE is closed (other
than for customary weekend and holiday
closings), (b) when trading in markets a Fund
normally utilizes is restricted, or an
emergency, as determined by the SEC, exists,
so that disposal of the Fund's investments or
determination of net asset value is not
reasonably practicable or (c) for such other
periods as the SEC by order may permit for the
protection of the Fund's shareholders.
DISTRIBUTIONS IN KIND
If the Board of Directors of the Company
determines that it would be detrimental to the
best interests of the remaining shareholders
of a Fund to make a redemption payment wholly
in cash, the Fund may pay, in accordance
with SEC rules, any portion of a redemption in
excess of the lesser of $250,000 or 1% of the
Fund's net assets by a distribution in kind of
portfolio securities in lieu of cash.
Securities issued as a distribution in kind
may incur brokerage commissions when
shareholders subsequently sell those
securities.
AUTOMATIC CASH WITHDRAWAL PLAN
An automatic cash withdrawal plan (the
"Withdrawal Plan") is available to
shareholders who own shares with a value of at
least $10,000 ($5,000 for retirement plan
accounts) and who wish to receive specific
amounts of cash monthly or quarterly.
Withdrawals of at least $50 may be made under
the Withdrawal Plan by redeeming as many
shares of a 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 withdrawals exceed dividends,
distributions and appreciation of a
shareholder's investment in a
Fund, there will be a reduction in the value
of the shareholder's investment and continued
withdrawal payments may reduce the
shareholder's investment and ultimately
exhaust it. Withdrawal payments should not be
considered as income from investment in the
Fund. Furthermore, as it generally would not
be advantageous to a shareholder to make
additional investments in the Fund at the same
time that he or she is participating in the
Withdrawal Plan, purchases by such
shareholders in amounts of less than $5,000
will not ordinarily be permitted.
Shareholders who wish to participate in the
Withdrawal Plan and who hold their shares in
certificate form must deposit their share
certificates with TSSG as agent for Withdrawal
Plan members. All dividends and distributions
on shares in the Withdrawal Plan are
automatically reinvested at net asset value in
additional shares of the Company. Withdrawal
Plans should be set up with a Smith Barney
Financial Consultant. A shareholder who
purchases shares directly through TSSG may
continue to do so and applications for
participation in the Withdrawal Plan must be
received by TSSG 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 Smith Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Company's
distributor on a best efforts basis
pursuant to a distribution agreement (the
"Distribution Agreement") which was most
recently approved by the Company's Board of
Directors on August 4, 1994.
When payment is made by the investor before
the settlement date, unless otherwise directed
by the investor, the funds will be held as a
free credit balance in the investor's
brokerage account, and Smith Barney may
benefit from the temporary use of the funds.
The investor may designate another use for the
funds prior to settlement date, such as
investment in a money market fund (other than
Smith Barney Exchange Reserve Fund) of the
Smith Barney Mutual Funds. If the investor
instructs Smith Barney to invest the funds in
a Smith Barney money market fund, the amount
of the investment will be included as part of
the average daily net assets of both the
Company and the money market fund, and
affiliates of Smith Barney that serve the
funds in an investment advisory capacity will
benefit from the fact that they are receiving
fees from both such investment companies for
managing these assets computed on the basis of
their average daily net assets. The Company's
Board of Directors has been advised of the
benefits to Smith Barney resulting from these
settlement procedures and will take such
benefits into consideration when reviewing the
Advisory, Administration and Distribution
Agreements for continuance.
During the fiscal year ended December 31,
1993, Shearson Lehman Brothers, the Company's
distributor prior to Smith Barney, received $
- ---- in the aggregate from the Company under
the Plan.
For the fiscal year ended December 31, 1994,
Smith Barney incurred distribution expenses
totalling approximately $11,061,000,
consisting of approximately $130,000 for
advertising, $124,000 for printing and mailing
of Prospectuses, $4,390,000 for support
services, $3,401,000 to Smith Barney
Financial Consultants, and $3,016,000 in
accruals for interest on the excess of Smith
Barney expenses incurred in distributing the
Fund's shares over the sum of the distribution
fees and CDSC received by Smith Barney
from the Fund. No comparable information is
available for 1992, the year that the variable
pricing system was implemented.
DISTRIBUTION ARRANGEMENTS
To compensate Smith Barney for the services it
provides and for the expense it bears under
the Distribution Agreement, the Company has
adopted a services and distribution plan (the
"Plan") pursuant to Rule 12b-1 under
the 1940 Act. Under the Plan, each Fund pays
Smith Barney a service fee, accrued daily and
paid monthly, calculated at the annual rate of
0.25% of the value of each Fund's average
daily net assets attributable to the
Class A, Class B and Class C shares. In
addition, the Fund pays Smith Barney a
distribution fee with respect to the Class B
and Class C shares primarily intended to
compensate Smith Barney for its initial
expense of paying Financial Consultants a
commission upon sales of those shares. Such
shares' distribution fees, which are accrued
daily and paid monthly, are calculated at the
annual rate of 0.75% of the value of average
daily net assets attributable to the Class B
and Class C shares with respect to Special
Equities Fund, 0.50% of the value of average
daily net assets attributable to the Class B
shares and 0.45% of the value of average daily
net assets attributable to Class C shares,
with respect to Government Securities Fund and
Investment Grade Bond Fund.
The following expenses were incurred during
the periods indicated:
Sales Charges (paid to Smith Barney or
Shearson Lehman Brothers, its predecessor).
CLASS A
FOR PERIOD
FROM 11/6/92 FISCAL YEAR FISCAL
YEAR
NAME OF FUND
THROUGH 12/31/92 ENDED 12/31/93 ENDED
12/31/94
Investment Grade Bond Fund
$15,635 $110,683
$114,571
Government Securities Fund
7,644 48,964
66,217
Special Equities Fund
867 172,978
186,104
CDSC (paid to Smith Barney or Shearson Lehman
Brothers, its predecessor).
CLASS B
FISCAL YEAR FISCAL YEAR FISCAL
YEAR
NAME OF FUND
ENDED 12/31/92 ENDED 12/31/93 ENDED
12/31/94
Investment Grade Bond Fund
$381,975 $498,515
$556,007
Government Securities Fund
630,245 820,619
629,700
Special Equities Fund
45,234 73,089
288,013
Service Fees
CLASS A
FOR PERIOD
FROM 11/6/92 FISCAL YEAR FISCAL
YEAR
NAME OF FUND
THROUGH 12/31/92 ENDED 12/31/93 ENDED
12/31/94
Investment Grade Bond Fund
$184 $16,729
$147,152
Government Securities Fund
67 13,628
334,848
Special Equities Fund
36 22,380
147,488
CLASS B
FISCAL YEAR FISCAL YEAR FISCAL
YEAR
NAME OF FUND
ENDED 12/31/92 ENDED 12/31/93 ENDED
12/31/94
Investment Grade Bond Fund
$177,932 $1,181,850 $
922,038
Government Securities Fund
222,385 2,384,061
1,505,763
Special Equities Fund
30,545 226,964
329,007
CLASS C
(FORMERLY DESIGNATED AS CLASS D)
FOR PERIOD
FROM 11/6/92 FISCAL YEAR FISCAL
YEAR
NAME OF FUND
THROUGH 12/31/92 ENDED 12/31/93 ENDED
12/31/94
Investment Grade Bond Fund
$0 $148
$1,009
Government Securities Fund
0 255
967
Special Equities Fund
0 281
1,975
Distribution Fees
CLASS B
FISCAL YEAR FISCAL YEAR FISCAL
YEAR
NAME OF FUND
ENDED 12/31/92 ENDED 12/31/93 ENDED
12/31/94
Investment Grade Bond Fund
$2,953,493 $2,363,700
$1,844,077
Government Securities Fund
8,189,796 4,768,122
3,011,526
Special Equities Fund
669,436 680,894
987,022
CLASS C
(FORMERLY DESIGNATED AS CLASS D)
FOR PERIOD
FROM 11/6/92 FISCAL YEAR FISCAL
YEAR
NAME OF FUND
THROUGH 12/31/92 ENDED 12/31/93 ENDED
12/31/94
Investment Grade Bond Fund
$0 $295
$1,958
Government Securities Fund
0 510
1,893
Special Equities Fund
0 281
5,927
Under its terms, the Plan continues from year
to year, provided such continuance is approved
annually by vote of the Board of Directors,
including a majority of the Independent
Directors. The Plan may not be amended to
increase the amount to be spent for the
services provided by Smith Barney without
shareholder approval, and all amendments of
the Plan also must be approved by the
Directors in the manner described above. The
Plan may be terminated at any time, without
penalty, by vote of a majority of the
Independent Directors or by a vote of a
majority of the outstanding voting
securities of the Company (as defined in the
1940 Act). Pursuant to the Plan, Smith Barney
will provide the Board of Directors periodic
reports of amounts expended under the Plan and
the purpose for which such expenditures were
made.
VALUATION OF
SHARES
Each Class' net asset value per share is
calculated on each day, Monday through Friday,
except days on which the NYSE is closed. The
NYSE currently is scheduled to be closed on
New Years's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas, and on the
preceding Friday or subsequent Monday when one
of these holidays falls on a Saturday or
Sunday, respectively. Because of the
differences in distribution fees and
Class-specific expenses, the per share net
asset value of each Class may differ. The
following is a description of the procedures
used by the Funds in valuing its assets.
A security which is listed or traded on more
than one exchange is valued at the quotation
on the exchange determined to be the primary
market for such security. All assets and
liabilities initially expressed in foreign
currency values will be converted into U.S.
dollar values at the mean between the bid and
offered quotations of such currencies against
U.S. dollars as last quoted by any recognized
dealer. If such quotations are not
available, the rate of exchange will be
determined in good faith by the Board of
Directors. In carrying out the Board of
Director's valuation policies, SBMFM, as
administrator, or Boston Advisors, as
sub-administrator, may consult with an
independent pricing service (the "Pricing
Service") retained by the Company.
Debt securities of United States issuers
(other than U.S. government securities and
short-term investments) are valued by SBMFM,
as administrator, or Boston Advisors, as
sub-administrator, after consultation with the
Pricing Service approved by the Board of
Directors. When, in the judgment of the
Pricing Service, quoted bid prices for
investments are readily available and are
representative of the bid side of the market,
these investments are valued at the mean
between the quoted bid prices and asked
prices. Investments for which, in the judgment
of the Pricing Service, there are no readily
obtainable market quotations are carried at
fair value as determined by the Pricing
Service. The procedures of the Pricing
Service are reviewed periodically by the
officers of the Company under the general
supervision and responsibility of the Board of
Directors.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any
fund of the Smith Barney Mutual Funds may
exchange all or part of their shares for
shares of the same class of other funds of the
Smith Barney Mutual Funds, to the extent such
shares are offered for sale in the
shareholder's state of residence and provided
your investment dealer is authorized to
distribute shares of the Fund, on
the basis of relative net asset value per
share at the time of exchange as
follows:
A. Class A shares of any fund purchased with a
sales charge may be exchanged for Class A
shares of any of the other funds, and the
sales charge differential, if any, will be
applied. Class A shares of any fund may be
exchanged without a sales charge for shares of
the funds that are offered without a sales
charge. Class A shares of any fund purchased
without a sales charge may be exchanged for
shares sold with a sales charge, and the
appropriate sales charge differential will be
applied.
B. Class A shares of any fund acquired by a
previous exchange of shares purchased with a
sales charge may be exchanged for Class A
shares of any of the other funds, and the
sales charge differential, if any, will be ap-
plied.
C. Class B shares of any fund may be exchanged
without a CDSC. Class B shares of the Fund
exchanged for Class B shares of another 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.
Dealers other than Smith Barney must notify
TSSG 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 B
above.
The exchange privilege enables shareholders to
acquire shares of the same Class in a fund
with different investment objectives when they
believe that a shift between funds is an
appropriate investment decision. This
privilege is available to shareholders
residing in any state in which the fund 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 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.
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.
PERFORMANCE DATA
From time to time, a Fund may quote its yield
or total return in advertisements or in
reports and other communications to
shareholders. The Fund may include comparative
performance information in advertising or
marketing the Fund's shares. Such performance
information may include the following industry
and financial publications: Barron's, Business
Week, CDA Investment Technologies, Inc.,
Changing Times, Forbes, Fortune, Institutional
Investor, Investors Daily, Money, Morningstar
Mutual Fund Values, The New York Times, USA
Today and The Wall Street Journal. To the
extent any advertisement or sales literature
of a Fund describes the expenses or
performance of a Class, it will also disclose
such information for the other Classes.
YIELD
A Fund's 30-day yield figure described below
is calculated according to a formula
prescribed by the SEC. The formula can be
expressed as follows:
YIELD = 2[( a-b / cd
+1)6 -1]
Where: a = dividends and interest
earned during the period.
b = expenses accrued for the
period (net of reimburse
ment).
c = the average daily number
of shares outstanding dur
ing the period that were entitled to receive
dividends.
d = the maximum offering
price per share on the last day
of the period.
For the purpose of determining the interest
earned (variable "a" in the formula) on debt
obligations purchased by the Fund at a
discount or premium, the formula generally
calls for amortization of the discount or
premium; the amortization schedule will be
adjusted monthly to reflect changes in the
market values of the debt obligations.
Investors should recognize that in periods of
declining interest rates a Fund's yield will
tend to be somewhat higher than prevailing
market rates, and in periods of rising
interest rates, the Fund's yield will tend to
be somewhat lower. In addition, when interest
rates are falling, the inflow of net new money
to the Fund from the continuous sale of its
shares will likely be invested in portfolio
instruments producing lower yields than
the balance of the Fund's investments, thereby
reducing the current yield of the Fund. In
periods of rising interest rates, the opposite
can be expected to occur.
The Class A yields for the 30-day period ended
December 31, 1994 for Investment Grade Bond
Fund and Government Securities Fund were 8.18%
and 7.35%, respectively.
The Class B yields for the 30-day period ended
December 31, 1994 for Investment Grade Bond
Fund and Government Securities Fund were 8.08%
and 7.19%, respectively.
The Class C yields for the 30-day period ended
December 31, 1994 for Investment Grade Bond
Fund and Government Securities Fund were 8.10%
and 7.25%, respectively.
AVERAGE ANNUAL TOTAL RETURN
"Average annual total return" figures, as
described below, are computed
according to a formula prescribed by the SEC.
The formula can be expressed as follows:
P(1+T)n = ERV
Where: P = a hypothetical initial
payment of $1,000.
T = average annual total
return.
n = number of years.
ERV = Ending Redeemable Value
of a hypothetical $1,000
investment made at the
beginning of a 1-, 5- or
10-year period at the
end of the 1-, 5- or 10-year
period (or fractional
portion thereof), assuming
reinvestment of all
dividends and distributions.
A Class' total return figures calculated in
accordance with the above formula assume that
the maximum applicable sales charge or maximum
applicable CDSC, as the case may be, has been
deducted from the hypothetical $1,000
initial investment at the time of purchase or
redemption, as applicable.
Class A's average annual total returns were as
follows for the periods indicated:
YEAR ENDED NOVEMBER 6, 1992*
NAME OF FUND
DECEMBER 31, 1994 THROUGH DECEMBER 31, 1994
Investment Grade Bond Fund
(13.05)% 2.90%
Government Securities Fund
(7.13) 2.49
Special Equities Fund
(10.31) 13.26
<FN>
* The Funds commenced selling Class A shares
on November 6, 1992.
Class B's average annual total returns
(reflecting the waiver of the Fund's
investment advisory, sub-investment advisory,
administration and distribution fees, when
applicable) were as follows for the periods
indicated:
FIVE YEAR TEN YEAR
YEAR
ENDED PERIOD ENDED PERIOD
ENDED
NAME OF FUND
DECEMBER 31, 1994 DECEMBER 31, 1994
DECEMBER 31, 1994(1)
Investment Grade Bond Fund
(13.10)% 7.75%
10.20%
Government Securities Fund
(7.37) 6.84 8.12
Special Equities Fund
(10.96) 7.87
9.73
<FN>
(1) Class B shares automatically convert to
Class A shares eight years
after date of original purchase. Thus, a
shareholder's actual return
for the ten years ended December 31, 1994
would be different than that
reflected above.
If investment advisory, sub-investment
advisory, administration and distribution fees
had not been waived, Class B's average annual
total return for the same periods would have
been the following:
FIVE YEAR TEN YEAR
YEAR
ENDED PERIOD ENDED PERIOD
ENDED
NAME OF FUND
DECEMBER 31, 1994 DECEMBER 31, 1994
DECEMBER 31, 1994(1)
Investment Grade Bond Fund
N/A 7.74%
10.16%
Government Securities Fund
N/A 6.80 8.09
Special Equities Fund
N/A N/A 9.73
<FN>
(1) Class B shares automatically convert to
Class A shares eight years
after date of original purchase. Thus, a
shareholder's actual return
for the ten years ended December 31, 1994
would be different than that
reflected above.
Class C's average annual total returns were as
follows for the periods indicated:
PER ANNUM FOR
THE PERIOD FROM
ONE YEAR COMMENCEMENT OF
PERIOD ENDED OPERATIONS
NAME OF FUND
12/31/94 THROUGH 12/31/94
Investment Grade Bond Fund(1)
(10.23)% (0.01)%
Government Securities Fund(2)
(4.16) 2.01
Special Equities Fund(3)
(7.21) (13.02)
<FN>
(1) The Fund commenced selling Class C shares
(previously designated as
Class D shares) on February 26, 1993.
(2) The Fund commenced selling Class C shares
(previously designated as
Class D shares) on February 4, 1993.
(3) The Fund commenced selling Class C shares
(previously designated as
Class D shares) on October 18, 1993.
AGGREGATE TOTAL RETURN
Aggregate total return figures, as described
below, represent the cumulative change in the
value of an investment in the Class for the
specified period and are computed by the
following formula:
ERV-P / P
Where: P = a hypothetical initial
payment of $10,000.
ERV = Ending Redeemable Value
of a hypothetical $10,000
investment made at the
beginning of a 1-, 5- or
10-year period (or
fractional portion thereof), at
the end of the 1-, 5-
or 10-year period (or frac-
tional portion
thereof), assuming reinvestment of
all dividends and
distributions.
Class A's aggregate total returns were as
follows for the periods indicated:
PERIOD FROM PERIOD
FROM
ONE YEAR
NOVEMBER 6, 1992* ONE YEAR NOVEMBER
6, 1992
PERIOD ENDED
THROUGH PERIOD ENDED
THROUGH
DECEMBER 31,
DECEMBER 31, DECEMBER 31,
DECEMBER 31,
NAME OF FUND 1994**
1994** 1994***
1994***
Investment Grade Bond Fund (8.95)%
11.36% (13.05)%
3.46%
Government Securities Fund (2.76)
10.41 (7.13)
2.56
Special Equities Fund (5.59)
37.38 (10.31)
27.77
<FN>
* The Funds commenced selling Class A shares
on November 6, 1992.
** Figures do not include the effect of the
maximum sales charge.
*** Figures include the effect of the maximum
sales charge.
Class B's aggregate total returns were as
follows for the periods indicated:
ONE YEAR
FIVE YEAR TEN YEAR ONE YEAR
FIVE YEAR TEN YEAR
PERIOD ENDED
PERIOD ENDED PERIOD ENDED PERIOD ENDED
PERIOD ENDED PERIOD ENDED
DECEMBER 31,
DECEMBER 31, DECEMBER 31, DECEMBER 31,
DECEMBER 31, DECEMBER 31,
NAME OF FUND 1994*
1994* 1994*(1) 1994**
1994** 1994**(1)
Investment Grade Bond
Fund (9.41)%
46.19% 164.07% (13.10)%
45.16% 164.07%
Government Securities
Fund (3.25)
40.20 118.37 (7.37)
39.20 118.37
Special Equities Fund (6.27)
47.03 153.15 (10.96)
47.03 153.15
<FN>
* Figures do not include the effect of the
CDSC (maximum 4.50% for Investment Grade Bond
Fund and Government Securities Fund and 5.00%
for
the other Funds).
** Figures include the effect of the maximum
applicable CDSC, if any.
(1) Class B shares automatically convert to
Class A shares eight years
after date of original purchase. Thus, a
shareholder's actual return
for the ten years ended December 31, 1994
would be different than that
reflected above.
Class C's (formerly Class D) aggregate total
returns were as follows for
the periods indicated:
PERIOD FROM PERIOD FROM
ONE YEAR
COMMENCEMENT* ONE YEAR COMMENCEMENT*
PERIOD ENDED
THROUGH PERIOD ENDED THROUGH
DECEMBER 31,
DECEMBER 31, DECEMBER 31, DECEMBER 31,
NAME OF FUND 1994**
1994** 1994*** 1994***
Investment Grade Bond Fund (9.41)%
(0.01)% (10.23)% (0.01)%
Government Securities Fund (3.25)
3.87 (4.16) 3.87
Special Equities Fund (6.27)
(15.43) (7.21) (15.43)
<FN>
* Investment Grade Bond Fund, Government
Securities Fund and Special Equities Fund
commenced selling Class C shares on February
26, 1993,
February 4, 1993 and October 18, 1993,
respectively. Class C shares
are sold at net asset value without any
sales charge or CDSC.
** Figures do not include the effect of the
CDSC.
*** Figures include the effect of the
applicable CDSC (1.00%).
It is important to note that the yield and
total return figures set forth above are based
on historical earnings and are not intended to
indicate future performance.
A Class' performance will vary from time to
time depending upon market conditions, the
composition of the Fund's investment portfolio
and operating expenses and the expenses
exclusively attributable to the Class.
Consequently, any given performance quotation
should not be considered representative of the
Class' performance for any specified period in
the future. Because performance will vary, it
may not provide a basis for comparing an
investment in the Class with certain bank
deposits or other investments that pay a fixed
yield for a stated period of time. Investors
comparing the Class' performance with that of
other mutual funds should give consideration
to the quality and maturity of the respective
investment companies' portfolio securities.
TAXES
The following is a summary of certain Federal
income tax considerations that may affect the
Company and its shareholders. The summary is
not intended as a substitute for individual
tax advice, and investors are urged to consult
their tax advisors as to the tax consequences
of an investment in any Fund of the Company.
TAX STATUS OF THE FUNDS
Each Fund will be treated as a separate
taxable entity for Federal income tax
purposes.
Each Fund has qualified and the Company
intends that each Fund will continue to
qualify separately each year as a "regulated
investment company" under the Code. A
qualified Fund will not be liable for Federal
income taxes to the extent that its taxable
net investment income and net realized capital
gains are distributed to its shareholders,
provided that each Fund distributes at least
90% of its net investment income.
Each Fund intends to accrue dividend income
for Federal income tax purposes in accordance
with the rules applicable to regulated
investment companies. In some cases, these
rules may have the effect of accelerating (in
comparison to other recipients of the
dividend) the time at which the dividend is
taken into account by a Fund as taxable
income.
Certain options, futures contracts and forward
contracts in which the Funds may invest are
"section 1256 contracts." Gains or losses on
section 1256 contracts generally are
considered 60% long-term and 40% short-term
capital gains or losses ("60/40"); however,
foreign currency gains or losses arising from
certain section 1256 contracts may be treated
as ordinary income or loss. Also, section 1256
contracts held by a Fund at the end of each
taxable year are "marked-to-market" with the
result that unrealized gains or losses are
treated as though they were realized and the
resulting gain or loss is treated as 60/40
gain or loss as ordinary income or loss, as
the case may be. These contracts also may be
marked-to-market for purposes of the 4% excise
tax under rules prescribed in the Code.
Many of the hedging transactions undertaken by
the Funds will result in "straddles" for
Federal income tax purposes. Straddles are
defined to include "offsetting positions" in
actively traded personal property. It is
not entirely clear under what circumstances
one investment made by a Fund will be treated
as offsetting another investment held by the
Fund. In general, positions are offsetting if
there is a substantial diminution in the
risk of loss from holding one position by
reason of holding one or more other positions.
The straddle rules may affect the character of
gains (or losses) realized on straddle
positions. In addition, losses realized by a
Fund on straddle positions may be deferred
under the straddle rules, rather than being
taken into account in calculating the taxable
income for the taxable year in which losses
are realized. The hedging transactions
may also increase the amount of gains from
assets held less than three months. As a
result, the 30% limit on gains from certain
assets held less than three months, which
applies to regulated investment companies, may
restrict a Fund in the amount of hedging
transactions which it may undertake. In
addition, hedging transactions may increase
the amount of short-term capital gain realized
by a Fund which is taxed as ordinary income
when distributed to the shareholders. The Fund
may make one or more of the elections
available under the Code which are applicable
to straddles. If a Fund makes any of the
elections, the amount, character and timing of
the recognition of gain or losses from the
affected straddle positions will be
determined under rules that vary according to
the election(s) made. Because only a few
regulations implementing the straddle rules
have been promulgated, the consequences of
straddle transactions to a Fund are not
entirely clear.
Distributions of investment company taxable
income generally are taxable
to shareholders as ordinary income. In view of
each Fund's investment policy, it is expected
that dividends from domestic corporations will
constitute a portion of the gross income of
several of the Funds but not of others.
Therefore, it is expected that a portion of
the income distributed by the Special Equities
Fund but not others (Investment Grade Bond
Fund and Government Securities Fund) may be
eligible for the dividends-received deduction
for corporations.
Distributions of net realized capital gains
designated by a Fund as capital gains
dividends are taxable to shareholders as
long-term capital gain, regardless of the
length of time the shares of a Fund have been
held by a shareholder. Distributions of
capital gains, whether long or short-term,
are not eligible for the dividends-received
deduction.
Dividends (including capital gain dividends)
declared by a Fund in October, November or
December of any calendar year to shareholders
of record on a date in such a month will be
deemed to have been received by shareholders
on December 31 of that calendar year, provided
that the dividend is actually paid by the Fund
during January of the following calendar
year.
All dividends are taxable to the shareholder
whether reinvested in additional shares or
received in cash. Shareholders receiving
distributions in the form of additional shares
will have a cost basis for Federal income
tax purposes in each share received equal to
the net asset value of a share of the Fund on
the reinvestment date. Shareholders will be
notified annually as to the Federal tax status
of distributions.
Under the Code, gains or losses attributable
to fluctuations in currency exchange rates
which occur between the time a Fund accrues
income or other receivables or accrues
expenses or other liabilities denominated in a
foreign currency and the time a Fund actually
collects such receivables or pays such
liabilities, generally are treated as ordinary
income or ordinary loss. Similarly, on
disposition of debt securities denominated in
a foreign currency and on disposition of
certain futures contracts, forward contracts
and options, gains or losses attributable to
fluctuations in the value of certain currency
between the date of acquisition of the
security and the date of disposition also are
treated as ordinary gain or loss. These gains
or losses, referred to under the Code as
"section 988" gains or losses, may increase or
decrease the amount of a Fund's investment
company taxable income to be distributed to
its shareholders as ordinary income.
It is expected that certain dividends and
interest received by the Fund will be subject
to foreign withholding taxes. So long as more
than 50% in value of a Fund's total assets at
the close of a given taxable year consists of
stocks or securities of foreign corporations,
the Fund may elect to treat any foreign taxes
paid or accrued by it as paid by its
shareholders. Each Fund will notify
shareholders in writing each year whether it
makes the election and the amount of foreign
taxes it has elected to have treated as paid
by the shareholders. If a Fund makes the
election, shareholders will be required to
include as income their proportionate share of
the amount of foreign taxes paid or accrued by
the Fund and generally will be entitled to
claim either a credit or deduction (as an
itemized deduction) for their share of the
taxes in computing their Federal income tax,
subject to limitations.
Generally, a credit for foreign taxes is
subject to the limitation that it may not
exceed the shareholder's United States tax
attributable to his or her total foreign
source taxable income. For this purpose, if
the pass through election is made, the source
of the electing Fund's income will flow
through to its shareholders. With respect to a
Fund, gains from the sales of securities
generally will be treated as derived from
United States sources and certain currency
fluctuation gains, including fluctuation gains
from foreign currency denominated debt
securities, receivables and payables, will be
treated as ordinary income derived from United
States sources. The limitation on the foreign
tax credit is applied separately to foreign
source passive income (as defined for purposes
of the foreign tax credit), including the
foreign source passive income passed through
by a Fund. Shareholders may be unable to claim
a credit for the full amount of their
proportionate share of the foreign tax paid or
accrued by a Fund. A foreign tax credit can be
used to offset only 90% of the alternative
minimum tax (as computed under the Code for
purposes of the limitation) imposed on
corporations and individuals. If a Fund is not
eligible to make the election to "pass
through" to its shareholders its foreign
taxes, the foreign taxes it pays will reduce
investment company taxable income and the
distributions by that Fund will be treated as
United States source income.
The foregoing is only a general description of
the foreign tax credit. Because application of
the credit depends on the particular
circumstances of each shareholder,
shareholders are advised to consult their own
tax advisors.
Distributions by a Fund reduces the net asset
value of the Fund's shares. Should a
distribution reduce the net asset value below
a shareholder's cost basis, such distribution
nevertheless generally would be taxable to
the shareholder as ordinary income or capital
gains as described above, even though, from an
investment standpoint, it may constitute a
partial return of capital. In particular,
investors should be careful to consider
the tax implications of buying shares just
prior to a distribution. The price of shares
purchased at that time includes the amount of
the forthcoming distribution but the
distribution generally would be taxable to
him.
Upon redemption, sale or exchange of his
shares, a shareholder will realize a taxable
gain or loss depending upon his basis for his
shares. Such gain or loss will be treated as
capital gain or loss if the shares are
capital assets in the shareholder's hands.
Such gain or loss generally will be long-term
or short-term depending upon the shareholder's
holding period for the shares. However, a loss
realized by a shareholder on the sale of
shares of a Fund with respect to which capital
gain dividends have been paid will, to the
extent of such capital gain dividends, be
treated as long-term capital loss if such
shares have been held by the shareholder
for six months or less. A gain realized on a
redemption, sale or exchange will not be
affected by a reacquisition of shares. A loss
realized on a redemption, sale or exchange,
however, will be disallowed to the extent
the shares disposed of are replaced (whether
through reinvestment of distributions or
otherwise) within a period of 61 days
beginning 30 days before and ending 30 days
after the shares are disposed of. In such a
case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
For the purposes of computing the revised
alternative minimum tax of 20% for
corporations, 75% of the excess of the
adjusted current earnings (as defined in the
Code) over other alternative minimum taxable
income is treated as an adjustment item.
Shareholders are advised to consult their
own tax advisors for details regarding the
alternative minimum tax.
If a Fund purchases shares in certain foreign
investment funds classified under the Code as
a "passive foreign investment company", the
Fund may be subject to Federal income tax on a
portion of an "excess distribution" and
gain from the disposition of such shares, even
though such income may have to be distributed
as a taxable dividend by the Fund to its
shareholders. In addition, gains on the
disposition of shares in a passive foreign in-
vestment company generally are treated as
ordinary income even though the shares are
capital assets in the hands of the Company.
Certain interest charges may be imposed on
either the Fund or its shareholders in respect
of any taxes arising from such distributions
or gains. A Fund may be eligible to elect to
include in its gross income its share of
earnings of a passive foreign investment
company on a current basis. Generally the
election would eliminate the interest charge
and the ordinary income treatment on the
disposition of stock, but such an election may
have the effect of accelerating the
recognition of income and gains by the Fund
compared to a fund that did not make the
election. In addition, another election may be
available that would involve marking to market
a Fund's passive foreign investment company
shares at the end of each taxable year (and on
certain other dates prescribed in the Code),
with the result that unrealized gains
are treated as though they were realized. If
this election were made, tax at the Fund level
under the passive foreign investment company
rules would generally be eliminated, but the
Fund could, in limited circumstances,
incur nondeductible interest charges. Each
Fund's intention to qualify annually as a
regulated investment company may limit its
elections with respect to shares of passive
foreign investment companies.
Because the application of the passive foreign
investment company rules may affect, among
other things, the character of gains, the
amount of gain or loss and the timing of the
recognition of income with respect to passive
foreign investment company shares, as well as
subject a Fund itself to tax on certain income
from such shares, the amount that must be
distributed to shareholders, and which will be
taxed to shareholders as ordinary income or
long-term capital gain, may be increased or
decreased substantially as compared to a fund
that did not invest in passive foreign
investment companies.
If a shareholder (a) incurs a sales charge in
acquiring shares of the Company, (b) disposes
of those shares within 90 days and (c)
acquires shares in a mutual fund for which the
otherwise applicable sales charge is reduced
by reason of a reinvestment right (i.e.,
exchange privilege), the original sales charge
increases the shareholder's tax basis in the
original shares only to the extent the
otherwise applicable sales charge for
the second acquisition is not reduced. The
portion of the original sales charge that does
not increase the shareholder's tax basis in
the original shares would be treated as
incurred with respect to the second
acquisition and, as a general rule, would
increase the shareholder's tax basis in the
newly acquired shares. Furthermore, the same
rule also applies to a disposition of the
newly acquired shares made within 90 days of
the subsequent acquisition. This provision
prevents a shareholder from immediately de-
ducting the sales charge by shifting his or
her investment in a family of mutual funds.
Backup Withholding. If a shareholder fails to
furnish a correct taxpayer identification
number, fails to fully report dividend or
interest income, or fails to certify that he
or she has provided a correct taxpayer
identification number and that he or she is
not subject to such withholding, then the
shareholder may be subject to a 31% "backup
withholding tax" with respect to (a) any
taxable dividends and distributions and (b)
any proceeds of any redemption of Company
shares. An individual's taxpayer
identification number is his or her social
security number. The backup withholding tax is
not an additional tax and may be credited
against a shareholder's regular federal income
tax liability.
The foregoing discussion relates only to
Federal income tax law as applicable to United
States citizens. Distributions by the Funds
also may be subject to state, local and
foreign taxes, and their treatment under
state, local and foreign income tax laws may
differ from the Federal income tax treatment.
The Government Securities Fund's dividends, to
the extent they consist of interest from
obligations of the United States government
and certain of its agencies and
instrumentalities, may be exempt
from state and local income taxes in some
jurisdictions. The Company intends to advise
shareholders of the proportion of that Fund's
dividends which are derived from such
interest. Shareholders should consult their
tax advisors with respect to particular
questions of Federal, state, local
and foreign taxation.
ADDITIONAL
INFORMATION
The Company was incorporated on September 29,
1981 under the name Hutton Investment Series
Inc. The Company's corporate name was changed
on December 29, 1988, July 30, 1993 and
October 28, 1994, to SLH Investment Port-
folios Inc., Smith Barney Shearson Investment
Funds Inc. and Smith Barney Investment Funds
Inc., respectively.
PNC Bank, is located at 17th and Chestnut
Streets, Philadelphia, Pennsylvania 19103, and
serves as the custodian of the Company. Under
its custody agreement with the Company, PNC
Bank holds the Company's fund securities and
keeps all necessary accounts and records. For
its services, PNC Bank receives a monthly fee
based upon the month-end market value of
securities held in custody and also receives
securities transaction charges. PNC Bank is
authorized to establish separate accounts for
foreign securities owned by the Company to be
held with foreign branches of other domestic
banks as well as with certain foreign banks
and securities depositories. The assets of the
Company are held under bank custodianship in
compliance with the 1940 Act.
TSSG is located at Exchange Place, Boston,
Massachusetts 02109 and serves as the
Company's transfer agent. For these services,
TSSG receives a monthly fee computed on the
basis of the number of shareholder accounts it
maintains for the Company during the month and
is reimbursed for out-of-pocket expenses.
FINANCIAL
STATEMENTS
The Annual Reports for each Fund for the
fiscal year ended December 31, 1994 accompany
this Statement of Additional Information and
are incorporated herein by reference in their
entirety.
APPENDIX
CORPORATE BONDS AND COMMERCIAL PAPER RATINGS
Corporate Bonds. Bonds rated Aa by Moody's are
judged by Moody's to be of high-quality by all
standards. Together with bonds rated Aaa
(Moody's highest rating) they comprise what
are generally known as high-grade
bonds. Aa bonds are rated lower than Aaa bonds
because margins of protection may not be as
large as those of Aaa bonds, or fluctuation of
protective elements may be of greater
amplitude, or there may be other elements
present which make the long-term risks appear
somewhat larger than those applicable to Aaa
securities. Bonds which are rated A by Moody's
possess many favorable investment attributes
and are to be considered as upper
medium-grade obligations. Factors giving
security to principal and interest are
considered adequate, but elements may be
present which suggest a susceptibility to
impairment sometime in the future.
Moody's Baa rated bonds 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.
Bonds rated AA by S&P are judged by S&P to be
the high-grade obligations and in the majority
of instances differ only in small degree from
issues rated AAA (S&P highest rating). Bonds
rated AAA are considered by S&P to be the
highest grade obligations and possess the
ultimate degree of protection as to principal
and interest. With AA bonds, as with AAA
bonds, prices move with the long-term money
market. Bonds rated A by S&P have a
strong capacity to pay principal and interest,
although they are somewhat more susceptible to
the adverse effects of changes in
circumstances and economic conditions.
Bonds rated BBB by S&P, or medium-grade
category bonds, are borderline between
definitely sound obligations and those where
speculative elements begin to predominate.
These bonds have adequate asset coverage and
normally are protected by satisfactory
earnings. Their susceptibility to changing
conditions, particularly to depressions,
necessitates constant watching. These bonds
generally are more responsive to business and
trade conditions than to interest rates. This
group is the lowest which qualifies for
commercial bank investment.
Commercial Paper. The Prime rating is the
highest commercial paper rating assigned by
Moody's. Among the factors considered by
Moody's in assigning ratings are the
following: (a) evaluation of the management of
the issuer; (b) economic evaluation of the
issuer's industry or industries and an
appraisal of speculative-type risks which may
be inherent in certain areas; (c) evaluation
of the issuer's products in relation to
competition and customer acceptance; (d)
liquidity; (e) amount and quality of long-term
debt; (f) trend of earnings over a period of
ten years; (g) financial strength of a parent
company and the relationships which exist with
the issuer; and (h) recognition by management
of obligations which may be present or may
arise as a result of public interest questions
and preparations to meet such obligations.
Issuers within the Prime category may be
given ratings 1, 2 or 3, depending on the
relative strengths of these factors.
Commercial paper rated A by S&P has the
following characteristics: (a) liquidity
ratios are adequate to meet cash requirements;
(b) long-term senior debt rating should be A
or better, although in some cases BBB credits
may be allowed if other factors outweigh the
BBB; (c) the issuer should have access to at
least two additional channels of borrowing;
(d) basic earnings and cash flow should have
an upward trend with allowances made
for unusual circumstances; and (e) typically
the issuer's industry should be well
established and the issuer should have a
strong position within its industry, and the
reliability and quality of management should
be unquestioned. Issuers rated A are further
referred to by use of number 1, 2 and 3 to
denote relative strength within this highest
classification.
SUPPLEMENTARY DESCRIPTION OF INTEREST RATE
FUTURES CONTRACTS AND RELATED
OPTIONS
Characteristics of Futures Contracts.
Currently, futures contracts can be
purchased and sold on such securities as U.S.
Treasury bonds, U.S. Treasury notes, GNMAs and
U.S. Treasury bills. Unlike when the Fund
purchases or sells a security, no price is
paid or received by the Fund upon the
purchase or sales of a futures contract. The
Fund will initially be required to deposit
with the custodian or the broker an amount of
"initial margin" of cash of U.S. Treasury
bills. The nature of initial margin in
futures transactions is different from that of
margin in security transactions in that
futures contract initial margin does not
involve the borrowing of funds by their
customer to finance the transaction. Rather,
the initial margin is in the nature of a
performance bond or good faith de-
posit on the contract which is returned to the
Fund upon termination of the futures contract,
assuming all contractual obligations have been
satisfied. Subsequent payments, called
maintenance margin, to and from the
broker, will be made on a daily basis as the
price of the underlying debt security
fluctuates, making the long and short
positions in the futures contract more or less
valuable, a process known as
"marked-to-market." For example, when the Fund
has purchased a futures contract and the price
of the underlying debt security has risen,
that position will have increased in value and
the Fund will receive from the broker a
maintenance margin payment equal to that
increase in value. Conversely, when the Fund
has purchased a futures contract and the price
of the underlying debt security has declined,
the position would be less valuable and the
Fund would be required to make a maintenance
margin payment to the broker. At any time
prior to expiration of the futures contract,
the Fund may elect to close the position by
taking an opposite position which will operate
to terminate the Fund's position in the
futures contract. A final determination of
maintenance margin is then made, additional
cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or a
gain.
While futures contracts based on debt
securities do provide for the delivery and
acceptance of securities, such deliveries and
acceptances are very seldom made. Generally,
the futures contract is terminated by entering
into an offsetting transaction. An offsetting
transaction for a futures contract sale is
effected by the Fund entering into a futures
contract purchase for the same aggregate
amount of the specific type of financial
instrument and same delivery date. If the
price in the sale exceeds the price in the
offsetting purchase, the Fund pays the
difference and realizes the loss. Similarly,
the closing out of a futures contract purchase
is effected by the Fund entering into a
futures contract sale. If the offsetting sale
price exceeds the purchase price, the Fund
realizes a gain, and if the purchase price
exceeds the offsetting price, the Fund
realizes a loss.
Risks of Transactions in Futures Contracts.
There are several risks in connection with the
use of futures contracts by Government
Securities Fund as a hedging device. One risk
arises because of the imperfect correlation
between movements in the price of the futures
contracts and movements in the price of the
debt securities which are the subject of the
hedge. The price of the futures contract may
move more than or less than the price of
the debt securities being hedged. If the price
of the futures contract moves less than the
price of the securities which are the subject
of the hedge, the hedge will not be fully
effective, but, if the price of the securities
being hedged has moved in an unfavorable
direction, the Fund would be in a better
position than if it has not hedged at all. If
the price of the securities being hedged has
moved in a favorable direction, this advantage
will be partially offset by the movement in
the price of the futures contract. If the
price of the futures contracts moves more
than the price of the security, the Fund will
experience either a loss or a gain on the
future which will not be completely offset by
movements in the prices of the debt securities
which are the subject of the hedge. To
compensate for the imperfect correlation of
movements in the price of debt securities
being hedged and movements in the prices of
the futures contracts, the Fund may buy or
sell futures contracts in a greater dollar
amount than the dollar amount of the
securities being hedged if the historical
volatility of the prices of such securities
has been greater than the historical
volatility of the futures contracts.
Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility
of the price of the securities being hedged is
less than the historical volatility of the
futures contracts. It is also possible that,
where the Fund has sold futures to hedge its
portfolio against decline in the market, the
market may advance and the value of securities
held in the Fund's portfolio may decline. If
this occurred, the Fund would lose money on
the futures contracts and also experience a
decline in value in its portfolio securities.
However, while this could occur for a very
brief period or to a very small degree, over
time the value of a diversified portfolio will
tend to move in the same direction as the
futures contracts.
Where futures are purchased to hedge against a
possible increase in prices of securities
before the Fund is able to invest its cash (or
cash equivalents) in U.S. government
securities (or options) in an orderly fashion,
it is possible that the market may decline
instead; if the Fund then concludes not to
invest in U.S. government securities or
options at that time because of concern as to
possible further market decline or for other
reasons, the Fund will realize a loss on the
futures contract that is not offset by a
reduction in the price of securities
purchased.
In addition to the possibility that there may
be an imperfect correlation, or no correlation
at all, between movements in the futures
contracts and the portion of the portfolio
being hedged, the market prices of futures
contracts may be affected by certain factors.
First, all participants in the futures market
are subject to margin deposit and maintenance
requirements. Rather than meeting additional
margin deposit requirements, investors may
close futures contracts though offsetting
transactions which could distort the normal
relationship between the debt securities and
futures markets; second, from the point of
view of speculators, the deposit requirements
in the futures market are less onerous than
margin requirements in the securities market.
Therefore, increased participation by
speculators in the futures market may also
cause temporary price distortions. Due to the
possibility of price distortion in the futures
market and because of the imperfect
correlation between movements in the debt
securities and movements in the prices of
futures contracts, a correct for
cast of interest rate trends by the investment
advisor may still not result in a successful
hedging transaction over a very short time
frame.
Positions in futures contracts may be closed
out only on an exchange or board of trade
which provides a secondary market for such
futures. Although Government Securities Fund
intends to purchase or sell futures only
on exchanges or boards of trade where there
appears to be an active secondary market,
there is no assurance that a liquid secondary
market on an exchange or board of trade will
exist for any particular contract or at
any particular time. In such event, it may not
be possible to close a futures position, and
in the event of adverse price movements, the
Fund would continue to be required to make
daily cash payments of variation margin.
However, in the event that the futures
contracts have been used to hedge portfolio
securities, such securities will not be sold
until the futures contracts can be terminated.
In such circumstances, an increase in
the price of the securities, if any, may
partially or completely offset losses on the
futures contracts. However, as described
above, there is no guarantee that the price of
the securities will, in fact, correlate with
the price movements of the futures contracts
and thus provide an offset to losses on
futures contracts.
Successful use of futures contracts by the
Fund is also subject to the investment
adviser's ability to predict correctly
movements in the direction of interest rates
and other factors affecting markets of debt
securities. For example, if the Fund has
hedged against the possibility of an increase
in interest rates which would adversely affect
debt securities held in its portfolio and
prices of such securities increase instead,
the Fund will lose part or all of the benefit
of the increased value of its securities
which it has hedged because it will have
offsetting losses in its futures positions. In
addition, in such situations, if the Fund has
insufficient cash, it may have to sell
securities to meet daily variation margin
requirements. Such sale of securities may be,
but will not necessarily be, at increased
prices which reflect the rising market. The
Fund may have to sell securities at a time
when it may be disadvantageous to do so.
Characteristics of Options on Futures
Contracts. As with options on debt
securities, the holder of an option may
terminate his position by selling an option of
the same series. There is no guarantee that
such closing transactions can be effected. The
Fund will be required to deposit initial
margin and maintenance margin with respect to
put and call options on futures contracts
written by it pursuant to brokers'
requirements similar to those applicable to
interest rate futures contracts described
above, and, in addition, net option premiums
received will be included as initial mar-
gin deposits.
In addition to the risks which apply to all
options transactions, there are several
special risks relating to options on futures
contracts. Trading in such options commenced
in October 1982. The ability to establish
and close out positions on such options will
be subject to the development and maintenance
of a liquid secondary market. It is not
certain that this market will develop. The
Fund will not purchase options on futures
contracts on any exchange unless and until, in
the investment advisor's opinion, the market
for such options had developed sufficiently
that the risks in connection with options on
futures contracts are not greater than the
risks in connection with futures contracts.
Compared to the use of futures contracts, the
purchase of options on futures contracts
involves less potential risk to the Fund
because the maximum amount of risk is the
premium paid for the options (plus transaction
costs). However, there may be circumstances
when the use of an option on a futures
contract would result in a loss to the Fund
when the use of a futures contract would not,
such as when there is no movement in the
prices of debt securities. Writing an option
on a futures contract involves risks similar
to those arising in the sale of futures
contracts, as described above.
SMITH BARNEY
INVESTMENT FUNDS INC.
388 Greenwich Street
New York, New York 10013
Smith Barney
INVESTMENT FUNDS INC.
SMITH BARNEY INVESTMENT GRADE BOND FUND
SMITH BARNEY GOVERNMENT SECURITIES FUND
SMITH BARNEY SPECIAL EQUITIES FUND
SMITH BARNEY GROWTH OPPORTUNITY FUND
SMITH BARNEY MANAGED GROWTH FUND
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1995
SMITH BARNEY
A Member of Travelers Group
STATEMENT OF ADDITIONAL INFORMATION
OF
COMMON SENSE TRUST - GROWTH OPPORTUNITY
FUND
DATED FEBRUARY 21, 1995
ANNUAL REPORT
OF
COMMON SENSE TRUST - GROWTH OPPORTUNITY FUND
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1994
PRO FORMA FINANCIAL STATEMENTS
PART C
OTHER INFORMATION
Item 15. Indemnification
The response to this item
is
incorporated by reference to "Liability of
Directors/Trustees" under the caption
"Comparative
Information on Shareholders' Rights" in Part A
of this
Registration Statement.
Item 16. Exhibits -- References are to
Registrant's Registration Statement on Form
N-1A as filed
with the Securities and Exchange Commission on
October 2,
1981 (File Nos. 2-74288 and 811-3275) (the
"Registration
Statement")
(1) Articles of Restatement dated
September 17, 1993 to Registrant's Articles of
Incorporation dated September 28, 1981,
Articles of Amendment dated October 14, 1994,
Articles Supplementary, Articles of Amendment
and Certificate of Correction dated November
7, 1994 are incorporated by reference to
Post-Effective Amendment No. 37 to the
Registration Statement filed on November 7,
1994 ("Post-Effective Amendment No. 37").
(2) Registrant's By-Laws, as
amended on September 30, 1992 are incorporated
by reference to Post-Effective
Amendment No. 30 to the Registration
Statement.
(3) Not Applicable.
(4) Registrant's Agreement and Plan
of Reorganization (included as Exhibit A to
Registrant's Prospectus/Proxy Statement
contained in Part A of this Registration
Statement).*
(5) Not Applicable.
(6) Management Agreement between
Smith Barney Inc. and the Registrant on behalf
of Smith Barney Growth Opportunity Fund.*
7)(a) Distribution Agreement dated
July 30, 1993, between Registrant and Smith
Barney Shearson Inc. is incorporated by
reference to the registration statement filed
on Form N-14 on September 2, 1993 File No.
33-50153.
(7)(b) Form of Distribution
Agreement between Registrant and PFS
Distributors.*
(8) Not Applicable.
(9)(a) Custodian Agreement between
Registrant and PNC Bank, National
Association.*
(9)(b) Transfer Agency and Registrar
Agreement dated August 5, 1993 between
Registrant and The Shareholder Services Group,
Inc. ("TSSG") is incorporated by reference to
Post-Effective Amendment No. 31 to the
Registration Statement, as filed on December
22, 1993 ("Post-Effective Amendment No. 31").
(9)(c) Form of Sub-Transfer Agency
Agreement between the Registrant and PFS
Shareholder Services.*
(10) Form of Shareholder Services and
Distribution
Plan of the Registrant on behalf of Smith
Barney
Growth Opportunity Fund.*
(11) Opinion and Consent of Willkie
Farr & Gallagher with respect to validity of
shares (with opinion of Venable, Baetjer and
Howard LLP attached thereto).*
(12) Opinion and Consent of Willkie
Farr & Gallagher with respect to tax matters.*
(13) Not Applicable.
(14) Consent of Ernst & Young LLP.*
(15) Not Applicable.
(16) Powers of Attorney (included on
Signature Page) are incorporated by reference
to Post-Effective Amendment No. 31.
(17)(a) Form of Proxy Card.*
(17)(b) Registrant's Declaration
pursuant to Rule 24f-2 is incorporated by
reference to its initial Registration
Statement.
_________________
* Filed herewith.
Item 17.Undertakings
(1) The undersigned Registrant agrees that
prior to any public reoffering of the
securities registered through the use of a
prospectus which is a part of this
Registration Statement by any person or party
who is deemed to be an underwriter within the
meaning of Rule 145(c) of the Securities Act
of 1933, the reoffering prospectus will
contain the information called for by the
applicable registration form for reofferings
by persons who may be deemed underwriters, in
addition to the information called for by the
other items of the applicable form.
(2) The undersigned Registrant agrees that
every prospectus that is filed under paragraph
(1) above will be filed as a part of an
amendment to the Registration Statement and
will not be used until the amendment is
effective, and that, in determining any
liability under the Securities Act of 1933,
each post-effective amendment shall be deemed
to be a new registration statement for the
securities offered therein, and the offering
of the securities at that time shall be deemed
to be the initial bona fide offering of them.
SIGNATURES
As required by Securities Act of 1933, as
amended, this Pre-Effective Amendment No. 2 to
the Registration Statement has been signed on
behalf of the registrant, in the City of New
York and State of New York on the 3rd day of
May, 1995.
SMITH BARNEY INVESTMENT
FUNDS INC.
on behalf of the GROWTH
OPPORTUNITY FUND
By: /s/ Heath B. McLendon*
Heath B. McLendon
Chairman of the Board
Investment Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each
person whose signature appears below
constitutes and appoints Jessica Bibliowicz,
Lewis E. Daidone and Christina T. Sydor, and
each and any of them, his true and lawful
attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him
and in his name, place and stead, in any and
all capacities, to sign any or all amendments
(including post-effective amendments) to this
Registration Statement, and to file the same,
with all exhibits thereto, and other documents
in connection therewith, with the Securities
and Exchange Commission, granting unto said
attorney-in-fact and agents, and each of them,
full power and authority to do and perform or
any of them, full power and authority to do
and perform each and every act and thing
requisite and necessary to be done in and
about the premises, as fully to all intents
and purposes as he might or could do in
person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any
of them, or their substitute or substitutes,
may lawfully do or cause to be done by virtue
thereof.
As required by the Securities Act of
1933, as amended, this Pre-Effective Amendment
No. 2 to the Registration Statement has been
signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Heath B. McLendon Chairman of the
Board (Chief Executive Officer) May 3,
1995
Heath B McLendon
/s/ Jessica Bibliowicz President
May 3, 1995
/s/ Lewis E Daidone Senior Vice President
and Treasurer (Chief Accounting and Financial
Officer)
May 3, 1995
Lewis E. Daidone
/s/ Paul R. Ades Director May 3, 1995
Paul R. Ades
/s/ Herbert Barg Director May 3, 1995
Herbert Barg
/s/ Dwight B. Crane Director May 3, 1995
Dwight B. Crane
/s/ Frank G. Hubbard Director May 3,
1995
Frank G. Hubbard
/s/ Allan R. Johnson Director May 3, 1995
Allan R. Johnson
/s/ Ken Miller Director May 3, 1995
Ken Miller
/s/ John F. White Director May 3, 1995
John F. White
* By: /s/ Christina T. Sydor
(Attorney-in-Fact)
EXHIBIT INDEX
Exhibit Number Description Page
(4) Agreement and Plan of
Reorganization (included as Exhibit A to
Registrant's Prospectus/Proxy Statement
contained in Part A of this Registration
Statement).
(6) Form of Management Agreement
Between Smith Barney Inc. and the
Registrant on behalf of Smith
Barney Growth Opportunity Fund.
(7)(b) Form of Distribution Agreement
between Registrant and PFS Distributors.
(9)(a) Custodian Agreement between
Registrant and
PNC Bank, National Association.
(9)(c) Form of Sub-Transfer Agency
Agreement between the Registrant and PFS
Shareholder Services.
(10) Form of Shareholder Services
and Distribution Plan of the
Registrant on behalf of Smith Barney
Growth Opportunity Fund.
(11) Opinion and Consent of
Willkie Farr & Gallagher with respect to
validity of shares (with opinion of Venable,
Baetjer and Howard LLP attached thereto).
(12) Opinion and Consent of Willkie Farr
& Gallagher with respect to tax matters.
(14) Consent of Ernst & Young LLP.
(17)(a) Form of Proxy Card.