<PAGE>1
SMITH BARNEY INCOME FUNDS
FORM N-14 CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933, as amended
Prospectus/Proxy
Part A Item No. and Caption Statement Caption
Item 1. Beginning of Cover Page; Cross Reference
Registration Sheet
Statement and
Outside Front Cover
Page of Prospectus
Item 2. Beginning and Table of Contents
Outside Back Cover
Page of Prospectus
Item 3. Fee Table, Synopsis Fee Table; Summary; Risk
Information, and Factors; Comparison of
Risk Factors Investment Objectives
and Policies
Item 4. Information About Summary; Reasons for the
the Transaction Reorganization; Information
About the Reorganization;
Information on Shareholders'
Rights; Exhibit A (Agreement
and Plan of Reorganization)
Item 5. Information About Cover Page; Summary;
the Information About the
Registrant Reorganization; Comparison of
Investment Objectives and
Policies; Information on
Shareholders' Rights;
Information About the
Acquiring Fund; Additional
Information About Smith Barney
Funds, Inc. and Smith Barney
Income Funds; Prospectus of
Smith Barney Utilities Fund
dated November 7, 1994, as
supplemented by Prospectus
Supplements dated May 22, 1995,
May 25, 1995 and July 15,1995
<PAGE>2
Item 6. Information About Summary; Information About the
the Company Being Reorganization; Comparison of
Acquired Investment Objectives and
Policies; Information on
Shareholders' Rights;
Information About the Acquired
Fund; Additional Information
About Smith Barney Funds, Inc.
and Smith Barney Income Funds
Item 7. Voting Information Summary; Information About the
Reorganization; Information on
Shareholders' Rights; Voting
Information
Item 8. Interest of Certain Financial Statements and
Persons and Experts Experts; Legal Matters
Item 9. Additional Not Applicable
Information Required
for Reoffering By
Persons Deemed to be
Underwriters
Statement of Additional
Part B Item No. and Caption Information Caption
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page
Item 12. Additional Cover Page; Statement of
Information About Additional Information of
the Registrant Smith Barney Income Funds
dated November 7, 1994, as
supplemented on May 22, 1995
Item 13. Additional Not Applicable
Information About
the Company Being
Acquired
<PAGE>3
Item 14. Financial Statements Annual Report of Smith Barney
Utilities Fund; Annual Report
of Smith Barney Funds, Inc. --
Utility Portfolio; Semi-Annual
Report of Smith Barney
Funds, Inc. -- Utility
Portfolio
Part C Item No. and Caption Other Information Caption
Item 15. Indemnification Incorporated by reference to
Part A caption "Information on
Shareholders' Rights --
Liability of
Directors/Trustees"
Item 16. Exhibits Exhibits
Item 17. Undertakings Undertakings
<PAGE>1
[Smith Barney Letterhead]
A SPECIAL NOTICE TO SHAREHOLDERS OF
SMITH BARNEY FUNDS, INC. -- UTILITY PORTFOLIO
Your Vote is Important
Dear Shareholder:
The Board of Directors of Smith Barney Funds, Inc. ("Smith Barney Funds") has
recently reviewed and unanimously endorsed a proposal for a reorganization of
the Utility Portfolio ("Utility Portfolio") of Smith Barney Funds which it
judges to be in the best interests of Utility Portfolio's shareholders.
UNDER THE TERMS OF THE PROPOSAL, SMITH BARNEY UTILITIES FUND ("UTILITIES
FUND"), A PORTFOLIO OF SMITH BARNEY INCOME FUNDS, WOULD ACQUIRE ALL OR
SUBSTANTIALLY ALL OF THE ASSETS AND LIABILITIES OF UTILITY PORTFOLIO. After
the transaction, Utility Portfolio will be liquidated and you will become a
shareholder of Utilities Fund, having received shares with an aggregate value
equivalent to the aggregate net asset value of your investment in Utility
Portfolio at the time of the transaction. No sales charge will be imposed in
the transaction. The transaction will, in the opinion of counsel, be free
from federal income taxes to you, Utility Portfolio and Utilities Fund, and it
is intended that the combined fund will be managed by the same portfolio
manager who currently manages Utilities Fund.
The Board of Directors of Smith Barney Funds has determined that it is
advantageous to combine Utility Portfolio with Utilities Fund as part of the
consolidation and integration of the two separate and distinct groups of
mutual funds currently distributed by Smith Barney Inc. that resulted from the
acquisition by Travelers Group Inc. (formerly Primerica Corporation) of
certain assets of Lehman Brothers Inc. (formerly Shearson Lehman Brothers
Inc.), including its retail brokerage and domestic asset management business.
In particular, the combination of Utility Portfolio and Utilities Fund is
expected to eliminate investor confusion associated with the offering by Smith
Barney Inc. of two similar utility industries funds that provide differing
yields and also should permit the funds' investment personnel to concentrate
their efforts on the management of one fund rather than having to divide their
attention between two funds with similar investment objectives.
In addition, the Board of Directors of Smith Barney Funds has determined that
the proposed reorganization should provide benefits to Class B and Class C
shareholders of Utility Portfolio due, in part, to savings in expenses borne
by such shareholders. Specifically, it is anticipated that the expense ratio
for Class B and Class C shares of the combined fund after the transaction will
be lower than the expense ratio currently applicable to Class B and Class
<PAGE>2
C shares of Utility Portfolio. Furthermore, Class A shareholders should not
be disadvantaged since the expense ratio for Class A shares is not anticipated
to increase.
SPECIAL MEETING OF SHAREHOLDERS:
YOUR VOTE IS IMPORTANT
To consider this transaction, we have called a Special Meeting of Shareholders
to be held on November 15, 1995. WE STRONGLY INVITE YOUR PARTICIPATION BY
ASKING YOU TO REVIEW, COMPLETE AND RETURN YOUR PROXY PROMPTLY.
Detailed information about the proposed transaction is described in the
enclosed proxy statement. On behalf of the Board of Directors, I thank you
for your participation as a shareholder and urge you to please exercise your
right to vote by completing, dating and signing the enclosed proxy card. A
self-addressed, postage-paid envelope has been enclosed for your convenience.
If you have any questions regarding the proposed transaction, please feel free
to call your Smith Barney Financial Consultant who will be pleased to assist
you.
IT IS VERY IMPORTANT THAT YOUR VOTING INSTRUCTIONS BE RECEIVED PROMPTLY.
Sincerely,
Heath B. McLendon
Chairman of the Board
October 3, 1995
<PAGE>1
SMITH BARNEY FUNDS, INC. -- UTILITY PORTFOLIO
388 Greenwich Street
New York, New York 10013
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on November 15, 1995
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of the Utility Portfolio ("Utility Portfolio") of Smith Barney
Funds, Inc. will be held at 388 Greenwich Street, 26th Floor, New York, New
York on November 15, 1995, commencing at 10:00 a.m. for the following purposes:
1. To approve or disapprove the Agreement and Plan of Reorganization
dated as of October 2, 1995 providing for (i) the acquisition of
all or substantially all of the assets of Utility Portfolio by Smith
Barney Income Funds on behalf of Smith Barney Utilities Fund
("Utilities Fund") in exchange for shares of Utilities Fund and the
assumption by Smith Barney Income Funds on behalf of Utilities Fund
of scheduled liabilities of Utility Portfolio, (ii) the distribution
of such shares of Utilities Fund to shareholders of Utility
Portfolio in liquidation of Utility Portfolio and (iii) the
subsequent termination of Utility Portfolio.
2. To transact such other business as may properly come before the
Meeting or any adjournment or adjournments thereof.
The Board of Directors of Smith Barney Funds, Inc. has fixed the
close of business on September 20, 1995 as the record date for the
determination of shareholders of Utility Portfolio entitled to notice of and
to vote at the Meeting and any adjournment or adjournments thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY.
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE SPECIAL MEETING ARE
URGED TO SIGN AND RETURN WITHOUT DELAY THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES, SO THAT
THEIR SHARES MAY BE REPRESENTED AT THE MEETING. INSTRUCTIONS FOR THE PROPER
EXECUTION OF PROXY CARDS ARE SET FORTH ON THE FOLLOWING PAGE. 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
<PAGE>2
REVOCATION TO UTILITY PORTFOLIO AT ANY TIME BEFORE THE PROXY IS EXERCISED OR
BY VOTING IN PERSON AT THE MEETING.
By Order of the Board of Directors
Christina T. Sydor, Esq.
Secretary
October 3, 1995
YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY WILL HELP TO AVOID THE
EXPENSE OF FURTHER SOLICITATION.
<PAGE>
INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and avoid the time and expense involved in validating your
vote if you fail to sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the party
signing should conform exactly to the name shown in the registration
on the proxy card.
3. All Other Accounts: The capacity of the individual signing the
proxy card should be indicated unless it is reflected in the form of
registration. For example:
Registration Valid Signatures
Corporate Accounts
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
Trust Accounts
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee
u/t/d 12/28/78 Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr. UGMA John B. Smith
(2) John B. Smith John B. Smith, Jr., Executor
<PAGE>1
PROSPECTUS/PROXY STATEMENT DATED October 3, 1995
Acquisition Of The Assets Of
UTILITY PORTFOLIO
a separate investment portfolio of
SMITH BARNEY FUNDS, INC.
388 Greenwich Street
New York, New York 10013
(800) 224-7523
By And In Exchange For Shares Of
SMITH BARNEY UTILITIES FUND
a separate investment portfolio of
SMITH BARNEY INCOME FUNDS
388 Greenwich Street
New York, New York 10013
(800) 224-7523
This Prospectus/Proxy Statement is being furnished to shareholders
of the Utility Portfolio (the "Acquired Fund") of Smith Barney Funds, Inc.
("Smith Barney Funds") in connection with a proposed plan of reorganization to
be submitted to shareholders of the Acquired Fund for consideration at a
Special Meeting of Shareholders to be held on November 15, 1995 at 10:00 a.m.
(the "Meeting"), at the offices of Smith Barney Inc. ("Smith Barney") located
at 388 Greenwich Street, 26th Floor, New York, New York 10013, or any
adjournment or adjournments thereof.
The plan provides for all or substantially all of the assets of the
Acquired Fund to be acquired by Smith Barney Income Funds on behalf of Smith
Barney Utilities Fund (the "Acquiring Fund") in exchange for shares of the
Acquiring Fund and the assumption by Smith Barney Income Funds on behalf of
the Acquiring Fund of scheduled liabilities of the Acquired Fund (hereinafter
referred to as the "Reorganization"). (The Acquiring Fund and the Acquired
Fund are sometimes referred to hereinafter as the "Funds" and individually as
a "Fund.") Shares of the Acquiring Fund would be distributed to shareholders
of the Acquired Fund in liquidation of the Acquired Fund and thereafter the
Acquired Fund would 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 value of such shareholder's shares of the Acquired Fund
immediately prior to the Reorganization. Holders of Class A shares of 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 or Class C shares
of the Acquired Fund will receive Class
<PAGE>2
B or Class C shares, respectively, of the Acquiring Fund. No contingent
deferred sales charge ("CDSC") will be imposed on Class B or Class C shares of
the Acquiring Fund upon consummation of the Reorganization. However, any 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
Class B or Class C shares of the Acquiring Fund, the period during which an
Acquired Fund shareholder held Class B or Class C shares of the Acquired Fund
will be counted. This transaction is structured to be tax-free for federal
income tax purposes to shareholders and to both the Acquiring Fund and the
Acquired Fund.
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.
The Acquiring Fund is a separate investment portfolio of Smith
Barney Income Funds, an open-end, diversified management investment company,
whose primary investment objective is to provide current income and whose
secondary investment objective is long-term capital appreciation. The
Acquiring Fund seeks to achieve its investment objectives by investing in the
equity and debt securities of companies in the utility industry. The Acquired
Fund is a separate investment portfolio of Smith Barney Funds, an open-end,
diversified management investment company, whose investment objective is to
provide current income and moderate capital growth by investing in equity and
debt securities of public utility companies.
Smith Barney Mutual Funds Management Inc., 388 Greenwich Street, New
York, New York 10013 (the "Manager"), serves as investment manager to both the
Acquiring Fund and the Acquired Fund. The Manager is a wholly owned
subsidiary of Smith Barney Holdings, Inc. which, in turn, is a wholly owned
subsidiary of Travelers Group Inc. It is proposed that, in connection with
the Reorganization, Jack S. Levande, the portfolio manager who has managed the
Acquiring Fund's portfolio, would manage the combined fund. Mr. Levande, a
Managing Director of Smith Barney, has served as Vice President and Investment
Officer of the Acquiring Fund since it commenced operations in 1988, and
manages the day-to-day operations of the Acquiring Fund, including making
substantially all investment decisions.
The investment policies of the Acquiring Fund are generally similar
to those of the Acquired Fund. Certain differences in the investment policies
of the Acquiring Fund and
<PAGE>3
the Acquired Fund, however, are described under "Comparison of Investment
Objectives and Policies" in this Prospectus/Proxy Statement.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about the Acquiring Fund that
a prospective investor should know before investing. Certain relevant
documents listed below, which have been filed with the Securities and Exchange
Commission ("SEC"), are incorporated in whole or in part by reference. A
Statement of Additional Information dated October 3, 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 writing to the Acquired Fund at the address listed on the
cover page of this Prospectus/Proxy Statement or by contacting a Smith Barney
Financial Consultant.
1. The Prospectus of Smith Barney Utilities Fund dated November 7,
1994, as supplemented by Prospectus Supplements dated May 22, 1995,
May 25, 1995 and July 15, 1995, is incorporated in its entirety by
reference and a copy is included herein.
2. The Prospectus of Smith Barney Funds, Inc. -- Utility Portfolio
dated April 28, 1995, as supplemented by Prospectus Supplements
dated June 26, 1995 and July 15, 1995, is incorporated in its
entirety by reference.
Also accompanying this Prospectus/Proxy Statement as Exhibit A is a
copy of the Agreement and Plan of Reorganization (the "Plan") for the proposed
transaction.
<PAGE>4
TABLE OF CONTENTS
PAGE
ADDITIONAL MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . . 4
FEE TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
REASONS FOR THE REORGANIZATION . . . . . . . . . . . . . . . . . . . . . 15
INFORMATION ABOUT THE REORGANIZATION . . . . . . . . . . . . . . . . . . 17
INFORMATION ABOUT THE ACQUIRING FUND . . . . . . . . . . . . . . . . . . 21
INFORMATION ABOUT THE ACQUIRED FUND . . . . . . . . . . . . . . . . . . . 28
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . 35
INFORMATION ON SHAREHOLDERS' RIGHTS . . . . . . . . . . . . . . . . . . . 44
ADDITIONAL INFORMATION ABOUT SMITH BARNEY FUNDS, INC. AND
SMITH BARNEY INCOME FUNDS . . . . . . . . . . . . . . . . . . . . . . . 47
OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
VOTING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
FINANCIAL STATEMENTS AND EXPERTS . . . . . . . . . . . . . . . . . . . . 50
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
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 October 3,
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 Income Funds
dated November 7, 1994, as supplemented on May 22, 1995 and May 25, 1995.
2. Annual Report of Smith Barney Utilities Fund for the fiscal year
ended July 31, 1995.
3. Annual Report of Smith Barney Funds, Inc. -- Utility Portfolio for
the fiscal year ended December 31, 1994.
4. Semi-Annual Report of Smith Barney Funds, Inc. -- Utility Portfolio
for the six-month period ended June 30, 1995.
<PAGE>5
FEE TABLES
Following are tables showing current costs and expenses of the
Acquired Fund and the Acquiring 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
<TABLE>
<CAPTION>
Acquired Acquiring
Fund Fund Pro Forma***
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases (as a
percentage of
offering price) . . . . . . . . . . . . . . . . . . . 5.00% 5.00% 5.00%
Maximum CDSC (as a percentage of original cost or
redemption proceeds, whichever is lower) . . . . . . . None* None* None*
Annual Operating Expenses
(as a percentage of average net assets)
Management fees . . . . . . . . . . . . . . . . . . . 0.60% 0.65% 0.65%
12b-1 fees . . . . . . . . . . . . . . . . . . . . . . 0.25 0.25 0.25
Other expenses** . . . . . . . . . . . . . . . . . . . 0.19 0.17 0.14
Total Operating Expenses . . . . . . . . . . . . . . . . 1.04% 1.07% 1.04%
<FN>
* 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.
** "Other expenses" for Class A shares of the Acquired Fund
are based on expenses for the six-month period ended June
30, 1995, for the Acquiring Fund are based on expenses for
the fiscal year ended July 31, 1995 and for the pro forma
financial figures are based on estimated expenses for the
fiscal year ended July 31, 1995.
*** The pro forma financial figures are intended to provide
shareholders with information about the continuing impact
of the Reorganization as if the Reorganization had taken
place as of July 31, 1995.
</TABLE>
<PAGE>6
CLASS B SHARES
<TABLE>
<CAPTION>
Acquired Acquiring
Fund Fund Pro Forma***
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases (as a
percentage of offering price) . . . . . . . . . . . None None None
Maximum CDSC (as a percentage of original cost or
redemption proceeds, whichever is lower) . . . . . . 5.00% 5.00% 5.00%
Annual Operating Expenses
(as a percentage of average net assets)
Management fees . . . . . . . . . . . . . . . . . . 0.60% 0.65% 0.65%
12b-1 fees* . . . . . . . . . . . . . . . . . . . . 1.00 0.75 0.75
Other expenses** . . . . . . . . . . . . . . . . . . 0.13 0.16 0.16
Total Operating Expenses . . . . . . . . . . . . . . . 1.73% 1.56% 1.56%
<FN>
* Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee.
** "Other expenses" for Class B shares of the Acquired Fund are based on
expenses for the six-month period ended June 30, 1995, for the Acquiring
Fund are based on expenses for the fiscal year ended July 31, 1995 and for
the pro forma financial figures are based on estimated expenses for the
fiscal year ended July 31, 1995.
*** The pro forma financial figures are intended to provide
shareholders with information about the continuing impact
of the Reorganization as if the Reorganization had taken
place as of July 31, 1995.
</TABLE>
<PAGE>7
CLASS C SHARES
<TABLE>
<CAPTION>
Acquired Acquiring
Fund Fund Pro Forma***
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases (as a
percentage of offering price) . . . . . . . . . . . . None None None
Maximum CDSC (as a percentage of original cost or
redemption proceeds,
whichever is lower) . . . . . . . . . . . . . . . . . 1.00% 1.00% 1.00%
Annual Operating Expenses
(as a percentage of average net assets)
Management fees . . . . . . . . . . . . . . . . . . . 0.60% 0.65% 0.65%
12b-1 fees* . . . . . . . . . . . . . . . . . . . . . 1.00 0.70 0.70
Other expenses** . . . . . . . . . . . . . . . . . . . 0.22 0.16 0.16
Total Operating Expenses . . . . . . . . . . . . . . . . 1.82% 1.51% 1.51%
<FN>
* Class C shares do not have a conversion feature and, therefore, are subject
to an ongoing distribution fee. As a result, long-term shareholders of
Class C shares may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc.
** "Other expenses" for Class C shares of the Acquired Fund are based on
expenses for the six-month period ended June 30, 1995, for the Acquiring
Fund are based on expenses for the six-month period ended June 30,
1995, and for the pro forma financial figures are based on estimated
expenses for the fiscal year ended July 31, 1995.
*** The pro forma financial figures are intended to provide shareholders with
information about the continuing impact of the Reorganization as if the
Reorganization had taken place as of July 31, 1995.
</TABLE>
<PAGE>8
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.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years*
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5.00% annual return
and (2) redemption at the end of each time period:
Class A
Acquired Fund . . . . . . . . . . . . . . . . . $60 81 $105 $171
Acquiring Fund . . . . . . . . . . . . . . . . . 60 82 106 174
Pro Forma . . . . . . . . . . . . . . . . . . . 60 81 105 171
Class B
Acquired Fund . . . . . . . . . . . . . . . . . $68 $84 $104 $186
Acquiring Fund . . . . . . . . . . . . . . . . . 66 79 95 172
Pro Forma . . . . . . . . . . . . . . . . . . . 66 79 95 172
Class C
Acquired Fund . . . . . . . . . . . . . . . . . $28 $56 $97 $211
Acquiring Fund . . . . . . . . . . . . . . . . . 25 48 82 180
Pro Forma . . . . . . . . . . . . . . . . . . . 25 48 82 180
<FN>
* Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
</TABLE>
<PAGE>9
An investor would pay the following expenses on the same investment, assuming
the same annual return and no redemption:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years*
<S> <C> <C> <C> <C>
Class A
Acquired Fund . . . . . . . . . . . . . . . $60 $81 $105 $171
Acquiring Fund . . . . . . . . . . . . . . . 60 82 106 174
Pro Forma . . . . . . . . . . . . . . . . . 60 82 106 171
Class B
Acquired Fund . . . . . . . . . . . . . . . $18 $54 $94 $186
Acquiring Fund . . . . . . . . . . . . . . . 16 49 85 172
Pro Forma . . . . . . . . . . . . . . . . . 16 49 85 172
Class C
Acquired Fund . . . . . . . . . . . . . . . $18 $56 $97 $211
Acquiring Fund . . . . . . . . . . . . . . . 15 48 82 180
Pro Forma . . . . . . . . . . . . . . . . . 15 48 82 180
<FN>
* Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
</TABLE>
The examples also provide a means for the investor to compare
expense levels of funds with different fee structures over varying investment
periods. To facilitate such comparison, all funds are required to utilize a
5.00% annual return assumption. However, each 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.
<PAGE>10
SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ADDITIONAL
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT, THE
AGREEMENT AND PLAN OF REORGANIZATION, A COPY OF WHICH IS ATTACHED TO THIS
PROSPECTUS/PROXY STATEMENT AS EXHIBIT A, THE ACCOMPANYING PROSPECTUS OF THE
ACQUIRING FUND DATED NOVEMBER 7, 1994, AS SUPPLEMENTED BY PROSPECTUS
SUPPLEMENTS DATED MAY 22, 1995, MAY 25, 1995 AND JULY 15, 1995, AND THE
PROSPECTUS OF THE ACQUIRED FUND DATED APRIL 28, 1995, AS SUPPLEMENTED BY
PROSPECTUS SUPPLEMENTS DATED JUNE 26, 1995 AND JULY 15, 1995.
PROPOSED REORGANIZATION. The Plan provides for the transfer of all
or substantially all of the assets of the Acquired Fund to Smith Barney Income
Funds on behalf of the Acquiring Fund in exchange for shares of the Acquiring
Fund and the assumption by Smith Barney Income Funds on behalf of the
Acquiring Fund of scheduled liabilities of the Acquired Fund. The Plan also
calls for the distribution of shares of the Acquiring Fund to the Acquired
Fund's 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 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, Class B or Class
C shares of the Acquired Fund will receive Class A, Class B or Class
C shares, respectively, of the Acquiring Fund.) See "Information About the
Reorganization -- Plan of Reorganization."
For the reasons set forth below under "Reasons for the
Reorganization," the Board of Directors of Smith Barney Funds, including the
Directors of Smith Barney Funds who are not "interested persons" (the
"Independent Directors"), as that term is defined in the Investment Company
Act of 1940, as amended (the "1940 Act"), has 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 will 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 Board of Trustees of Smith Barney Income
Funds has reached similar conclusions with respect to the Acquiring Fund and
has also approved the Reorganization in respect of the Acquiring Fund.
Approval of the Reorganization will require the affirmative vote of
the holders of a majority of the Acquired Fund shares outstanding and entitled
to vote at the Meeting, in
<PAGE>11
person or by proxy, if a quorum is present. For purposes of voting with
respect to the Reorganization, the Class A, Class B and Class C
shares of the Acquired Fund will vote together as a single class. See "Voting
Information."
TAX CONSEQUENCES. Prior to completion of the Reorganization, the
Funds will have received an opinion of counsel 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 aggregate tax basis of the Acquiring Fund
shares received by an Acquired Fund shareholder will be the same as the
holding period and aggregate tax basis of the shares of the Acquired Fund
previously held by such shareholder. In addition, 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 AND POLICIES. The Acquired Fund and the
Acquiring Fund have generally similar investment objectives, policies and
restrictions. The Acquired Fund seeks to provide current income and moderate
capital appreciation by investing in equity and debt securities of public
utility companies. The Acquiring Fund seeks primarily to provide current
income and secondarily to provide long-term capital appreciation. The
Acquiring Fund attempts to achieve its investment objective by investing
primarily, but not exclusively, in the equity and debt securities of companies
in the utility industry. For a discussion of the differences between the
investment policies of the Acquiring Fund and the Acquired Fund, see
"Comparison of Investment Objectives and Policies."
PURCHASE AND REDEMPTION PROCEDURES. The purchase and redemption
procedures available to shareholders of the Acquiring Fund are virtually
identical to those available to shareholders of the Acquired Fund. Purchase
of shares of the Acquiring Fund and the Acquired Fund may be made through the
Funds' distributor, Smith Barney, a broker that clears securities transactions
through Smith Barney on a fully disclosed basis (an "Introducing Broker") or
an investment dealer in the selling group, at their respective public offering
prices (net asset value next determined plus any applicable sales charge).
Class A shares of both the Acquiring Fund and the Acquired Fund are sold
subject to a maximum initial sales charge of 5.00% of the public offering
price. Class A shares of either Fund may be purchased at a reduced sales
charge or at net asset value, determined by aggregating the dollar amount of a
new purchase and the total asset value of all Class A shares of Funds offered
by Smith Barney held by such person that are exchangeable with Class A shares
of either Fund and applying the (reduced) sales charge applicable to such
aggregate. Purchases of Class A shares of both Funds, 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
<PAGE>12
redemptions made within 12 months. Class B and Class C 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. In addition Class Y shares of both Funds are currently offered
for sale, without an initial sales charge or CDSC, and are available only to
investors meeting an initial investment minimum of $5,000,000. As of
September 20, 1995 (the "Record Date"), no Class Y shares of either Fund were
outstanding. Further, Class Z shares are currently offered by
the Acquiring Fund exclusively for sale to tax-exempt employee benefit and
retirement plans of Smith Barney or any of its affiliates and to certain unit
investment trusts sponsored by Smith Barney or any of its affiliates. The
Acquired Fund does not offer Class Z shares.
Class A shares of both the Acquiring and the Acquired Fund may be
redeemed at their respective net asset values per share next determined
without charge, except as set forth in the preceding paragraph. Class B
shares of both Funds 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% the first year after purchase and by 1.00% each
year thereafter to zero. Class C shares of both Funds may be redeemed at
their net asset value per share, subject to a CDSC of 1.00% if such shares are
redeemed during the first 12 months following their purchase. Shares of both
Funds held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. All other shares may
be redeemed through a Smith Barney Financial Consultant, Introducing Broker or
dealer in the selling group or by forwarding a written request for redemption
to The Shareholder Services Group, Inc. ("TSSG" or the "transfer agent"), a
subsidiary of First Data Corporation. See "Redemption of Shares" in the
accompanying Prospectus of the Acquiring Fund.
EXCHANGE PRIVILEGES. The exchange privileges available to
shareholders of the Acquiring Fund are virtually identical to those available
to shareholders of the Acquired Fund. Shareholders of both the Acquired Fund
and the Acquiring Fund may exchange at net asset value all or a portion of
their shares for shares of the same class in certain other 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. A sales charge differential, however, may apply to exchanges of
Class A shares with other Smith Barney Mutual Funds. For purposes of
computing the CDSC that may be payable upon a disposition, the Class B and
Class C shares acquired in the exchange will be deemed to have been purchased
on the same date as the Class B and Class C shares that were exchanged
therefor. 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. See "Exchange Privilege" in the accompanying
Prospectus of the Acquiring Fund.
<PAGE>13
DIVIDENDS. Dividends from net investment income, if any, of the
Acquiring Fund will be declared monthly and will be paid on the last Friday of
each month. Distributions of any net long-term capital gains earned by the
Acquiring Fund will be made annually after the close of the fiscal year in
which they are earned. Distributions of short-term capital gains may be paid
more frequently with dividends from net investment income. The Acquired
Fund's policy is to declare and pay dividends from net investment income
monthly 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 gains 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 any time by contacting a Smith Barney Financial
Consultant. See "Dividends, Distributions and Taxes" in the accompanying
Prospectus of the Acquiring Fund.
SHAREHOLDER VOTING RIGHTS. Smith Barney Funds and Smith Barney
Income Funds are both registered with the SEC as open-end, diversified
management investment companies. The Acquired Fund is a separate series of
Smith Barney Funds, a Maryland corporation having a Board of Directors. The
Acquiring Fund is a separate series of Smith Barney Income Funds, a
Massachusetts business trust having a Board of Trustees. Shareholders of both
Funds have similar voting rights. Neither Fund holds a meeting of
shareholders annually, 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 has 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 State of Maryland, 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, Class B and Class C shares of the Acquired Fund will vote together
as a single class. See "Information on Shareholders' Rights -- Voting
Rights."
<PAGE>14
RISK FACTORS
Due to the similarities of investment objectives and policies of the
Acquiring Fund and the Acquired Fund, the investment risks are substantially
similar. Such risks are generally those typically associated with investing
in equity and debt securities of companies in the utilities industries. The
following is a summary of certain risk factors associated with investing in
shares of the Acquiring Fund and, where applicable, shares of the Acquired
Fund. This summary is qualified in its entirety by the accompanying
Prospectus of the Acquiring Fund. In addition, certain risks associated with
various investment strategies utilized by the Acquiring Fund are described
herein under "Comparison of Investment Objectives and Policies."
Investment in Utility Securities. Because each Fund concentrates in
investments in one sector, their portfolios may be subject to greater risk and
market fluctuations than a portfolio of securities representing a broader
range of investment alternatives. The Funds are particularly subject to risks
that are inherent to the utility industries that make up this sector,
including difficulty in obtaining an adequate return on invested capital,
difficulty in financing large construction programs during an inflationary
period, restrictions on operations and increased cost and delays attributable
to environmental considerations and regulation, availability of certain types
of fuel, the effects of energy conservation, the effects of a national energy
policy and lengthy delays and greatly increased costs and other problems
associated with the design, construction, licensing, regulation and operation
of nuclear facilities for electric generation, including, among other
considerations, the problems associated with the use of radioactive materials
and the disposal of radioactive wastes. There are substantial differences
between the regulatory practices and policies of various jurisdictions, and
any given regulatory agency may make major shifts in policy from time to time.
There is no assurance that regulatory authorities will grant rate increases in
the future or that such increases will be adequate to permit the payment of
dividends on common stocks. Additionally, existing and possible future
regulatory legislation may make it even more difficult for these utilities to
obtain adequate relief.
Each of the risks referred to above could adversely affect the
ability and inclination of public utilities to declare or pay dividends and
the ability of holders of common stock to realize any value from the assets of
the issuer upon liquidation or bankruptcy. Moreover, price disparities within
selected utility groups and discrepancies in relation to averages and indices
have occurred frequently for reasons not directly related to the general
movements or price trends of utility common stocks. Causes of these
discrepancies include changes in the overall demand for and supply of various
securities (including the potentially depressing effect of new stock
offerings), and changes in investment objectives, market expectations or cash
requirement of other purchasers and sellers of securities.
<PAGE>15
Interest Rate Risk. Each Fund will be affected by general changes
in interest rates which will result in increases or decreases in the market
value of the debt securities held by the Acquiring Fund. The market value of
the debt securities held by a Fund can be expected to vary inversely to
changes in prevailing interest rates.
REASONS FOR THE REORGANIZATION
The Board of Directors of Smith Barney Funds has determined that it
is advantageous to combine the Acquired Fund with the Acquiring Fund. The
Funds have generally similar investment objectives and policies and have the
same investment adviser and transfer agent. In reaching this conclusion, the
Board considered a number of factors as described below.
Among the factors considered by the Board of Directors of Smith
Barney Funds was the 1993 transaction pursuant to which Travelers Group Inc.
(formerly Primerica Corporation) acquired certain assets of Lehman Brothers
Inc. (formerly Shearson Lehman Brothers Inc.), including its retail brokerage
and domestic asset management business. As a result of this transaction,
Smith Barney became the sponsor of two separate and totally distinct families
of mutual funds, each with, among other things, differing pricing structures,
classes of shares, exchange privileges, sweep functions and types of funds.
The Board was advised that with the completion of the merger of back-office
brokerage operations and the implementation of a uniform pricing and class
structure on November 7, 1994, significant consolidation of the two mutual
fund groups has been made feasible and desirable. The Board was further
informed that the next step in this process would be to eliminate the
duplication of funds within the consolidated Smith Barney fund complex. The
Board of Directors of Smith Barney Funds was presented with information that
indicated that investors have been and will continue to be confused in the
face of similar utility industries funds managed by the same investment
adviser (although the Acquired Fund and the Acquiring Fund have different
portfolio managers, i.e., the individual primarily responsible for each Fund's
day-to-day investment decisions). In particular, the Board was presented with
information to the effect that, with two different funds, Smith Barney was
confronted with the following operational and shareholder services issues,
including (i) dilution of the firm's money management and research expertise
due to the splitting of attention between the two highly similar funds, and
(ii) investor confusion associated with offering similar funds that provide
differing yields.
The Board of Directors of Smith Barney Funds also considered that no
sales charges would be imposed in effecting the Reorganization, the advantages
of eliminating duplication inherent in marketing two funds with similar
investment objectives and the savings in expenses borne by Acquired Fund
shareholders expected to be realized by the Reorganization. The Board
recognized that the annual management fee payable by the
<PAGE>16
Acquiring Fund after the transaction would, as a percentage of average net
assets, be 0.05% higher than that currently paid by the Acquired Fund.
However, the Board was also shown pro forma financial information which
indicated that, assuming the same level of assets for the combined fund after
the Reorganization as on April 30, 1995, it is estimated that Class A
shareholders of the Acquired Fund would experience no increase in total
operating expenses, and that, notwithstanding the increase in management fees,
Class B and Class C shareholders of the Acquired Fund should actually
experience a reduction in expenses of 0.26% and 0.31%, respectively.
Subsequently, information regarding the operating expenses of the Acquired
Fund and the Acquiring Fund became available reflecting expenses as of June
30, 1995 and July 31, 1995, respectively, which is included under the caption
"Fee Tables" in this Prospectus/Proxy Statement. Based upon these levels of
expenses, assuming the same level of assets for the combined fund after the
Reorganization as on July 31, 1995, it is estimated that Class A shareholders
of the Acquired Fund would experience no increase in total operating expenses,
and Class B and Class C shareholders would experience a reduction in total
operating expenses of 0.17% and 0.28%, respectively. The Board also
considered, among other things, the terms and conditions of the Reorganization
and the comparative investment performance of the Funds. In addition, the
Board was advised that the Reorganization would be effected as a tax-free
reorganization.
In light of the foregoing, the Board of Directors of Smith Barney
Funds, including the Independent Directors, has determined that it is in the
best interests of the Acquired Fund and its shareholders to combine with the
Acquiring Fund. The Board of Directors has also determined that a combination
of the Acquired Fund and the Acquiring Fund would not result in a dilution of
the interests of the Acquired Fund's shareholders.
The Board of Trustees of Smith Barney Income Funds has also
determined that it is advantageous to the Acquiring Fund to acquire the assets
of the Acquired Fund. The Board of Trustees was presented with information
that indicated that investors have been and will continue to be confused in
the face of similar utility industries funds managed by the same adviser. The
Board of Trustees was presented with information to the effect that, with two
different funds, Smith Barney experienced (i) dilution of the firm's money
management and research expertise due to the splitting of attention between
the two highly similar funds, and (ii) client confusion associated with
offering similar funds that provide differing yields. In addition, among
other factors, the Board of Trustees considered pro forma financial
information provided by Smith Barney which indicated that the Reorganization
would likely not increase the expense ratio on shares of the Acquiring Fund.
The Board of Trustees also considered the terms and conditions of the
Reorganization and representations that the Reorganization would be effected
as a tax-free reorganization. Accordingly, the Board of Trustees, including a
majority of the independent Trustees, has determined that the Reorganization
is in the best interests of the Acquiring Fund's shareholders and that the
interests of the Acquiring Fund's shareholders would 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 Smith Barney Income Funds on behalf of the Acquiring Fund
will acquire all or substantially
<PAGE>17
all of the assets of the Acquired Fund in exchange for shares of the Acquiring
Fund and the assumption by Smith Barney Income Funds on behalf of the
Acquiring Fund of scheduled liabilities of the Acquired Fund on November 17,
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 other than those reflected on
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, currently
4:00 p.m., New York City time, on the Closing Date. The number of full and
fractional Class A, Class B and Class C 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 value per
Class A, Class B and Class C shares, respectively. The net asset
value per share of each class will be determined by dividing assets, less
liabilities, by the total number of outstanding shares of the relevant class.
The Acquired Fund and the Acquiring Fund will utilize the procedures
set forth in the Prospectus of the Acquiring Fund to determine the value of
their respective portfolio securities and to determine the aggregate value of
each Fund's portfolio. The method of valuation employed will be consistent
with the requirements set forth in the Prospectus of the Acquiring Fund, Rule
22c-1 under the 1940 Act and the interpretation of such rule by the SEC's
Division of Investment Management.
At or prior to the Closing Date, the Acquired Fund will, and the
Acquiring Fund may, declare a dividend or dividends which, together with all
previous such dividends, will have the effect of distributing to their
respective shareholders all taxable income for the taxable period ending on or
prior to the Closing Date (computed without regard to any deduction for
dividends paid). In addition, the Acquired Fund's dividend will include its
net capital gains realized in the taxable year 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 transfer 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.
<PAGE>18
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) by mutual agreement of Smith Barney Funds on behalf of the
Acquired Fund and Smith Barney Income Funds on behalf of the Acquiring Fund;
(ii) Smith Barney Funds on behalf of the Acquired Fund in the event that Smith
Barney Income Funds shall, or Smith Barney Income Funds on behalf of the
Acquiring Fund in the event that Smith Barney Funds shall, materially breach
any representation, warranty or agreement contained in the Plan to be
performed at or prior to the Closing Date; or (iii) by Smith Barney Funds on
behalf of the Acquired Fund, or by Smith Barney Income Funds on behalf of the
Acquiring Fund, if a condition to 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 the
holders of a majority of the Acquired Fund shares outstanding and entitled to
vote at the Meeting, in person or by proxy, if a quorum is present. If the
Reorganization is not approved by shareholders of the Acquired Fund, the Board
of Directors of the Acquired Fund will consider other possible courses of
action available to it, including resubmitting the Reorganization proposal to
shareholders.
DESCRIPTION OF THE ACQUIRING FUND'S SHARES. Full and fractional
shares of beneficial interest 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 transfer agent. See "Information on
Shareholders' Rights" and the Prospectus of the Acquiring Fund for additional
information with respect to the shares of the Acquiring Fund.
FEDERAL INCOME TAX CONSEQUENCES. The exchange of assets of the
Acquired Fund 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, Smith Barney Income Funds on behalf of
the Acquiring Fund and Smith Barney Funds on behalf of 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 scheduled liabilities of the Acquired Fund will
constitute a "reorganization" within the meaning of Section 368(a)(1)(C)
of the Code, and the Acquiring Fund and the
<PAGE>19
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 of scheduled liabilities of
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's shares and the assumption of scheduled
liabilities of the Acquired Fund or upon the distribution (whether actual
or constructive) of the Acquiring Fund's 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 shares of the Acquired Fund for
shares of the Acquiring Fund;
(5) the aggregate tax basis for shares of the Acquiring Fund
received by each shareholder of the Acquired Fund pursuant to the
Reorganization will be the same as the aggregate tax basis of shares of
the Acquired Fund surrendered therefor, and the holding period of shares
of the Acquiring Fund to be received by each shareholder of the Acquired
Fund will include the period during which shares of the Acquired Fund
exchanged therefor were held by such shareholder (provided shares of the
Acquired Fund were held as capital assets on the date of the
Reorganization); and
(6) the tax basis to the Acquiring Fund 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.
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.
<PAGE>20
CAPITALIZATION. The following table shows the capitalization of the
Acquiring Fund and the Acquired Fund as of September 20, 1995, and on a pro
forma basis as of that date, giving effect to the proposed acquisition of
assets at net asset value.
<TABLE>
<CAPTION>
Smith Barney Smith Barney Pro Forma for
Funds, Inc.- Utilities Reorganization Acquiring
Utilities Portfolio Fund (Unaudited)
(Unaudited) (Unaudited)
<S> <C> <C> <C>
(In thousands, except per share values)
Class A Shares
Net assets . . . . . . . . . . . . . . . . . $ 68,175 $ 171,171 $ 239,345
Net asset value per share . . . . . . . . . . $ 12.74 $ 14.58 $ 14.58
Shares outstanding . . . . . . . . . . . . . 5,352 11,742 16,419
Class B Shares
Net assets . . . . . . . . . . . . . . . . . $ 2,266 $ 1,596,105 $ 1,598,372
Net asset value per share . . . . . . . . . . $ 12.76 $ 14.57 $ 14.57
Shares outstanding . . . . . . . . . . . . . 178 109,578 109,733
Class C Shares
Net assets . . . . . . . . . . . . . . . . . $ 7,426 $ 4,090 $ 11,516
Net asset value per share . . . . . . . . . . $ 12.75 $ 14.57 $ 14.57
Shares outstanding . . . . . . . . . . . . . 582 281 790
Class Y Shares
Net assets . . . . . . . . . . . . . . . . . $ 0 $ 0 $ 0
Net asset value per share . . . . . . . . . . $ 0 $ 0 $ 0
Shares outstanding . . . . . . . . . . . . . 0 0 0
Class Z Shares
Net assets . . . . . . . . . . . . . . . . . N/A 1,032 $ 15,043
Net asset value per share . . . . . . . . . . N/A 14.58 $ 14.58
Shares outstanding . . . . . . . . . . . . . N/A 1,032 1,032
</TABLE>
As of the Record Date there were 5,352,407 outstanding Class A
shares, 117,605 outstanding Class B shares, 582,357 outstanding Class
C shares and no outstanding Class Y shares of the Acquired Fund, and
11,742,219 outstanding Class A shares, 109,577,685 outstanding Class B
shares, 280,765 outstanding Class C shares, no outstanding Class Y
<PAGE>21
shares and 1,031,893 outstanding Class Z shares of the Acquiring Fund. As
of the Record Date, the officers and Directors of Smith Barney Funds
beneficially owned as a group less than 1% of the outstanding shares of each
class of the Acquired Fund. To the best knowledge of the Directors of Smith
Barney Funds, 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 outstanding shares of a class of the Acquired Fund.
As of the Record Date, the officers and Trustees of Smith Barney Income Funds
beneficially owned as a group less than 1% of the outstanding shares of each
class of the Acquiring Fund. To the best knowledge of the Trustees of Smith
Barney Income Funds, as of the Record Date, no shareholder or "group" (as that
term is used in Section 13(d) of the Exchange Act) owned beneficially or of
record more than 5% of the outstanding shares of a class of the Acquiring
Fund.
<TABLE>
<CAPTION>
Percentage of
Class Owned
of Record
or Beneficially
<S> <C> <C> <C>
Name and Fund Upon Consummation of the
Address and Class As of the Record Date Reorganization
Katherine M. Washburne Aquired Fund 5.28% 5.27%
2022 N. 71st Street Class B
Milwaukee, WI 53213
</TABLE>
<PAGE>22
INFORMATION ABOUT THE ACQUIRING FUND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF MARKET CONDITIONS AND
PORTFOLIO REVIEW (THROUGH AUGUST 18, 1995).
During the fiscal year ended July 31, 1995, the financial markets
provided both fixed-income and equity investors with substantial total
returns. The catalyst for these positive returns was the preemptive actions
of the Federal Reserve Board to orchestrate an economic slowdown while
controlling inflation. At the same time, domestic corporations recorded
better-than-expected earnings as they continued to benefit from improved
productivity and international competitiveness. The 30-year Treasury bond
market remained volatile with yields declining from 7.36% on July 31, 1994 to
6.86% on July 31, 1995. The majority of this decline occurred in the past six
months after long-term yields rose to over 8% late in 1994. The equity
markets reacted positively to this combination of lower interest rates and
improved corporate earnings. The Standard & Poor's 500 Index, a common
benchmark for the U.S. stock market, produced a total return of 26.07% for the
year ended July 31, 1995 with the majority of the gain occurring since the
beginning of this year. Utility investors also participated in this rally
with the Standard & Poor's Utilities Index, which is composed of telephone,
natural gas and electric companies, generating a total return of 12.39% for
the same period.
Since January 1995, the rally in the utility sector has more than
offset the declines experienced during the previous fiscal year. In
management's view, this reinforces the benefits of long-term investing and the
importance of a balanced investment portfolio. During the past fiscal year,
the Utilities Fund produced a positive total return of 13.24% for Class A
shares and 12.62% for Class B shares. The Utilities Fund has proved to be a
solid long-term investment with average annual returns since 1988 (excluding
sales charge) to the end of its fiscal year on July 31, 1995, of 11.61% to
investors in Class B shares (the Fund's oldest investment class). In
management's opinion, utilities offer high current income and tend to provide
lower returns than more volatile, economically sensitive sectors in an equity
market rally. When viewed over a full market cycle, management believes that
utilities are a suitable alternative for more conservative investors.
Management has a positive long-term outlook for the financial
markets but its expectations are realistic. Management does not see the
current pace continuing without a period of consolidation or possibly several
short-term market declines. Over the next several quarters, management
envisions sustainable 2% to 3% economic growth without inflationary pressures,
<PAGE>23
combined with continued corporate-productivity and international-earnings
gains. Financial-market volatility could increase if inflation fears emerge
or corporate earnings do not meet optimistic investor expectations. The
business climate should remain favorable, however, since the Federal Reserve
recently lowered short-term interest rates. Corporations are focused on
controlling costs and technological advances continue to enhance productivity.
Industry Overview
The domestic electric-utility industry continues to be challenged by
its evolving transition to a more competitive operating environment. This
will be particularly visible at the generation level of a vertically
integrated industry. The goal of deregulation is to reduce the cost of
electricity and improve industry efficiency. These changes will impact the
entire electric-utility industry, although the effect on individual companies
and the pace of change will vary. Many individual states are now studying
proposals for restructuring the industry within their own geographic
boundaries. California is the most visible of these states with a
proposal for the creation of a power-pool structure to purchase electricity
from the lowest-cost supplier. Other states are taking a more cautious
approach and awaiting the results of further studies. This disparity of
proposals at the state level, combined with the strong mandate on the federal
level, will likely result in a slower transition to a fully competitive
industry structure. The industry's evolution has continued to create investor
uncertainty although the recent recognition that utilities are entitled to
recover part or all of their uneconomic assets in a fully competitive
environment on both the federal and state levels, has been encouraging.
In the past year, electric-utility managements have studied and
implemented strategies designed to make companies more competitive. These
include operating-cost reductions, using excess cash flow to retire debt and
repurchase common stock, negotiating long-term contracts with large,
industrial customers, accelerating depreciation schedules on nuclear plants,
and reviewing diversification activities. The utilities that are a lower-cost
provider, which have strong management, a defined corporate strategy, and
focus on customer needs, will benefit from a more competitive industry
structure. Those companies with favorable competitive positions have
performed better than those that are facing increasing competitive pressure.
The uncertainty created by the industry's transition and the rally in the
equity market have caused utility stocks to lag the market during 1995.
During the second quarter of 1995, the yield on utility stocks was almost
equal to the yield on long-term Treasury bonds. Historically, this has proven
to be an attractive level for utility investors, relative to the fixed-income
market. Management expects electric utilities to perform in line with the
broad equity market for the balance of 1995. Electric-utility stocks could,
on occasion, outperform if volatility increases and investors seek more
defensive investments.
<PAGE>24
Portfolio Strategy
Management's portfolio strategy remains focused on solid fundamental
analysis and attractive relative valuations in the selection of investments.
Management combines both fixed-income and equity investments which gives the
Utilities Fund access to market opportunities in both areas as long-term
interest rates change. As of August 18, 1995, the Utilities Fund's current
portfolio mix was 51% common stocks (43% electric and gas and 8%
telecommunications), 41% long-term investment-grade utility bonds, and 8%
cash.
During the past fiscal year, electric utility stock prices have
reacted to the level of long-term interest rates which continue to be the
major factor in the price movement of the sector. The decline in long-term
interest rates and strong rally in utility stocks during the first half of
1995 have caused management to increase the Utilities Funds's cash holdings by
taking profits in selected issues that appear to be fully valued. Management
intends to reinvest this cash in the next several months as the financial
markets consolidate their recent gains. A market correction would be viewed
as a buying opportunity. The Utilities Fund's
current electric-utility holdings combine yield-oriented defensive issues with
growth-oriented, lower-yielding investments. Future investments will include
both defensive and growth issues with special emphasis on less current income
and more defined long-term growth opportunities. Management feels that
companies with solid management and service-territory growth will provide
attractive total returns and achieve higher market valuations. During the
past fiscal year, management has changed the Utilities Fund's focus to more
long-term growth. Management has initiated or added the following to the
Utilities Fund's holdings: American Electric Power, Baltimore Gas and
Electric, FPL Group Inc., DPL Inc., Portland General, and Houston Industries.
Management has sold or reduced the Utilities Fund's holdings in: Allegheny
Power Systems, Dominion Resources, Florida Progress, Long Island Lighting,
Pacific Gas and Electric, and Pacificorp. Management has maintained the
Utilities Fund's weighting in the natural-gas sector as the industry offers
some attractive long-term growth prospects but faces the more immediate
problems of high storage levels and a declining commodity price level.
Management will continue to monitor this sector and will increase the
Utilities Fund's holdings if the demand/supply relationship for the industry
improves. Management slightly reduced the Utilities Fund's telecommunications
holdings during the past year as the industry awaits a major telecommunication
reform proposal from Congress. This proposal would give the regional Bell
operating companies greater access to the long-distance telephone market.
Management will review this industry as the legislation moves closer to
approval and may add to the Utilities Fund's growth-oriented holdings such as
GTE Corporation and Bell South Corporation.
<PAGE>25
The portfolio's fixed-income holdings are relatively unchanged and
benefited from the rally in long-term bonds. Management's focus continues to
be on investment-grade, first-mortgage debentures with favorable price spreads
to the fixed-income market. The yield spread between utility common stocks
and utility bonds has favored equity investment during the past fiscal year.
The number of new electric utility bond offerings has also declined
substantially resulting in an improved price structure and has made it more
difficult to replace higher-quality holdings. However, since management
intends to retain higher-quality holdings, this should not affect the
portfolio. The substantial income received from this sector of the portfolio
has enabled management to place additional emphasis on the selection of
growth-oriented equity holdings.
Some Final Thoughts
Electric utilities provide essential services to our growing
economy. The changes occurring within the industry are focused on improving
efficiency and lowering the cost of electricity to the consumer. While the
industry must endure a period of uncertainty until the final structure is
designed, it should not deter the long-term investor from the potential income
and growth benefits of utility investing. In management's opinion, careful
stock selection, diversification and professional management will help to
reduce the risks.
<PAGE>26
Smith Barney Utilities Fund
<TABLE>
<CAPTION>
Historical Performance Class A Shares
<S> <C> <C> <C> <C> <C>
Net Asset Value
Beginning End Income Capital Gains Total
Year Ended of Year of Year Dividends Distributions Returns(1)
7/31/95 $13.28 $14.03 $0.84 $0.08 13.24%
7/31/94 15.97 13.28 0.83 0.50 (8.99)
Inception* - 7/31/93 14.36 15.97 0.64 0.13 17.01
Total $2.31 $0.71
</TABLE>
<TABLE>
<CAPTION>
Historical Performance Class B Shares
<S> <C> <C> <C> <C> <C>
Net Asset Value
Beginning End Income Capital Gains Total
Year Ended of Year of Year Dividends Distributions Returns(1)
7/31/95 $13.28 $14.02 $0.78 $0.08 12.62%
7/31/94 15.97 13.28 0.75 0.50 (9.52)
7/31/93 14.83 15.97 0.80 0.15 14.96
7/31/92 13.95 14.83 0.35 0.00 8.98
2/28/92 13.21 13.95 0.84 0.15 13.63
2/28/91 12.93 13.21 0.90 0.10 10.46
2/28/90 12.09 12.93 0.90 0.21 16.34
Inception* - 2/28/89 $12.00 12.09 0.57 0.15 6.80
Total $5.89 $1.34
</TABLE>
<TABLE>
<CAPTION>
Historical Performance Class C Shares
<S> <C> <C> <C> <C> <C>
Net Asset Value
Beginning End Income Capital Gains Total
Year Ended of Year of Year Dividends Distributions Returns(1)
7/31/95 $13.28 $14.02 $0.78 $0.08 12.62%
7/31/94 15.97 13.28 0.75 0.50 (9.52)
Inception* - 7/31/93 15.17 15.97 0.39 0.02 8.08
Total $1.91 $0.60
</TABLE>
<PAGE>27
Smith Barney Utilities Fund
<TABLE>
<CAPTION>
Historical Performance Class Z Shares
<S> <C> <C> <C> <C> <C>
Net Asset Value
Beginning End Income Capital Gains Total
Year Ended of Year of Year Dividends Distributions Returns(1)
7/31/95 $13.28 $14.02 $0.89 $0.08 13.55%
7/31/94 $15.97 13.28 0.87 0.50 (8.78)
Inception* - 7/31/93 14.36 15.97 0.66 0.14 17.21
Total $2.42 $0.72
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains,
if any, annually.
<TABLE>
<CAPTION>
Average Annual Total Return
<S> <C> <C> <C>
Without Sales Charge
(1) Class A Class B Class C Class Z
Year Ended 7/31/95 13.24% 12.62% 12.62% 13.55%
Five Years Ended 7/31/ 95 N/A 9.21 N/A N/A
Inception* - 7/31/95 7.09 9.79 3.95 7.35
With Sales Charge
(2) Class A Class B Class C Class Z
Year Ended 7/31/95 7.57% 7.62% 11.62% 13.55%
Five Years Ended 7/31/95 N/A 9.07 N/A N/A
Inception* - 7/31/95 5.08 9.79 3.95 7.35
</TABLE>
<PAGE>28
Smith Barney Utilities Fund
<TABLE>
<CAPTION>
Cumulative Total Return
<S> <C>
Without
Sales Charge(1)
Class A (Inception* through 7/31/95) 20.57%
Class B (Inception* through 7/31/95) 98.62
Class C (Inception* through 7/31/95) 10.11
Class Z (Inception* through 7/31/95) 21.38
<FN>
(1) Assumes reinvestment of all dividends and capital gains distributions at net asset value and does not reflect deduction of
the applicable sales charge with respect to Class A shares or the applicable CDSC with respect to Class B and Class C
shares.
(2) Assumes reinvestment of all dividends and capital gains distributions at net asset value. In addition, Class A shares
reflect the deduction of the maximum initial sales charge of 5.00%, Class B shares reflect the deduction of a 5.00% CDSC,
which applies if shares are redeemed less than one year from initial purchase. Class C shares reflect the deduction of a
1.00% CDSC if shares are redeemed within the first year of purchase.
* Inception dates for Class A, Class B, Class C and Class Z shares are November 6, 1992, March 28, 1988, February 4, 1993 and
November 6, 1992, respectively.
</TABLE>
<PAGE>29
Growth of $10,000 Invested in Class B Shares of
Smith Barney Utilities Fund
vs. the Standard & Poor's 500 Index and Lipper Utilities Average*
(unaudited)
March 1988 - July 1995
Description of Mountain Chart -- Class B
A line graph depicting the total growth (including reinvestment of
dividends and capital gains) of a hypothetical investment of $10,000 on March
28, 1988 in Class B shares of the Acquiring Fund as compared with the growth
of a $10,000 investment in the S&P 500 and the Lipper Utilities Average. The
plot points used to draw the line graphs were as follows:
<TABLE>
<CAPTION>
Growth of $10,000 Growth of $10,000
Month Growth of $10,000 Invested Investment in the Lipper Investment in the
Ended in Class B Shares of the Fund Utilities Average S&P 500 Index
<S> <C> <C> <C>
3/28/88 $10,000 $10,000 $10,000
7/88 $10,208 $10,466 $10,626
7/89 $12,210 $13,152 $14,019
7/90 $12,785 $13,654 $14,931
7/91 $14,362 $15,089 $16,837
7/92 $16,997 $18,063 $18,990
7/93 $19,494 $21,096 $20,649
7/94 $17,636 $19,855 $21,714
7/95 $19,861 $21,853 $27,383
<FN>
* Hypothetical illustration of $10,000 invested in Class B shares at
inception on March 28, 1988, assuming reinvestment of dividends and
capital gains, if any, at net asset value through July 31, 1995. The
Standard & Poor's 500 Stock Index ("S&P 500") is an index composed of
widely held common stocks listed on the New York Stock Exchange, American
Stock Exchange and over-the-counter market. Figures for the S&P 500
index include reinvestment of dividends. The index is unmanaged and is
not subject to the same management and trading expenses of a mutual fund.
The Lipper Analytical Services, Inc. Utilities Fund Average ("Lipper
Utilities Average") is composed of the Utilities Fund's peer group of
mutual funds (13 funds as of July 31, 1995) investing in utilities
securities. The performance of the Utilities Fund's other classes may be
greater or less than the Class B shares' performance indicated on this
chart, depending on whether greater or lesser sales charges and fees were
incurred by shareholders investing in other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption values may be more or less than the original cost. No
adjustment has been made for shareholder tax liability on dividends or
capital gains.
Performance information is not available for Class Y shares of the
Acquiring Fund because, as of the Record Date, no Class Y shares of the
Acquiring Fund had been sold.
</TABLE>
<PAGE>30
INFORMATION ABOUT THE ACQUIRED FUND
Management's Discussion and Analysis of Market Conditions and
Portfolio Review (through December 31, 1994).
Smith Barney Funds, Inc. -- Utility Portfolio's total return for the
year ended December 31, 1994 was a negative 8.56% for Class A shares, compared
to a negative 8.99% for the average utility stock fund during the same period,
according to Lipper Analytical Services. The Standard & Poor's Utilities
Index returned a negative 7.95% and the Lehman Government/Corporate Index
returned a negative 3.51%, both for the same period.
Market Review
Although 1993 was a solid year for utilities, most utility stocks
experienced a steep correction in 1994. Throughout the year, the electric
utility industry was buffeted by both internal and external forces. External
pressures occurred as the Federal Reserve Board attempted to slow economic
growth and prevent inflation by increasing interest rates six times throughout
the year. In response, the bond market plunged, suffering one of its worst
declines in 40 years. Not only did higher interest rates push bond prices
down, but they also caused utility prices to fall.
Internal forces, however, are producing a fundamental change in the
electric utility industries in the form of deregulation. This deregulation is
creating competitive challenges which will ultimately affect all U.S.
utilities. Concerns about deregulation added to last year's correction in the
utilities market. The earnings of several electric utility companies have
already been affected by deregulation as more retail customers are able to
choose from a selection of electric power providers, and industrial heavy
users negotiate lower rates. FPL Group (formerly Florida Power & Light), SCE
Corporation, a Rosemead, California company, and New York State Gas and
Electric are notable cases where dividends have been cut. The Federal Energy
Regulatory Commission is currently considering other significant deregulation
issues, such as separating the cost of producing electricity from transmitting
it across the wires.
Several other influences on 1994 utility results are also worth
mentioning. First, weather conditions became less severe as the year
progressed which hurt natural gas and electric utility earnings. Second, the
typically high payout ratios (about 85%) of the electric utility industries
left little room for negative earnings surprises. At worst this contributed
to dividend cuts in a period when the industry, as a whole, had slowed its
dividend growth to less than 1%.
<PAGE>31
Portfolio Strategy
In the face of industry and market uncertainties, management's
strategy has been to keep the Utility Portfolio well diversified. In the
second half of the year, management gradually increased the Portfolio's equity
position. At year end, the Utility Portfolio's allocation was approximately
60% stocks, 39% bonds and 1% cash. Within the equity sector, 67% was
allocated to electric, 11% to natural gas and 13% to telephone. Late in the
year, management increased both the Utility Portfolio's stock and bond
electric position. With prices depressed, electric utilities offer good value
and attractive yields. Management decreased the Utility Portfolio's natural
gas holdings because prices had collapsed, and management thought they might
suffer further losses. Also, management sold Sprint, taking a profit on the
strength of their long distance business, which decreased the Portfolio's
telephone position.
To benefit from the effects of rising interest rates, management
modestly increased the average duration in the bond portion of the Utility
Portfolio late in 1994. Duration is a measure of a fund's volatility when
interest rates move up or down. The longer the duration, the more sensitive
the fund is to interest rate changes.
Companies that management favors are low-cost producers with no
expensive nuclear power generating equipment. One such company is American
Electric Power. Located in Columbus, Ohio, it benefits from the Midwest's
industrial strength and has excellent transmission capabilities. Another is
Dayton Power & Light. It received a favorable rate decision from Ohio state
regulators which should be good for earnings and above-average dividend
growth. In the telephone sector, management has positive expectations for
GTE. Although the benefits of restructuring have appeared more slowly than
expected, management believes they will be seen in the next few years. There
are also excellent opportunities in their cellular phone business.
Outlook
Looking ahead, management believes that interest rates will
stabilize, creating more favorable circumstances for both the bond and stock
markets. Deregulation should proceed more slowly than expected by many
investors, but it will still be a factor in the industry. Some utilities with
low costs already in place are in a position to benefit from deregulation, and
management will continue to seek those companies for the Utility Portfolio.
In this environment, management expects that the performance of the Utility
Portfolio should improve as management continues to emphasize a diversified
portfolio and individual stock selection in the coming year.
<PAGE>32
Management's Update (through July 28, 1995).
Financial assets performed well across the board for the first half
of 1995, and utility issues were no exception. Interest rates have declined
this year almost as sharply as they rose last year. One important difference
this year is that market forces are now leading interest rates down whereas in
1994 the Federal Reserve Board led rates up. The Federal Reserve Board's
recent decision to notch down rates by one-quarter percentage point bodes well
for utility stocks since a further decline in rates is expected. As we moved
through the first half of 1995, consumer sales weakened, which, in turn,
contributed to a classic inventory correction. A number of key commodity
prices have either declined or peaked out. Significantly, there appears to be
some progress in Washington in paring down the budget excesses of the past.
Thus, we may be in an environment where short-term trends favorable to low
inflation and stable interest rates are reinforced by longer-term trends.
Portfolio Strategy
The Utility Portfolio has been fully invested throughout the year.
As of July 28, 1995, asset allocation for the Utility Portfolio was 32% bonds
and 68% stocks. The duration of the bonds is less than 10 years, and they
are, for the most part, widely diversified between electric and natural gas
utility issuers. In the equity sector, the breakdown is: electric, 65%;
telephone, 16%; natural gas, 15%; and miscellaneous, 4%.
Deregulation is having a huge impact on electric utilities as it
slowly erodes utilities' monopoly status and makes them compete to sell power,
especially to large industrial users. Because of these pressures, market
participants now perceive electric utility stocks to be more risky
investments. This has pushed utility yields to about the same level as
Treasury bond yields whereas historically, utility yields have been
approximately one percentage point lower. In this changing market
environment, investors are more carefully evaluating a utility's competitive
position with respect to production costs, debt levels, and market share --
making dividend yield a less important criterion.
In selecting stocks for the Utility Portfolio, management tries to
focus on companies with low payout ratios combined with being a low-cost
producer of electricity. Special situations are also an integral part of the
Portfolio. One example is Entergy, an out-of-favor electric utility with a
low price/book ratio and a high yield. Management thinks that there are a
number of positive changes taking place within the company which are not yet
reflected in the price of the stock. Management has also added Houston
Industries to the Portfolio. Management believes that the sale of its cable
operations will provide funds for a share buy-back plan and boost earnings.
In the telephone utilities area, management has added Sprint and Comsat and
increased the Portfolio's position in Telmex.
<PAGE>33
Outlook
As discussed above, the yield on utility stocks is historically high
relative to Treasuries. In management's opinion, utility stock prices are
still undervalued primarily because of the threat of deregulation and
therefore have a potential for appreciation. Although increased competition
and deregulation is still very real, it could take a long time to materialize.
This should benefit electric utility stock performance over the near term. In
the natural-gas sector, the price of natural gas has also declined, but should
recover later in the year. This will be modestly positive for Questar,
Tenneco and Sonat. In the telephone industry, the soft landing for the
economy should keep interest rates attractive and provide unit-volume growth,
which will be especially positive for Sprint. Regulatory changes pending in
Congress should benefit management's largest position in GTE, as well as Bell
Atlantic.
<PAGE>34
Smith Barney Funds, Inc. - Utility Portfolio
<TABLE>
<CAPTION>
Historical Performance Class A Shares
<S> <C> <C> <C> <C> <C>
Net Asset Value
Beginning End Income Capital Gains Total
Year Ended of Year of Year Dividends Distributions Returns(1)
12/31/94 $13.29 $11.31 $0.81 $0.05 (8.56)%
12/31/93 13.07 13.29 0.81 0.31 10.37
12/31/92 13.07 13.07 0.79 0.17 7.77
12/31/91 11.94 13.07 0.79 0.06 17.21
12/28/90* - 12/31/90 11.94 11.94 0.01 0.00 0.08
Total $3.21 $0.59
It is the Fund's policy to distribute dividends monthly and capital gains, if any, annually.
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return Class A Shares
<S> <C> <C>
Without With
Sales Charge(1) Sales Charge(2)
Year Ended 12/31/94 (8.56)% (13.14)%
12/28/90* through 12/31/94 6.26 4.90
</TABLE>
<TABLE>
<CAPTION>
Historical Performance Class B Shares
<S> <C> <C> <C> <C> <C>
Net Asset Value
Beginning End Income Capital Gains Total
Year Ended of Year of Year Dividends Distributions Returns(1)
11/7/94* - 12/31/94 $11.29 $11.32 $0.12 $0.05 1.82%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return Class B Shares
<S> <C> <C>
Without With
Sales Charge(1) Sales Charge(2)
11/7/94* through 12/31/94 1.82% (3.18)%
* Inception
</TABLE>
<PAGE>35
Smith Barney Funds, Inc. - Utility Portfolio
<TABLE>
<CAPTION>
Historical Performance Class C Shares
<S> <C> <C> <C> <C> <C>
Net Asset Value
Beginning End Income Capital Gains Total
Year Ended of Year of Year Dividends Distributions Returns(1)
12/31/94 $13.28 $11.32 $0.71 $0.05 (9.19)%
12/31/93 $13.07 13.28 0.71 0.31 9.48
12/2/92* - 12/31/92 12.98 13.07 0.03 0.16 2.23
Total $1.45 $0.52
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return Class C Shares
<S> <C> <C>
Without With
Sales Charge(1) Sales Charge(2)
Year Ended 12/31/94 (9.19)% (10.10)%
12/2/90* through 12/31/94 0.77 0.77
</TABLE>
Cumulative Total Return
<TABLE>
<CAPTION>
<S> <C>
Without
Sales Charge(1)
Class A (12/28/90* through 12/31/94) 27.56%
Class B (11/7/94* through 12/31/94) 1.82
Class C (12/2/92* through 12/31/94) 1.62
<FN>
(1) Assumes reinvestment of all dividends and capital gains distributions at net asset value and does not reflect deduction of
the applicable sales charge with respect to Class A shares or the applicable CDSC with respect to Class B and Class C
shares.
(2) Assumes reinvestment of all dividends and capital gains distributions at net asset value. In addition, Class A shares
reflect the deduction of the maximum initial sales charge of 5.00%, Class B shares reflect the deduction of a 5.00% CDSC,
which applies if shares are redeemed less than one year from initial purchase and declines by 1.00% per year until no CDSC
is incurred. Class C shares reflect the deduction of a 1.00% CDSC if shares are redeemed within the first year of purchase.
* Inception
</TABLE>
<PAGE>36
Growth of $10,000 Invested in
Class A Shares of Utility Portfolio* vs. Standard & Poor's
Utility, Lehman Bros. Intermediate Corp.
Bond and Lehman Bros. Government Corp. Bond Indices
(unaudited)
December 1990 - December 1994
Description of Mountain Chart - Class A
A line graph depicting the total growth (including reinvestment of
dividends and capital gains) of a hypothetical investment of $10,000 on
December 28, 1990 in Class A shares of the Acquired Fund as compared with the
growth of a $10,000 investment in the S&P 500, the Lehman Brothers
Intermediate Corporate Bond Index and the Lehman Brothers Government Corp.
Bond Index. The plot points used to draw the line graphs were as follows:
<TABLE>
<CAPTION>
Growth of $10,000
Growth of $10,000 Growth of $10,000 Investment in Lehman Growth of $10,000 Investment
Month Investment in Investment in S&P 500 Brothers Intermediate Corp. in Lehman Brothers Gov't
Ended Class A Shares Bond Index Corp. Bond Index
<S> <C> <C> <C> <C>
12/28/90 $ 9,550 $10,000 $10,000 $10,000
12/90 9,559 10,012 10,017 10,010
12/91 11,205 11,479 11,742 11,544
12/92 12,076 12,636 12,675 12,378
12/93 13,326 14,453 14,054 13,698
12/94 12,185 12,946 13,738 13,235
<FN>
* Hypothetical illustration of $10,000 invested in Class A shares at
inception on December 28, 1990, assuming deduction of the maximum 4.50%
sales charge at the time of investment and reinvestment of dividends and
capital gains at net asset value through December 31, 1994. The Standard
& Poor's Utility Index is composed of Telephone, Natural Gas and Electric
Companies. The Lehman Brothers Intermediate (1-10) Corporate Bond Index
includes all publicly issued fixed rate, nonconvertible investment grade
SEC-registered corporate debt. The Lehman Brothers Government Corp. Bond
Index includes the Government and Corporate Bond Indices, including U.S.
government treasury and agency securities, corporate and yankee bonds.
The corporate index sectors are industrial finance, utility and Yankee.
The indices are unmanaged and are not subject to the same management and
trading expenses of a mutual fund. The performance of the Portfolio's
other classes may be greater or less than the Class A shares' performance
indicated on this chart, depending on whether greater or lesser sales
charges and fees were incurred by shareholders investing in the other
classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption values may be more or less than the original cost. No
adjustment has been made for shareholder tax liability on dividends or
capital gains.
</TABLE>
Performance information is not available for Class Y shares of the
Acquired Fund because, as of the Record Date, no Class Y shares of the
Acquired Fund had been sold.
<PAGE>37
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 disclosure in the prospectuses of the
Acquiring Fund and the Acquired Fund with respect to the Funds' respective
investment objectives, policies and restrictions. For a full discussion of
the investment objective, policies and restrictions of the Acquiring Fund,
refer to the Prospectus of the Acquiring Fund, which accompanies this
Prospectus/Proxy Statement, under the caption "Investment Objective and
Management Policies," and for a discussion of these issues as they relate to
the Acquired Fund, refer to the Prospectus of the Acquired Fund under the
caption "Investment Objectives and Management Policies."
INVESTMENT OBJECTIVE. The Acquired Fund and the Acquiring Fund have
generally similar investment objectives. The Acquired Fund seeks to provide
current income and moderate capital growth by investing in equity and debt
securities of public utility companies. The Acquiring Fund seeks primarily to
provide current income and secondarily to provide long-term capital
appreciation. The Acquiring Fund attempts to achieve its investment objective
by investing primarily, but not exclusively, in the debt and equity securities
of companies in the utility industries. There can be no assurance that either
Fund will be able to achieve its investment objective. Both the Acquiring
Fund's and the Acquired Fund's investment objectives are considered
fundamental policies which cannot be changed without the affirmative vote of a
majority, as defined in the 1940 Act, of the outstanding voting securities of
the respective Fund, which is the lesser of: (i) 67% of the voting securities
of the Fund present at a meeting of shareholders, if the holders of more than
50% of the outstanding voting securities of such Fund are present or
represented by proxy; or (ii) more than 50% of the outstanding voting
securities of such Fund.
PRIMARY INVESTMENTS. Each Fund seeks to achieve its objectives by
investing in equity and debt securities of companies in the utility
industries. The utility industries are deemed by each Fund to be comprised of
companies principally engaged in the manufacture, production, generation,
transmission and sale of electric and gas energy and companies principally
engaged in the communications field, including entities such as telephone,
telegraph, satellite, microwave and other companies regulated by governmental
agencies as utilities that provide communication facilities for the public
benefit, but not including those in public broadcasting. The Acquiring Fund
defines "principally engaged" to mean at least 50% of a company's assets,
gross income or net profits results from utility operations or the company is
regulated as a utility by a government agency or authority.
The Acquiring Fund will invest primarily in utility equity and debt
securities that have a high expected rate of return, as determined by the
Manager. Under normal market conditions, the Acquiring Fund will invest at
least 65% of its assets in such securities. The Acquiring Fund may invest up
to 35% of its assets in equity and debt
<PAGE>38
securities of non-utility companies believed to afford a reasonable
opportunity for achieving the Acquiring Fund's investment objectives. The
Acquired Fund invests in both equity and debt securities, and shifts its asset
allocation without restriction between types of utilities and between equity
and debt securities based upon the Manager's determination of how to achieve
the Acquired Fund's investment objective in light of the prevailing market,
economic and financial conditions. The Manager may choose to allocate up to
100% of the Acquired Fund's assets in a particular type of security (e.g.,
equity securities) in a specific industry segment (e.g., electric utilities).
When the Manager believes that market conditions warrant, each Fund may adopt
a temporary defensive posture and may invest, without limit, in debt
securities (whether or not they are utility securities) such as rated or
unrated bonds, debentures and commercial paper, United States government
securities and money market instruments. Each Fund may invest up to 10% of
its assets in securities rated BB or B by Standard & Poor's Corporation
("S&P") or Ba or B by Moody's Investors Service, Inc. ("Moody's") whenever the
Manager believes that the incremental yield on such securities is advantageous
to the Fund in comparison to the additional risk involved.
Low-rated and comparable unrated securities will likely have some
quality and protective characteristics that, in the judgment of the rating
organization, are outweighed by large uncertainties or major risk exposures to
adverse conditions, and are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the securities. While the market values of low-rated and comparable
unrated securities tend to react less to fluctuations in interest rate levels
than the market values of higher-rated securities, the market value of certain
low-rated and comparable unrated securities also tends to be more sensitive to
individual corporate development and changes in economic conditions than
higher-rated securities. In addition, low-rated securities and comparable
unrated securities generally present a higher degree of credit risk. Issuers
of low-rated and comparable unrated securities are often highly leveraged and
may not have more traditional methods of financing available to them so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. The risk
of loss due to default by such issuers is significantly greater because low-
rated and comparable unrated securities generally are unsecured and frequently
are subordinated to the prior payment of senior indebtedness. Fixed income
securities, including low-rated securities and comparable unrated securities,
frequently have call or buy-back features that permit their issuers to call or
repurchase the securities from the holders, such as the Funds. If an issuer
exercises these rights during periods of declining interest rates, a Fund may
have to replace the security with a lower yielding security, thus resulting in
a decreased return to the Fund.
Each Fund has the ability to engage in a number of specialized
investment strategies and techniques designed to enable the Fund to achieve
its investment objectives, certain of which are discussed below.
<PAGE>39
United States Government Securities. Each Fund may purchase United
States government securities, which are obligations of, or guaranteed by, the
United States government, its agencies or instrumentalities ("U.S. government
securities"). These include bills, certificates of indebtedness, notes and
bonds issued by the United States Treasury or by agencies or instrumentalities
of the United States government. Some U.S. government securities, such as
Treasury bills and bonds, are supported by the full faith and credit of the
United States; others, such as those of Federal Home Loan Banks, are supported
by the right of the issuer to borrow from the United States Treasury; others,
such as those of the Federal National Mortgage Association, are supported by
the discretionary authority of the United States government to purchase the
agency's obligations; still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the
instrumentality.
Repurchase Agreements. The Acquiring Fund may engage in repurchase
agreement transactions (typically the acquisition of 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 Acquiring Fund
to resell, the obligation at an agreed-upon price and time) with certain
member banks of the Federal Reserve System and with certain dealers on the
Federal Reserve Bank of New York's list of reporting dealers. The value of
the underlying securities will be at least equal at all times to the total
amount of the repurchase obligation, including interest. The Manager, acting
under the supervision of the Smith Barney Income Fund's Board of Trustees,
reviews on an ongoing basis the value of the collateral and creditworthiness
of those banks and dealers with which the Acquiring Fund enters into
repurchase agreements to evaluate potential risks. The Acquired Fund may
enter into repurchase agreements with broker-dealers or other financial
institutions that are deemed creditworthy by the Manager under guidelines
approved by the Manager. It is the policy of the Acquired Fund not to invest
in repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Acquired Fund,
amount to more than 15% of the Acquired Fund's total assets.
Lending Portfolio Securities. Each Fund is authorized to lend its
portfolio securities to brokers, dealers and other financial organizations.
The Funds' loans of securities will be collateralized by cash or U.S.
government securities, and in the case of the Acquiring Fund, letters of
credit, that are maintained at all times in an amount at least equal to the
current market value of the loaned securities. The Manager limits such
lending with respect to the Acquired Fund to not more than one-third of the
value of the Acquired Fund's net assets, and with respect to the Acquiring
Fund, to not more than 20% of the value of the Acquiring Fund's net assets.
The risks associated with lending portfolio securities, as with other
extensions of credit, consists of possible loss of rights in the collateral
should the borrower fail financially.
Short Sales Against the Box. Each Fund may make short sales (in the
case of the Acquiring Fund, to the extent of 5% of the Acquiring Fund's net
assets) if at all times
<PAGE>40
when a position is open, such Fund owns the stock or owns preferred stock or
debt securities convertible or exchangeable without payment of further
consideration for, securities of the same issue as the securities sold short.
Short sales of this kind are referred to as "against the box." Possible
losses from short sales differ from losses that could be incurred from a
purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested.
Options Activities. The Acquiring Fund may write (that is, sell)
call options ("calls") if the calls are covered throughout the life of the
option. A call is covered if the Acquiring Fund (a) owns the optioned
securities, (b) maintains in a segregated account with Smith Barney Income
Fund's custodian, cash, cash equivalents or U.S. government securities with a
value sufficient to meet the Acquiring Fund's obligations under the call, or
(c) owns an offsetting call option. The Acquiring Fund may purchase calls on
securities and also may purchase and sell stock index calls which differ
from calls on individual securities in that they are settled in cash based on
the values of the securities in the underlying index, rather than by delivery
of the underlying securities. The Acquiring Fund may write and purchase put
options ("puts"). The Acquiring Fund also may purchase and sell stock index
puts, which differ from puts on individual securities in that they are settled
in cash based on the values of the securities in the underlying index, rather
than by delivery of the underlying securities. The Acquiring Fund will not
purchase puts or calls on securities if more than 5% of its assets would be
invested in premiums on puts and calls, not including that portion of the
premium which reflects the value of the securities owned by the Acquiring Fund
and underlying a put at the time of purchase. The Acquiring Fund may write
puts on securities only if they are "secured." A put is "secured" if the
Acquiring 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 the
Acquiring Fund, together with the aggregate value of the obligations
underlying calls on securities which are written by the Acquiring Fund and
covered with cash, cash equivalents or U.S. government securities, will not
exceed 50% of the Acquiring Fund's net assets. The Acquiring Fund also may
write "straddles," which are combinations of secured puts and covered calls on
the same underlying security. Because option premiums paid by the Acquiring
Fund are small in relation to the market value of the investments underlying
the options, buying put options can result in large amounts of leverage. The
leverage offered by trading in options could cause the Acquiring Fund's net
asset value to be subject to more frequent and wider fluctuation than would be
the case if the Acquiring Fund did not invest in options. Although the
Acquired Fund may buy or sell put and call options, including stock index
options, on up to 15% of its net assets, provided such options are listed on a
national securities exchange, the Acquired Fund has not done so in its last
fiscal year, nor does it currently intend to commit more than 5% of its assets
to be invested in or subject to put and call options.
<PAGE>41
Futures Contracts. The Acquiring Fund may not purchase futures
contracts or related options if, immediately thereafter, more than 30% of the
Acquiring Fund's total assets would be so invested. In order to prevent
leverage in connection with the purchase of futures contracts by the Acquiring
Fund, an amount of cash and cash equivalents equal to the market value of
futures contracts purchased will be maintained in a segregated account with
the Acquiring Fund's custodian. The Acquiring Fund will engage only in
futures contracts and related options which are listed on a national
commodities exchange. The Acquiring Fund may purchase and sell interest rate
futures contracts as a hedge against changes in interest rates. The Acquiring
Fund may also purchase and sell listed put and call options on interest rate
futures contracts. When the Acquiring Fund enters into a stock index futures
contract, it must make an initial deposit, known as "initial margin," as a
partial guarantee of its performance under the contract. As the value of the
stock index fluctuates, either party to the contract is required to make
additional margin deposits, known as "variation margin," to cover any
additional obligation that it may have under the contract. The Acquiring Fund
may not at any time commit more than 5% of its total assets to initial margin
deposits on futures contracts. The Acquired Fund does not purchase futures
contracts.
The use of futures contracts as a hedging device involves several
risks. No assurance can be given that a correlation will exist between price
movements in the stock index and price movements in the securities that are
the subject of the hedge; the risk of imperfect correlation increases as the
composition of the securities held by the Acquiring Fund diverges from the
securities included in the applicable stock index. Positions in futures
contracts may be closed out only on the exchange on which they were entered
into (or through a linked exchange) and no secondary market exists for those
contracts. In addition, although the Acquiring Fund intends to enter into
futures contracts only if an active market exists for the contracts, no
assurance can be given that an active market will exist for the contracts at
any particular time. Certain exchanges do not permit trading in particular
contracts at prices that represent a fluctuation in price during a single
day's trading beyond a certain set limit. If prices fluctuate during a single
day's trading beyond those limits, the Acquiring Fund could be prevented from
promptly liquidating unfavorable positions and thus be subjected to losses.
Foreign Securities and American Depositary Receipts. Each Fund may
purchase foreign securities or American Depositary Receipts ("ADRs"). ADRs
are U.S. dollar-denominated receipts issued generally by domestic banks,
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.
Non-Publicly Traded and Illiquid Securities. The sale of securities
that are not publicly traded is typically restricted under the federal
securities laws. As a result, each Fund may be forced to sell these
securities at less than fair market value or may not be able to sell them when
the Manager believes it desirable to do so.
<PAGE>42
When-Issued and Delayed Delivery Securities. The Acquired Fund may
purchase or sell securities on a when-issued or delayed delivery basis. When-
issued or delayed delivery transactions arise when securities are purchased or
sold by the Acquired Fund with payment and delivery taking place in the future
in order to secure what is considered to be an advantageous price and yield to
the Acquired Fund at the time of entering into the transaction. The Acquired
Fund's custodian will maintain, in a segregated account of the Acquired Fund,
cash, U.S. government securities or other liquid high-grade debt obligations
having a value equal to or greater than the Fund's purchase commitments; the
Acquired Fund's custodian will likewise segregate securities sold on a delayed
basis. The Acquiring Fund cannot purchase or sell securities on a when-issued
or delayed delivery basis.
INVESTMENT RESTRICTIONS. Each Fund has adopted the following
investment restrictions for the protection of shareholders. These
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 Fund.
1. Each Fund is prohibited from purchasing the securities of any issuer
(other than U.S. government securities) if as a result more than 5% of the
value of such Fund's total assets would be invested in the securities of the
issuer, except that up to 25% of the value of such Fund's total assets may be
invested without regard to this 5% limitation.
2. Each Fund is prohibited from purchasing more than 10% of the voting
securities of any one issuer, provided that this limitation shall not apply to
investments in U.S. government securities.
3. The Acquiring Fund is prohibited from purchasing securities on
margin, except that the Acquiring Fund may obtain any short-term credits
necessary for the clearance of the purchases and sales of securities. For
purposes of this restriction, the deposit or payment of initial or variation
margin in connection with futures contracts or related options will not be
deemed to be a purchase of securities on margin by the Acquiring Fund. The
Acquired Fund is also prohibited from purchasing securities on margin.
4. Each Fund is prohibited from making short sales of securities or
maintaining a short position, except that a Fund may engage in such activities
without limit if, at all times when a short position is open, the Fund owns an
equal amount of the securities or securities convertible into or exchangeable,
without payment of any further consideration, for securities of the same
issuer as, and at least equal in amount to, the securities sold short. In
addition, the Acquired Fund may make short sales or maintain a short position
only to the extent of 5% of its net assets.
5. The Acquiring Fund is prohibited from borrowing money, except that
the Acquiring Fund may borrow from banks for temporary or emergency (not
leveraging)
<PAGE>43
purposes including the meeting of redemption requests that might otherwise
require the untimely disposition of securities, in an amount not exceeding 20%
of the value of the Acquiring Fund's total assets (including the amount
borrowed) valued at market less liabilities (not including the amount
borrowed) at the time the borrowing is made. Whenever borrowings exceed 5% of
the value of the Acquiring Fund's total assets, the Acquiring Fund will not
make any additional investments. The Acquired Fund is prohibited from
borrowing money (including borrowings through entering into reverse repurchase
agreements) in excess of 33 1/3% of its total assets (including the amount of
money borrowed but excluding any liabilities and indebtedness not constituting
senior securities, or letters of credit solely for purposes of participating
in a captive insurance company sponsored by the Investment Company Institute
to provide fidelity and directors and officers liability insurance), or
pledging its assets other than to secure such borrowings or in connection with
short sales, when-issued and delayed delivery transactions and similar
investment strategies. Whenever borrowings exceed 5% of the value of the
Acquired Fund's total assets, the Acquired Fund will not make any additional
investments.
6. The Acquiring Fund is prohibited from pledging, hypothecating,
mortgaging or otherwise encumbering more than 10% of the value of the
Acquiring Fund's total assets. For purposes of this restriction (a) the
deposit of assets in escrow in connection with the writing of covered put or
call options and the purchase of securities on a when-issued or delayed-
delivery basis and (b) collateral arrangements with respect to (i) the
purchase and sale of stock options, options on foreign currencies and options
on stock indexes and (ii) initial or variation margin for futures contracts
will not be deemed to be pledges of the Acquiring Fund's assets. The Acquired
Fund does not have a similar investment policy.
7. The Acquiring Fund is prohibited from writing or selling puts, calls,
straddles, spreads or combinations thereof, investing in commodities, except
that the Acquiring Fund may purchase or write futures contracts and options on
futures contracts as described in its Prospectus (and summarized herein under
"-- Primary Investment"). The Acquired Fund adheres to an operating policy of
not purchasing or selling commodities or commodity futures or options thereon,
or interest in commodity pools; is prohibited from purchasing or selling puts,
calls, straddles, spreads or combinations thereof in excess of 15% of its net
assets; and adheres to an operating policy of not exceeding 5% of net assets;
and is prohibited from purchasing and selling options that are not listed on a
national securities exchange.
8. Each Fund is prohibited from making loans to others, except through
the purchase of qualified debt obligations, loans of portfolio securities and
the entry into repurchase agreements.
<PAGE>44
9. Each Fund is prohibited from investing more than 25% of its assets in
any industry, except that each Fund will invest in excess of 25% of its assets
in the securities of companies within the utility industries.
10. The Acquiring Fund is prohibited from purchasing restricted
securities, illiquid securities (such as repurchase agreements with maturities
in excess of seven days) or other securities that are not readily marketable
if more than 10% of the total assets of the Acquiring Fund would be invested
in such securities. This is not a fundamental policy of the Acquiring Fund
and may be changed by a vote of the majority of the Board of Trustees of the
Acquiring Fund. The Acquired Fund adheres to a similar operating policy of
not investing in repurchase agreements with maturities in excess of seven days
if any such investment, together with any other illiquid assets held by the
Acquired Fund, amount to more than 15% of the Acquired Fund's total assets.
11. The Acquiring Fund is prohibited from underwriting the securities of
other issuers, except insofar as the Acquiring Fund may be deemed an
underwriter under the Securities Act of 1933, as amended, by virtue of
disposing of portfolio securities. The Acquired Fund does not have a similar
investment restriction.
12. Each Fund is prohibited from purchasing or selling real estate or
interests in real estate, although either Fund may purchase and sell
securities that are secured by real estate and may purchase securities issued
by companies that invest or deal in real estate.
13. The Acquiring Fund is prohibited from investing in oil, gas or
mineral exploration or development programs, except that the Acquiring Fund
may invest in the securities of companies that invest in or sponsor those
programs. This is not a fundamental policy of the Acquiring Fund and may be
changed by a vote of the majority of the Board of Trustees of the Acquiring
Fund. The Acquired Fund is prohibited from purchasing oil, gas or other
mineral leases, rights or royalty programs, except that the Acquired Fund may
invest in the securities of companies that operate, invest in, or sponsor such
programs.
14. The Acquiring Fund is prohibited from investing in securities of
other investment companies registered or required to be registered under the
1940 Act, except as they may be acquired as part of a merger, consolidation,
reorganization, acquisition of assets or offer of exchange. The Acquired Fund
is prohibited from investing in securities of another investment company
except by purchase in the open market involving only customary brokerage
commissions or as part of a merger, consolidation or acquisition.
15. The Acquiring Fund is prohibited from purchasing any security if as
a result the Acquiring Fund would then have more than 5% of its total assets
invested in securities of companies (including predecessors) that have been in
continuous operation for less than three years. This is not a fundamental
policy of the Acquiring Fund and may be changed by a
<PAGE>45
vote of the majority of the Board of Trustees of the Acquiring Fund.
Similarly, the Acquired Fund adheres to an operating policy of not purchasing
any security if, as a result, the Acquired Fund would then have more than 5%
of its current assets (taken at current value) invested in securities of
companies (including predecessors) that have been in operation for less than
three years or in equity securities for which market quotations are not
readily available.
16. The Acquiring Fund is prohibited from, and the Acquired Fund adheres
to an operating policy of not, purchasing or retaining the securities of any
issuer if any of the officers and Directors/Trustees of the Fund or the
Manager own beneficially more than 1/2 of 1% of the issuer and together own
beneficially more than 5% of the issuer's securities. This is not a
fundamental policy of the Acquiring Fund and may be changed by a vote of a
majority of the Board of Trustees of the Acquiring Fund.
17. The Acquiring Fund is prohibited from investing in warrants (other
than warrants acquired by the Acquiring Fund as part of a unit or attached to
securities at the time of purchase) if, as a result, the investments (valued
at the lower of cost or market) would exceed 5% of the value of the Acquiring
Fund's net assets, of which not more that 2% of the Acquiring Fund's net
assets may be invested in warrants not listed on a recognized United States or
foreign stock exchange to the extent permitted by applicable state securities
laws. This is not a fundamental policy of the Acquiring Fund and may be
changed by a vote of a majority of the Board of Trustees of the Acquiring
Fund. The Acquired Fund adheres to an operating policy of not purchasing
warrants if, as a result, the Acquired Fund would then have more than 5% of
its net assets (determined at the time of investment) invested in warrants.
Warrants will be valued at the lower of cost or market and investments in
warrants which are not listed on the New York Stock Exchange or American Stock
Exchange will be limited to 2% of the Acquired Fund's net assets (determined
at the time of investment).
18. The Acquiring Fund is prohibited from making investments for
purposes of exercising control. This is not a fundamental policy of the
Acquiring Fund and may be changed by a vote of a majority of the Board of
Trustees of the Acquiring Fund. The Acquired Fund has no such investment
policy.
19. The Acquiring Fund is prohibited from purchasing in excess of 5% of
the voting securities of a public utility or public utility
holding company, so as to become a public utility holding company as defined
in the Public Utility Holding Act of 1935, as amended. This is not a
fundamental policy of the Acquiring Fund and may be changed by a vote of a
majority of the Board of Trustees of the Acquiring Fund. The Acquired Fund
has no such investment policy.
<PAGE>46
INFORMATION ON SHAREHOLDERS' RIGHTS
General. Smith Barney Income Funds and Smith Barney Funds are open-
end, management investment companies registered under the 1940 Act, which
continuously offer to sell shares at their current net asset value. The
Acquired Fund is a series of Smith Barney Funds, which is a Maryland
corporation that was incorporated on December 2, 1966 and is governed by its
Articles of Incorporation, By-Laws and Board of Directors. The Acquiring Fund
is a series of Smith Barney Income Funds, which was organized on March 12,
1985 under the laws of Massachusetts and is a business entity commonly known
as a "Massachusetts business trust." Smith Barney Income Funds is governed by
its Master Trust Agreement, By-Laws and Trustees. Each Fund is also governed
by applicable state and federal law. Smith Barney Funds has an authorized
capital of 2,000,000,000 shares of common stock with a par value of $.01 per
share. The Board of Directors of Smith Barney Funds has authorized the
issuance of fifteen series of shares, each representing shares in one of
fifteen 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
Acquiring 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. The
Trustees of Smith Barney Income Funds have authorized the issuance of eight
series of shares, each representing shares in one of eight separate
portfolios, and may authorize the issuance of additional series of shares in
the future. In both the Acquiring Fund and the Acquired Fund, Class A shares,
Class B sharess and Class C shares represent interests in the
assets of the 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 such class and each
class of shares has exclusive voting rights with respect to provisions of such
Fund's Rule 12b-1 distribution plan which pertains to a particular class.
Notwithstanding the foregoing, Class B shares of either Fund will convert
automatically to Class A shares of such Fund, based on relative net asset
value, eight years after the date of the original purchase of such shares.
Upon conversion, these shares will no longer be subject to an annual
distribution fee. In addition, a certain portion of Class B shares that have
been acquired through the reinvestment of dividends and distributions will be
converted to Class A shares of the respective Fund at that time.
Directors/Trustees. The By-Laws of Smith Barney Funds provide that
the term of office of each Director shall be from the time of his or her
election and qualification until the next annual meeting of shareholders and
until his or her successor shall have been elected and shall have qualified.
The Master Trust Agreement of Smith Barney Income Funds 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 until such Trustee sooner dies, resigns or is
removed. Any Director of Smith Barney Funds may be removed by the vote of at
least a majority of the shares of capital stock then entitled to be cast for
the election of Directors.
<PAGE>47
A Trustee of Smith Barney Income Funds may be removed with or without cause
(i) by written instrument, signed by at least two-thirds of the number of
Trustees prior to such removal, (ii) by vote of shareholders holding not less
than two-thirds of the shares then outstanding at a meeting called for the
purpose or (iii) by a written declaration signed by shareholders holding not
less than two-thirds of the shares then outstanding. Vacancies on the Boards
of either Smith Barney Funds or Smith Barney Income Funds 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 Smith Barney Funds nor Smith Barney Income
Funds holds a meeting of shareholders annually, 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. A meeting of shareholders of Smith
Barney Income Funds, for any purpose, must be called upon the written request
of shareholders holding at least 10% of such Fund's outstanding shares. A
meeting of shareholders of Smith Barney Funds must be called upon the written
request of holders of at least 25% of the outstanding capital stock of Smith
Barney Funds entitled to vote at such meeting. On each matter submitted to a
vote of the shareholders of the Smith Barney Income Funds or Smith Barney
Funds, each shareholder is entitled to one vote for each whole share owned and
a proportionate, fractional vote for each fractional share outstanding in the
shareholder's name on the respective Fund's books. With respect to the shares
of the Smith Barney Funds, the affirmative vote of the holders of a majority
of the outstanding shares entitled to vote thereon, present in person or by
proxy at a shareholder meeting at which a quorum is present, shall decide any
questions except when a different vote is required or permitted by any
provision of the 1940 Act or other applicable law or as may otherwise be set
forth in Smith Barney Funds' organizational documents, or in cases where the
vote is submitted to the holders of one or more but not all portfolios or
classes, a majority of the votes cast of the particular portfolio or class
affected by the matter shall decide such matter. With respect to matters
relating to a portfolio of Smith Barney Income Funds requiring a majority
shareholder vote as described in Smith Barney Income Funds' Master Trust
Agreement, a majority of shares of such portfolio represented in person or by
proxy and entitled to vote at a meeting of shareholders at which a quorum is
present shall decide such matter. In cases where the vote is submitted to the
holders of one or more but not all classes, a majority of the outstanding
shares of the particular class affected by the matter shall decide such
matter.
Liquidation or Dissolution. In the event of the liquidation or
termination of any of the portfolios of Smith Barney Income Funds or Smith
Barney Funds, the shareholders of the respective portfolio are entitled to
receive, when, and as declared by the Trustees or Directors, as the case may
be, the excess of the assets over the liabilities belonging to the liquidated
or terminated portfolio of Smith Barney Income Funds or Smith
<PAGE>48
Barney Funds, as the case may be. In either case, the assets so distributed
to shareholders will be distributed among the shareholders in proportion to
the number of shares held by them and recorded on the books of the liquidated
or terminated portfolio of the applicable Fund.
Liability of Directors/Trustees. The Articles of Incorporation of
Smith Barney Funds provides 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
Articles of Incorporation further provide that Smith Barney Funds shall
indemnify each Director and officer except for negligence and misconduct in
the performance of his or her duties. Under the Master Trust Agreement of the
Smith Barney Income Funds, 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 Master
Trust Agreement 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
Smith Barney Income Funds 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 Smith
Barney Funds or any agent of such shareholder to inspect and copy during the
Acquired Fund's usual business hours the Acquired Fund's By-laws, minutes of
shareholder proceedings, annual statements of the Acquired Fund's affairs and
voting trust agreements on file at its principal office. Shareholders of
Smith Barney Income Funds 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, Smith Barney Funds'
shareholders do not have personal liability for the Acquired Fund's 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, transferable without restrictions and will have no
preemptive rights. Under Massachusetts law, shareholders of the Acquiring
Fund may, under certain circumstances, be held personally liable for the
obligations of the Acquiring Fund. The Acquiring Fund's Master Trust
Agreement, however, disclaims shareholder liability for acts or obligations of
the Acquiring Fund and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Fund.
The Master Trust Agreement also provides indemnification out of the property
of the Acquiring Fund for all losses and expenses of any shareholder held
personally liable for the obligations of the Acquiring Fund.
<PAGE>49
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
SMITH BARNEY FUNDS, INC.
AND
SMITH BARNEY INCOME FUNDS
SMITH BARNEY FUNDS, INC. Information about the Acquired Fund is
included in its current Prospectus dated April 28, 1995, as supplemented by
Prospectus Supplements dated June 26, 1995 and July 15, 1995, and in the
Statement of Additional Information of Smith Barney Funds dated April 28,
1995, that have been filed with the SEC, both of which are incorporated
herein by reference. A copy of the Prospectus and the Statement of
Additional Information is available upon request and without charge by
writing to the Acquired Fund at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free (800) 224-7523.
SMITH BARNEY INCOME FUNDS. Information about the operation and
management of the Acquiring Fund is incorporated herein by reference from its
current Prospectus dated November 7, 1994, as supplemented by Prospectus
Supplements dated May 22, 1995, May 25, 1995 and July 15, 1995, and the
Statement of Additional Information of Smith Barney Income Funds dated
November 7, 1994, as supplemented on May 22, 1995. A copy of the Prospectus
accompanies this Prospectus/Proxy Statement and a copy of such Statement of
Additional Information is available upon request and without charge by
writing to the Acquiring Fund at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free (800) 224-7523.
Both Smith Barney Funds and Smith Barney Income Funds are subject to
the informational requirements of the Exchange Act and in accordance therewith
file reports and other information including proxy material, reports and
charter documents with the SEC. These materials 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 at 7 World Trade Center, Suite 1300, New York, New York 10048. 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.
<PAGE>50
OTHER BUSINESS
The Directors of Smith Barney Funds 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 Board of Directors of Smith Barney Funds to be
used at the Special Meeting of Shareholders of the Acquired Fund to be held at
10:00 a.m. on November 15, 1995, at 388 Greenwich Street, New York, New York
10013 and at any adjournment or 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 October 4, 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 approval of any other
matters deemed appropriate. A proxy may be revoked at any time on or before
the Meeting by written notice to the Secretary of the Acquired Fund, Christina
T. Sydor, Esq., 388 Greenwich Street, New York, New York 10013. 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 the
holders of a majority of the Acquired Fund shares outstanding and entitled to
vote at the Meeting, in person or by proxy, if a quorum is present.
Shareholders of Class A, Class B and Class C shares of the Acquired
Fund will vote together as a single class. Shareholders of the
<PAGE>51
Acquired Fund are entitled to one vote for each share. Fractional shares are
entitled to proportional voting rights.
Proxy solicitations will be made primarily by mail, but proxy
solicitations also may be made by telephone, telegraph or personal interviews
conducted by officers and employees of Smith Barney and its affiliates and/or
by TSSG. In addition, Applied Mailing Systems, Inc., an affiliate of TSSG
("Applied Mailing"), or an agent of Applied Mailing, may call shareholders to
ask if they would be willing to authorize Applied Mailing or its agent to
execute a proxy on their behalf authorizing the voting of their shares in
accordance with the instructions given over the telephone by the shareholders.
The latter telephone vote solicitation procedure is designed to authenticate the
shareholder's identity by asking the shareholder to provide his or her social
security number (in the case of an individual) or taxpayer identification
number (in the case of an entity). The shareholder's telephone instructions
will be implemented in a proxy executed by Applied Mailing or its agent and a
confirmation will be sent to the shareholder to ensure that the vote has been
authorized in accordance with the shareholder's instructions. Although a
shareholder's vote may be solicited and cast in this manner, each shareholder
will receive a copy of this Prospectus/Proxy Statement and may vote by mail
using the enclosed proxy card. The Acquired Fund believes that this
telephonic voting system will comply with Maryland law and will obtain an
opinion of counsel to that effect prior to implementing such procedures. The
aggregate cost of solicitation of the shareholders of the Acquired Fund is
expected to be approximately $12,000. Expenses of the Reorganization,
including the costs of the proxy solicitation and the preparation of
enclosures to the Prospectus/Proxy Statement, reimbursement of expenses of
forwarding solicitation material to beneficial owners of shares of the
Acquired Fund and expenses incurred in connection with the preparation of this
Prospectus/Proxy Statement will be borne by the Acquiring Fund and the
Acquired Fund in proportion to their assets.
In the event that a quorum necessary for a shareholders meeting is
not present or sufficient votes to approve the Reorganization are not received
by November 15, 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 a
decision to adjourn the Meeting.
The votes of the shareholders of the Acquiring Fund are not being
solicited by this Prospectus/Proxy Statement.
<PAGE>52
FINANCIAL STATEMENTS AND EXPERTS
The statement of assets and liabilities of the Acquired Fund,
including the schedule of portfolio investments, as of December 31, 1994, the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended and
the financial highlights for each of the years in the five-year period then
ended, have been incorporated by reference into this Prospectus/Proxy
Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
accountants, given on the authority of such firm as experts in accounting and
auditing. The statement of assets and liabilities of the Acquiring Fund,
including the schedule of investments, as of July 31, 1995, the related
statement of operations, the statements of changes in net assets and the
financial highlights for the one year then ended have been incorporated by
reference into this Prospectus/Proxy Statement in reliance upon the report of
KPMG Peat Marwick LLP, independent accountants, and upon the authority of such
firm as experts in accounting and auditing, and the statement of changes in
net assets for the year ended July 31, 1994, and the financial highlights for
each of the two years in the period ended July 31, 1994, the five-month period
ended July 31, 1992, each of the three years in the period ended February
29,1992 and for the period March 28, 1988 (commencement of operations) to
Februay 28, 1989, have been incorporated by reference into this
Prospectus/Proxy Statement in reliance upon the reports of Coopers & Lybrand
L.L.P., independent accountants, and upon the authority of such firm as
experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of the
Acquiring Fund 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 Goodwin, Procter &
Hoar as to certain matters under Massachusetts law.
THE BOARD OF DIRECTORS OF SMITH BARNEY FUNDS, INCLUDING THE
INDEPENDENT DIRECTORS, UNANIMOUSLY RECOMMENDS APPROVAL OF THE PLAN, AND ANY
UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR
OF APPROVAL OF THE PLAN.
<PAGE>1
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made
as of this 2nd day of October, 1995, by and between Smith Barney Funds, Inc.
("Smith Barney Funds"), a Maryland corporation with its principal place of
business at 388 Greenwich Street, New York, New York 10013, on behalf of its
Utility Portfolio (the "Acquired Fund") and Smith Barney Income Funds, a
Massachusetts business trust, with its principal place of business at 388
Greenwich Street, New York, New York 10013, on behalf of its Smith Barney
Utilities Fund (the "Acquiring Fund").
This Agreement is intended to be and is adopted as a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) 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,
Class B and Class C shares of beneficial interest of the Acquiring
Fund (collectively, the "Acquiring Fund Shares" and each, an "Acquiring Fund
Share") and the assumption by the Acquiring Fund of 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 termination of the Acquired Fund, all
upon the terms and conditions hereinafter set forth in this Agreement.
WHEREAS, Smith Barney Funds and Smith Barney Income Funds 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 Funds is authorized to issue shares of common
stock and Smith Barney Income Funds is authorized to issue shares of
beneficial interest in respect of its sub-trusts;
WHEREAS, the Board of Directors of Smith Barney Funds has determined
that the exchange of all or substantially all of the assets and scheduled
liabilities of the Acquired Fund for Acquiring Fund Shares and the assumption
of such liabilities by Smith Barney Income 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 Trustees of Smith Barney Income Funds has
determined that the exchange of all or substantially all the assets and
scheduled liabilities of the Acquired Fund for Acquiring Fund Shares and the
assumption of such liabilities by Smith
<PAGE>2
Barney Income Funds on behalf of the Acquiring Fund 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 ACQUIRING FUND
SHARES AND ASSUMPTION OF SCHEDULED LIABILITIES OF THE ACQUIRED FUND 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, Smith Barney
Funds agrees on behalf of the Acquired Fund to transfer the Acquired Fund's
assets as set forth in paragraph 1.2 to Smith Barney Income Funds on behalf of
the Acquiring Fund, and Smith Barney Income 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; (iii) to deliver to the Acquired Fund the
number of Class C Acquiring Fund Shares, including fractional Class C
Acquiring Fund Shares, determined by dividing the value of the Acquired Fund's
net assets attributable to its Class C 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 C Acquiring Fund Share, computed in the manner and as of the time and
date set forth in paragraph 2.2; and (iv) to assume 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 Income Funds on behalf of the Acquiring Fund shall consist of all or
substantially all property, including, without limitation, all cash,
securities and dividends or interest
<PAGE>3
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 these
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 ad dition, 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. The Acquired Fund will endeavor to discharge all the Acquired
Fund's known liabilities and obligations prior to the Closing Date. Smith
Barney Income 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 Smith
Barney Mutual Fund Management Inc. (the "Manager"), as adviser of the Acquired
Fund, 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 Income 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 thereon.
1.4. As provided in paragraph 3.3, 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, Class B and Class C of
the Acquired Fund shall receive Class A, Class B and Class C 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 Shareholders and representing the
<PAGE>4
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 any outstanding 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.
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 State of Maryland and in accordance with its governing documents.
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 the Manager in
accordance with its regular practice as pricing agent for the Acquired Fund
and the Acquiring Fund, respectively.
<PAGE>5
3. CLOSING AND CLOSING DATE
3.1. The Closing Date shall be November 17, 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. Smith Barney Funds shall deliver on behalf of the Acquired
Fund 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 the Chairman of the Board or President of Smith
Barney Funds. 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 Smith Barney Funds, or provide
evidence satisfactory to Smith Barney Funds 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. Smith Barney Funds and the Acquired Fund represent and warrant
to Smith Barney Income Funds and the Acquiring Fund as follows:
(a) The Acquired Fund is a portfolio of Smith Barney Funds, which
is a corporation duly organized, validly existing and in good standing under
the laws of the State of Maryland;
(b) Smith Barney Funds 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;
<PAGE>6
(c) Smith Barney Funds is not, and the execution, delivery and
performance of this Agreement 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 to which Smith Barney Funds
or the Acquired Fund is a party or by which it is bound;
(d) Smith Barney Funds 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 litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or to Smith
Barney Funds' knowledge threatened against Smith Barney Funds with respect to
the Acquired Fund or any of the Acquired Fund's properties or assets (other
than that previously disclosed to the other party to the Agreement) which, if
adversely determined, would materially and adversely affect its financial
condition or the conduct of its business. Smith Barney Funds and the Acquired
Fund know 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 the Acquired Fund's business or the ability of Smith Barney
Funds on behalf of the Acquired Fund to consummate the transactions herein
contemplated;
(f) The Statements of Assets and Liabilities of the Acquired Fund
for each of the four years ended December 31, 1994 and for the period December
28, 1990 (commencement of operations) to December 31, 1990 have been audited
by KPMG Peat Marwick LLP, independent 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 dates, 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;
<PAGE>7
(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 3.3. 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 (other than Class B shares of the Acquired Fund
which, under certain circumstances, are convertible into Class A 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 Smith Barney
Funds' Board of Directors, and subject to the approval of the Acquired Fund's
shareholders, this Agreement, assuming due authorization, execution and
delivery by Smith Barney Income Funds on behalf of 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 misleading.
<PAGE>8
4.2. Smith Barney Income Funds and the Acquiring Fund represent and
warrant to the Acquired Fund as follows:
(a) The Acquiring Fund is a portfolio of Smith Barney Income Funds,
which is a business trust duly organized and validly existing under the laws
of the Commonwealth of Massachusetts;
(b) Smith Barney Income 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 statement of
additional information of Smith Barney Income 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 Income Funds will have good
and marketable title to the Acquiring Fund's assets;
(e) Smith Barney Income 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 Master Trust Agreement or By-laws or of
any agreement, indenture, instrument, contract, lease or other undertaking
with respect to the Acquiring Fund to which Smith Barney Income Funds is a
party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or threatened
against Smith Barney Income Funds with respect to the Acquiring Fund or any of
the Acquiring Fund's properties or assets. Smith Barney Income Funds and the
Acquiring Fund know of no facts which might form the basis for the institution
of such proceedings and neither Smith Barney Income 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 Income Funds' ability on
behalf of the Acquiring Fund to consummate the transactions contemplated
herein;
(g) The Statement of Assets and Liabilities of the Acquiring Fund
for each fiscal year for the period August 1, 1992 through July 31, 1994, for
the period March 1, 1992 to July 31, 1992, for each fiscal year for the period
March 1, 1990 through February 28, 1992 and for the period March 28, 1988
(commencement of operations) to February 28, 1989 have been audited by Coopers
& Lybrand L.L.P., independent accountants, and the Statement of Assets and
Liabilities of the Acquiring Fund for the fiscal year ended July 31,
<PAGE>9
1995 has been audited by KPMG Peat Marwick LLP, independent accountants, and
are all in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquired Fund) fairly reflect the financial condition of the Acquiring
Fund as of such dates, and there are no known contingent liabilities of the
Acquiring Fund as of such dates not disclosed therein;
(h) 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
date 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;
(i) 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;
(j) 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. 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;
(k) The execution, delivery and performance of this Agreement has
been duly authorized by all necessary action, if any, on the part of Smith
Barney Income Funds' Board of Trustees, and this Agreement constitutes a valid
and binding obligation of Smith Barney Income 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 (other than
Class B shares of the Acquiring Fund which, under certain circumstances, are
convertible into Class A shares of the Acquired Fund);
(l) 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, assuming due authorization, execution and
delivery by Smith Barney Funds on behalf of the Acquired Fund, 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;
(m) 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
<PAGE>10
in all material respects with federal securities and other laws and
regulations applicable thereto;
(n) The Proxy Statement to be included in the Registration
Statement (only insofar as it relates to the Acquiring Fund and Smith Barney
Income 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 misleading; and
(o) Smith Barney Income 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 THE ACQUIRED FUND, SMITH BARNEY FUNDS, THE ACQUIRING FUND
AND SMITH BARNEY INCOME FUNDS
5.1. Smith Barney Income Funds on behalf of the Acquiring Fund and
Smith Barney Funds 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. 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. 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, Smith Barney
Funds on behalf of the Acquired Fund and Smith Barney Income 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.
<PAGE>11
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 Chairman of the Board or President
and the Treasurer of Smith Barney Funds.
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 the
Acquiring Fund (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 SMITH BARNEY FUNDS IN RESPECT OF
THE ACQUIRED FUND
The obligations of Smith Barney Funds on behalf of the Acquired Fund
to consummate the transactions provided for herein shall be subject, at its
election, to the performance by Smith Barney Income 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 Income
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 Income Funds on behalf of the Acquiring Fund
shall have delivered to the Acquired Fund a certificate executed in its name
by its President or Vice President and its Treasurer or Assistant Treasurer,
in a form reasonably satisfactory to the Acquired Fund and dated as of the
Closing Date, to the effect that the representations and warranties of Smith
Barney Income Funds and the Acquiring Fund made in this Agreement are true and
correct in all material respects at and as of the Closing Date, except as they
may be affected by the transactions contemplated by this Agreement; and
6.3. The Acquired Fund 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
Christina T. Sydor, Esq., Secretary of the Acquired Fund, covering the
following points:
<PAGE>12
That (a) the Acquiring Fund is a sub-trust of Smith Barney Income Funds,
which is a voluntary association of the type commonly referred to as a
Massachusetts business trust, duly organized and validly existing
pursuant to its Master Trust Agreement of Trust under the laws of the
Commonwealth of Massachusetts; (b) Smith Barney Income 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 Income Funds and the Acquiring Fund, and this
Agreement has been duly executed and delivered by Smith Barney Income
Funds on behalf of the Acquiring Fund and, assuming due authorization by
Smith Barney Funds on behalf of the Acquiring Fund, is a valid and
binding obligation of Smith Barney Income Funds with respect to the
Acquiring Fund enforceable in accordance with its terms against the
assets of the Acquiring Fund, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and to
general equity principles; and (d) the Acquiring Fund Shares to be issued
to the Acquired Fund for distribution to its shareholders pursuant to
this Agreement have been duly authorized and, when issued in accordance
with this Agreement, will be validly issued and fully paid and
non-assessable by Smith Barney Income Funds.
Such opinion may state that it is solely for the benefit of Smith
Barney 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.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SMITH BARNEY INCOME FUNDS IN
RESPECT OF THE ACQUIRING FUND
The obligations of Smith Barney Income Funds on behalf of the
Acquiring Fund to complete the transactions provided for herein shall be
subject, at its election, to the performance by Smith Barney Funds and the
Acquired Fund of all the obligations to be performed by them hereunder on or
before the Closing Date and, in addition thereto, the following conditions:
7.1. All representations and warranties of Smith Barney Funds 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. Smith Barney Funds on behalf of 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 basis of such securities by
<PAGE>13
lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer or Assistant Treasurer of Smith Barney Funds;
7.3. Smith Barney Funds on behalf of the Acquired Fund shall have
delivered to the Acquiring Fund on the Closing Date a certificate executed in
its name by its Chairman of the Board, 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 Smith Barney Funds and the Acquired Fund
made in this Agreement are true and correct in all material respects 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 & Cromwell, 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) the Acquired Fund is a series of Smith Barney Funds, which is
duly organized and validly existing under the laws of the State of
Maryland; (b) the Acquired Fund 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 Smith
Barney Funds, and this Agreement has been duly executed and delivered by
Smith Barney Funds and, assuming due authorization, execution and
delivery by Smith Barney Income Funds on behalf of the Acquiring Fund, is
a valid and binding obligation of Smith Barney Funds with respect to the
Acquired Fund enforceable in accordance with its terms against the assets
of the Acquired Fund, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles.
Such opinion may state that it is solely for the benefit of Smith
Barney Income Funds, 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.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND, SMITH
BARNEY FUNDS, THE ACQUIRING FUND AND SMITH BARNEY INCOME FUNDS
If any of the conditions set forth below do not exist on or before
the Closing Date with respect to Smith Barney Income Funds on behalf of the
Acquiring Fund, or Smith Barney Funds 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:
<PAGE>14
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 Smith Barney
Funds' Articles of Incorporation 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 Income
Funds on behalf of the Acquiring Fund nor Smith Barney Funds 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 Acquiring Fund which, together with
all previous such dividends, shall have the effect of distributing to the
shareholders of the Acquiring Fund all of the investment company taxable
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 Income Funds in respect of the
Acquiring Fund and Smith Barney Funds in respect of the Acquired Fund and
satisfactory to Christina T. Sydor, Esq., as Secretary of each of the Funds,
substantially to the effect that for federal income tax purposes:
<PAGE>15
(a) the transfer of all or substantially all of the Acquired Fund's
assets in exchange for Acquiring Fund Shares and the assumption by the
Acquiring Fund of scheduled liabilities of the Acquired Fund will
constitute a "reorganization" within the meaning of Section 368(a)(1)(C)
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
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 Acquiring Fund Shares and
the assumption by the Acquiring Fund of scheduled liabilities of the
Acquired Fund or upon the distribution (whether actual or constructive)
of Acquiring Fund Shares to 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; (e)
the aggregate tax basis for 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 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 to the Acquiring Fund 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 Income Funds on behalf of the Acquiring Fund nor Smith Barney Funds 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 Income Funds on behalf of the Acquiring Fund
represents and warrants to Smith Barney Funds on behalf of the Acquired Fund,
and Smith Barney Funds on behalf of the Acquired Fund represents and warrants
to Smith Barney Income 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,
<PAGE>16
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
or 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: (x) all fees and expenses related to the liquidation and
termination of the Acquired Fund; and (y) 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: (i) the mutual agreement of Smith Barney Funds on behalf of
the Acquired Fund and Smith Barney Income Funds on behalf of the Acquiring
Fund; (ii) Smith Barney Funds on behalf of the Acquired Fund in the event that
Smith Barney Income Funds or the Acquiring Fund shall, or Smith Barney Income
Funds on behalf of the Acquiring Fund in the event that Smith Barney Funds 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
(iii) Smith Barney Funds on behalf of the Acquired Fund, or Smith Barney
Income Funds on behalf of the Acquiring Fund, if a condition herein expressed
to be
<PAGE>17
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 Smith Barney Funds on behalf of
the Acquired Fund or Smith Barney Income Funds on behalf of the Acquiring Fund
or their respective Directors, Trustees 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 Smith Barney Funds and Smith Barney Income Funds; provided,
however, that following the meeting of the Acquired Fund's 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 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 Smith Barney Funds, Inc.,
388 Greenwich Street, 22nd Floor, New York, New York 10013, Attention: Heath
B. McLendon; or to Smith Barney Income Funds, 388 Greenwich Street, 22nd
Floor, New York, New York 10013, Attention: Jessica Bibliowicz.
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.
<PAGE>18
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 Smith
Barney Income Funds in respect of the Acquiring Fund shall not be binding upon
any Trustees, shareholders, nominees, officers, agents or employees
personally, but bind only the trust property of Smith Barney Income Funds as
provided in the Master Trust Agreement of Smith Barney Income Funds. The
execution and delivery of this Agreement have been authorized by the Trustees
of Smith Barney Income Funds and this Agreement has been executed by
authorized officers of Smith Barney Income Funds, 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 Smith Barney Income Funds as provided in Smith Barney Income
Funds' Master Trust Agreement.
<PAGE>19
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.
Attest: SMITH BARNEY INCOME FUNDS
on behalf of SMITH BARNEY UTILITIES FUND
/s/ Christina T. Sydor By: /s/ Jessica Bibliowicz
Name: Christina T. Sydor Name: Jessica Bibliowicz
Title: Secretary Title: President
Attest: SMITH BARNEY FUNDS, INC.
on behalf of the UTILITY PORTFOLIO
/s/ Christina T. Sydor By: /s/ Heath B. McLendon
Name: Christina T. Sydor Name: Heath B. McLendon
Title: Secretary Title: Chairman of the Board
<PAGE>
PROSPECTUS OF
SMITH BARNEY UTILITIES FUND
DATED NOVEMBER 7, 1994
AS SUPPLEMENTED BY PROSPECTUS SUPPLEMENTS
DATED MAY 22, 1995, MAY 25, 1995
AND JULY 15, 1995
<PAGE>1
SMITH BARNEY MUTUAL FUNDS
Supplement dated July 15, 1995 to the Prospectuses of the Funds indicated
below:
Effective immediately, employees of members of the National Association
of Securities Dealers, Inc. may purchase Class A shares of Smith Barney mutual
funds at net asset value.
<TABLE>
<CAPTION>
FUND DATE
---- ----
<S> <C>
Smith Barney Adjustable Rate Government Income Fund July 30, 1994
Smith Barney Aggressive Growth Fund Inc. November 7, 1994
Smith Barney Appreciation Fund Inc. March 1, 1995
Smith Barney Arizona Municipals Fund Inc. July 30, 1994
Smith Barney California Municipals Fund Inc. April 29, 1995
Smith Barney Equity Fund April 1, 1995
Smith Barney Florida Municipals Fund December 30, 1994
Smith Barney Fundamental Value Fund Inc. February 1, 1995
Smith Barney Funds, Inc. April 28, 1995
Smith Barney Growth Opportunity Fund May 1, 1995
Smith Barney Income Funds November 7, 1994
Smith Barney Income Trust January 29, 1995
Smith Barney Investment Funds March 1, 1995
Smith Barney Managed Governments Fund Inc. November 7, 1994
Smith Barney Managed Municipals Fund Inc. April 29, 1995
Smith Barney Massachusetts Municipals Fund Inc. March 1, 1995
Smith Barney New Jersey Municipals Fund Inc. May 29, 1995
Smith Barney New York Municipals Fund Inc. March 1, 1995
Smith Barney Oregon Municipals Fund June 29, 1995
</TABLE>
<PAGE>2
<TABLE>
<S> <C>
Smith Barney Precious Metals and Minerals Fund Inc. March 1, 1995
Smith Barney Telecommunications Growth Fund May 1, 1995
Smith Barney World Funds, Inc. February 28, 1995
</TABLE>
<PAGE>1
SMITH BARNEY
Adjustable Rate Government Income Fund
Arizona Municipals Fund
California Municipals Fund
Diversified Strategic Income Fund
Florida Municipals Fund
Government Securities Fund
Intermediate Maturity California Municipals Fund
Intermediate Maturity New York Municipals Fund
Investment Grade Bond Fund
Limited Maturity Municipals Fund
Limited Maturity Treasury Fund
Managed Governments Fund
Managed Municipals Funds
Massachusetts Municipals Fund
New York Municipals Fund
Oregon Municipals Fund
Tax-Exempt Income Fund
Utilities Fund
Supplement Dated May 25, 1995 to Prospectuses*
The following information supplements, and to the extent inconsistent
therewith, supersedes the information set forth in the Prospectuses of the
above mentioned Funds.
Dividend Declaration
Beginning July 1, 1995, each Fund will declare dividends from its net
investment income monthly. Dividends will be ordinarily paid by each Fund on
the last Friday of each month, to shareholders of record as of the preceding
Tuesday.
Payment for and Redemption of Shares
Beginning June 7, 1995, in accordance with certain regulatory changes,
payment for Fund shares is due to Smith Barney or an Introducing Broker or an
investment dealer in the selling group on the third business day after trade
date. In addition, redemption proceeds will be remitted to shareholders no
later than the third business day after receipt of proper tender of a
redemption request.
* Prospectuses dated:
Adjustable Rate Government Income Fund............... 7/30/94
Arizona Municipals Fund.............................. 7/30/94
California Municipals Fund........................... 4/29/95
Diversified Strategic Income Fund.................... 11/07/94
<PAGE>2
Florida Municipals Fund.............................. 12/30/94
Government Securities Fund........................... 3/01/95
Intermediate Maturity California Municipals Fund..... 1/29/95
Intermediate Maturity New York Municipals Fund....... 1/29/95
Investment Grade Bond Fund........................... 3/01/95
Limited Maturity Municipals Fund..................... 1/29/95
Limited Maturity Treasury Fund....................... 1/29/95
Managed Governments Fund ............................ 11/07/94
Managed Municipals Funds............................. 4/29/95
Massachusetts Municipals Fund........................ 1/29/95
New York Municipals Fund............................. 11/07/94
Oregon Municipals Fund............................... 5/23/94
Tax-Exempt Income Fund............................... 11/07/94
Utilities Fund....................................... 11/07/94
<PAGE>1
SMITH BARNEY INCOME FUNDS (the "Funds")
Smith Barney Convertible Securities Fund
Smith Barney High Income Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Utilities Fund
Smith Barney Exchange Reserve Fund
Smith Barney Premium Total Return Fund
Supplement dated May 22, 1995 to
Prospectuses and Statements of Additional
Information dated November 7, 1994
On March 27, 1995, Smith Barney Mutual Funds Management Inc. assumed
responsibility for all administrative functions for the Funds, including
functions previously performed by The Boston Company Advisors, Inc. ("Boston
Advisors").
As of the date, Boston Advisors ceases to serve as sub-administrator
to the Funds.
Also as of March 27, 1995, PNC Bank, National Association assumed
responsibility as the custodian for the Funds.
As of the date, Boston Safe Deposit and Trust Company, an affiliate
of Boston Advisors, ceased to serve as the Funds' custodian. PNC Bank,
National Association is located at 17th and Chestnut Streets, Philadelphia.
Supplement dated May 22, 1995
<PAGE>87
P
R SMITH BARNEY
O UTILITIES
S FUND
P
NOVEMBER 7, 1994
E
C Prospectus begins on page one
T
U
[LOGO] SMITH BARNEY MUTUAL FUNDS
INVESTING FOR YOUR FUTURE.
EVERYDAY.
<PAGE>88
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS November 7, 1994
388 Greenwich Street
New York, New York 10013
(212) 723-9218
The Smith Barney Utilities Fund (the "Fund") is a diversified fund that
seeks current income by investing in equity and debt securities of utility
companies selected by the Fund's investment adviser. Long-term capital
appreciation is a secondary objective of the Fund. The Fund is one of a number
of funds, each having distinct investment objectives and policies, making up the
Smith Barney Income Funds (the "Trust"). The Trust is an open-end management
investment company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution and service fees and expenses,
that prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of other funds offered by the Trust are described in
separate prospectuses that may be obtained by calling the Trust at the telephone
number set forth above or by contacting a Smith Barney Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 7, 1994, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>89
SMITH BARNEY
Utilities Fund
<TABLE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<S> <C>
PROSPECTUS SUMMARY 3
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 11
---------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
---------------------------------------------------------------------------
VALUATION OF SHARES 27
---------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 28
---------------------------------------------------------------------------
PURCHASE OF SHARES 30
---------------------------------------------------------------------------
EXCHANGE PRIVILEGE 40
---------------------------------------------------------------------------
REDEMPTION OF SHARES 44
---------------------------------------------------------------------------
MINIMUM ACCOUNT SIZE 46
---------------------------------------------------------------------------
PERFORMANCE 46
---------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 47
---------------------------------------------------------------------------
DISTRIBUTOR 49
---------------------------------------------------------------------------
ADDITIONAL INFORMATION 50
---------------------------------------------------------------------------
</TABLE>
2
<PAGE>90
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospectus.
See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks current income by investing in the equity and debt securities
of companies in the utility industries. Long-term capital appreciation is a
secondary objective. The utility industries are comprised of companies
principally engaged (that is, at least 50% of a company's assets, gross income
or net profits results from utility operations or the company is regulated as a
utility by a government agency or authority) in the manufacture, production,
generation, transmission and sale of electric and gas energy and companies
principally engaged in the communications field, including entities such as
telephone, telegraph, satellite, microwave and other companies regulated by
governmental agencies as utilities that provide communication facilities for the
public benefit, but not including those in public broadcasting. Under normal
circumstances, the Fund will invest at least 65% of its assets in equity and
debt securities of companies in the utility industries and will concentrate in
excess of 25% of its assets in the securities of these companies. See
"Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. In
addition, a fifth Class, Class Z shares, which is offered pursuant to a separate
prospectus, is offered exclusively to (a) tax-exempt employee benefit and
retirement plans of Smith Barney Inc. ("Smith Barney") and its affiliates and
(b) unit investment trusts ("UITs") sponsored by Smith Barney and its
affiliates. See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% imposed at the time of purchase and are subject to
an annual service fee of 0.25% of the average daily net assets of the Class. The
initial sales charge may be reduced or waived for certain purchases. 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
3
<PAGE>91
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
made at net asset value with no sales charge, but will be subject to a
contingent deferred sales charge ("CDSC") of 1.00% on redemptions made within 12
months of purchase. See "Prospectus Summary--Reduced or No Initial Sales
Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year after
the date of purchase to zero. This CDSC may be waived for certain redemptions.
Class B shares are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.50% of the average daily net assets of the Class. The
Class B shares' distribution fee may cause that Class to have higher expenses
and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternative."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.45% of the average daily net assets of the Class C shares,
and investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months
of purchase. This CDSC may be waived for certain redemptions. The Class C
shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A shares. Purchases of Class C shares, which when
combined with current holdings of Class C shares of the Fund equal or exceed
$500,000 in the aggregate, should be made in Class A shares at net asset value
with no sales charge, and will be subject to a CDSC of 1.00% on redemptions made
within 12 months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
4
<PAGE>92
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
In deciding which Class of Fund shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an investment
alternative, Class B and Class C shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Fund. Any
investment return on these additional invested amounts may partially or wholly
offset the higher annual expenses of these Classes. Because the Fund's future
return cannot be predicted, however, there can be no assurance that this would
be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
C shares to investors with longer term investment outlooks.
Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to an initial sales charge, CDSC or service or
distribution fee. The maximum purchase amount for Class A shares is $4,999,999,
Class B shares is $249,999 and Class C shares is $499,999. There is no maximum
purchase amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases, 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 initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The $500,000 aggregate
investment may be met by adding the purchase to the net asset value of all Class
A shares held in funds sponsored by Smith Barney listed under "Exchange
Privilege." Class A share purchases may also be eligible for a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing expenses of
5
<PAGE>93
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
Class A shares will be lower than those for Class B and Class C shares,
purchasers eligible to purchase Class A shares at net asset value or at a
reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose of
the CDSC on the Class B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the Classes of
shares.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to participate in the
Smith Barney 401(k) Program, which is generally designed to assist plan sponsors
in the creation and operation of retirement plans under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as other types
of participant directed, tax-qualified employee benefit plans (collectively,
"Participating Plans"). Class A, Class B, Class C and Class Y shares are
available as investment alternatives for Participating Plans. See "Purchase of
Shares--Smith Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Smith Barney, a broker that clears securities transactions through Smith Barney
on a fully disclosed basis (an "Introducing Broker") or an investment dealer in
the selling group. Direct purchases by certain retirement plans may be made
through the Fund's transfer agent, The Shareholder Services Group, Inc.
("TSSG"), a subsidiary of First Data Corporation. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each account,
or $250 for an individual retirement account ("IRA") or a Self-Employed
Retirement Plan. Investors in Class Y shares may open an account for an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made for
all Classes. For participants in retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes is $25. The minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
6
<PAGE>94
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
investment requirement for all Classes through the Systematic Investment Plan
described below is $100. There is no minimum investment required in Class A for
unitholders who invest distributions from a UIT sponsored by Smith Barney. See
"Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares in an amount of at least $100. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE TRUST AND THE FUND Smith Barney Mutual Funds Management Inc.
("SBMFM"), serves as the Fund's investment adviser. SBMFM provides investment
advisory and management services to investment companies affiliated with Smith
Barney. SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of The Travelers Inc.
("Travelers"), a diversified financial services holding company engaged, through
its subsidiaries, principally in four business segments: Investment Services,
Consumer Finance Services, Life Insurance Services and Property & Casualty
Insurance Services.
SBMFM also serves as the Fund's administrator. The Boston Company Advisors,
Inc. ("Boston Advisors") serves as the Fund's sub-administrator. Boston Advisors
is a wholly owned subsidiary of The Boston Company, Inc. ("TBC"), which in turn
is a wholly owned subsidiary of Mellon Bank Corporation ("Mellon"). See
"Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds. Certain exchanges
may be subject to a sales charge differential. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund generally is quoted daily in
the financial section of most newspapers and is also available from Smith Barney
Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are declared
daily and paid monthly. Distributions of net realized capital gains are paid
annually, although distributions of short-term capital gains may be paid more
frequently than annually. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor,
7
<PAGE>95
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
in additional shares of the same Class at current net asset value. Shares
acquired by dividend and distribution reinvestments will not be subject to any
sales charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. Because the Fund concentrates its
investments in one sector, its portfolio may be subject to greater risk and
market fluctuations than a portfolio of securities representing a broader range
of investment alternatives. The Fund will be affected by general changes in
interest rates which will result in increases or decreases in the market value
of the debt securities held by the Fund; the market value of the debt securities
held by the Fund can be expected to vary inversely to changes in prevailing
interest rates. The Fund may invest up to 10% of its assets in lower-rated
fixed-income securities, which securities (a) will likely have some quality and
protective characteristics that, in the judgment of a rating organization, are
outweighed by large uncertainties or major risk exposures to adverse conditions
and (b) are predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the securities.
Certain of the investments held by the Fund and certain of the investment
strategies and techniques that the Fund may employ might expose it to certain
risks. The investments presenting the Fund with risks are low-rated securities,
as described above, foreign securities and non-publicly traded and illiquid
securities. The investment strategies and techniques presenting the Fund with
risks are entering in repurchase agreements, lending portfolio securities,
engaging in short sales against the box and entering into transactions involving
options and futures contracts. See "Investment Objectives and Management
Policies."
8
<PAGE>96
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Fund, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and, unless otherwise noted, the
Fund's operating expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None None None
Maximum CDSC
(as a percentage of original cost or redemption
proceeds, whichever is lower) None* 5.00% 1.00% None
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management fees 0.65% 0.65% 0.65% 0.65%
12b-1 fees*** 0.25 0.75 0.70 None
Other expenses**** 0.17 0.14 0.08 0.17
- --------------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.07% 1.54% 1.43% 0.82%
- --------------------------------------------------------------------------------------------
<FN>
* 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.
** The annual fund operating expenses for Class C shares have been restated to
reflect a reduction of the 12b-1 fee from 0.75% of average net assets to
0.70%.
*** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class C shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
**** For Class Y shares, "Other expenses" have been based on expenses incurred
by the Class A shares because Class Y shares were not available for
purchase prior to November 7, 1994.
</TABLE>
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in the
case of Class B, Class C and certain Class A shares the length of time the
shares are held and whether the shares are held through the Smith Barney 401(k)
Program. See "Purchase of Shares" and "Redemption of Shares." Smith Barney
receives an annual 12b-1 service fee of 0.25% of the value of average daily net
assets of Class A shares. Smith Barney also receives an annual 12b-1 fee of
0.75% of the value of average daily net assets of Class B shares, consisting of
a 0.50% distribution fee and a 0.25% service fee. In Class C shares, Smith
Barney receives an annual 12b-1 fee of 0.70% of the value of average daily net
assets of this Class, consisting of a 0.45% distribution fee and a 0.25% service
fee. "Other expenses" in the above table include fees for shareholder services,
custodial fees, legal and accounting fees, printing costs and registration fees.
9
<PAGE>97
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
EXAMPLE The following example is intended to assist an investor in
understanding the various costs that an investor in the Fund will bear directly
or indirectly. The example assumes payment by the Fund of operating expenses at
the levels set forth in the table above. See "Purchase of Shares," "Redemption
of Shares" and "Management of the Trust and the Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5.00% annual
return and (2) redemption at the end of each time
period:
Class A $ 60 $ 82 $106 $174
Class B 66 79 94 171
Class C 25 45 78 171
Class Y 8 26 46 101
An investor would pay the following expenses on the
same investment, assuming the same annual return
and no redemption:
Class A 60 82 106 174
Class B 16 49 84 171
Class C 15 45 78 171
Class Y 8 26 46 101
- --------------------------------------------------------------------------------------
<FN>
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
</TABLE>
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
10
<PAGE>98
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Except where otherwise noted, the following information has been audited by
Coopers & Lybrand L.L.P., independent accountants, whose report thereon appears
in the Fund's Annual Report dated July 31, 1994. The information set out below
should be read in conjunction with the financial statements and related notes
that also appear in the Fund's Annual Report, which is incorporated by reference
into the Statement of Additional Information.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94 7/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $ 15.97 $ 14.36
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.56 0.66
Net realized and unrealized gain/(loss) on investments (1.92) 1.72
- --------------------------------------------------------------------------------------
Total from investment operations (1.36) 2.38
- --------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.80) (0.63)
Distributions in excess of net investment income (0.03) (0.01)
Distributions from net realized capital gains (0.50) (0.13)
- --------------------------------------------------------------------------------------
Total distributions (1.33) (0.77)
- --------------------------------------------------------------------------------------
Net Asset Value, end of period $ 13.28 $ 15.97
- --------------------------------------------------------------------------------------
Total return++ (8.99)% 17.01%
- --------------------------------------------------------------------------------------
Ratios to average net assets/Supplemental Data:
Net assets, end of period (in 000's) $41,458 $53,856
Ratio of operating expenses to average net assets 1.07% 1.07%+
Ratio of net investment income to average net assets 5.54% 5.67%+
Portfolio turnover rate 28% 37%
- --------------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
+ Annualized.
++ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
</TABLE>
11
<PAGE>99
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR PERIOD YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
7/31/94 7/31/93 7/31/92# 2/28/92 2/28/91 2/28/90 2/28/89*
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of year $15.97 $14.83 $13.95 $13.21 $12.93 $12.09 $12.00
- ------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.75 0.79 0.35 0.82 0.88 0.87 0.64
Net realized and
unrealized
gain/(loss) on invest-
ments (2.19) 1.30 0.89 0.94 0.40 1.08 0.17
- ------------------------------------------------------------------------------------------------------------
Total from investment
operations (1.44) 2.09 1.24 1.76 1.28 1.95 0.81
- ------------------------------------------------------------------------------------------------------------
Less distributions:
Distributions from net
investment income (0.72) (0.79) (0.35) (0.84) (0.90) (0.90) (0.57)
Distributions in excess
of net investment
income (0.03) (0.01) -- -- -- -- --
Distributions from net
realized capital gains (0.50) (0.15) -- (0.15) (0.10) (0.21) (0.15)
Distributions from
capital -- -- (0.01) (0.03) -- -- --
- ------------------------------------------------------------------------------------------------------------
Total distributions (1.25) (0.95) (0.36) (1.02) (1.00) (1.11) (0.72)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value,
end of year $13.28 $15.97 $14.83 $13.95 $13.21 $12.93 $12.09
- ------------------------------------------------------------------------------------------------------------
Total return++ (9.52%) 14.69% 8.98% 13.63% 10.46% 16.34% 6.80%
- ------------------------------------------------------------------------------------------------------------
Ratios to average
net assets/
Supplemental Data:
Net assets, end of year
(in 000's) $1,822,546 $2,765,858 $1,721,312 $1,274,853 $707,272 $603,739 $416,320
Ratio of operating
expenses
to average net assets 1.54% 1.56% 1.57%+ 1.58% 1.65% 1.70% 1.77%+
Ratio of net investment
income to average
net assets 5.07% 5.17% 5.78%+ 6.04% 6.89% 6.83% 6.99%+
Portfolio turnover rate 28% 37% 10% 33% 31% 50% 46%
- ------------------------------------------------------------------------------------------------------------
<FN>
* The Fund commenced operations on March 28, 1988. On November 6, 1992 the Fund
commenced selling Class A shares and Class Z shares (previously designated as
Class C shares). Those shares in existence prior to November 6, 1992 were
designated as Class B shares.
+ Annualized.
++ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
# During the period from March 1, 1992 through July 31, 1992, the Fund changed
its fiscal year end to July 31. Prior to this, the Fund's fiscal year end was
February 28.
</TABLE>
12
<PAGE>100
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94 7/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $15.97 $15.17
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.73 0.35
Net realized and unrealized gain/(loss) on investments (2.17) 0.86
- -------------------------------------------------------------------------------------
Total from investment operations (1.44) 1.21
- -------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.72) (0.38)
Distributions in excess of net investment income (0.03) (0.01)
Distributions from net realized capital gains (0.50) (0.02)
- -------------------------------------------------------------------------------------
Total distributions (1.25) (0.41)
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $13.28 $15.97
- -------------------------------------------------------------------------------------
Total return++ (9.52)% 8.08%
- -------------------------------------------------------------------------------------
Ratios to average net assets/Supplemental Data:
Net assets, end of period (in 000's) $1,894 $ 252
Ratio of operating expenses to average net assets 1.48% 1.49%+
Ratio of net investment income to average net assets 5.13% 5.25%+
Portfolio turnover rate 28% 37%
- -------------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class C shares (previously designated as Class D
shares) on February 4, 1993.
+ Annualized.
++ Total return represents aggregate total return for the period indicated.
</TABLE>
Prior to November 7, 1994, the Fund did not offer Class Y shares and
accordingly, no comparable financial data is available at this time for that
Class.
13
<PAGE>101
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
INVESTMENT OBJECTIVE
The primary investment objective of the Fund is to provide current income.
Long-term capital appreciation is a secondary objective. The Fund's investment
objectives may be changed only with the approval of a majority of the Fund's
outstanding shares. There can be no assurance that the Fund will achieve its
investment objectives.
INVESTMENT POLICIES
The Fund seeks to achieve its objectives by investing in equity and debt
securities of companies in the utility industries. For purposes of this
Prospectus, the utility industries are deemed to be comprised of companies
principally engaged (that is, at least 50% of a company's assets, gross income
or net profits results from utility operations or the company is regulated as a
utility by a government agency or authority) in the manufacture, production,
generation, transmission and sale of electric and gas energy and companies
principally engaged in the communications field, including entities such as
telephone, telegraph, satellite, microwave and other companies regulated by
governmental agencies as utilities that provide communication facilities for the
public benefit, but not including those in public broadcasting. The Fund will
invest primarily in utility equity and debt securities that have a high expected
rate of return, as determined by the Fund's investment adviser, SBMFM. Under
normal market conditions, the Fund will invest at least 65% of its assets in
such securities. The Fund may invest up to 35% of its assets in equity and debt
securities of non-utility companies believed to afford a reasonable opportunity
for achieving the Fund's investment objectives. When SBMFM believes that market
conditions warrant, the Fund may adopt a temporary defensive posture and may
invest, without limit, in: debt securities (whether or not they are utility
securities) such as rated or unrated bonds, debentures and commercial paper,
United States government securities and money market instruments. The Fund may
invest up to 10% of its assets in securities rated BB or B by Standard & Poor's
Corporation ("S&P") or Ba or B by Moody's Investors Service, Inc. ("Moody's")
whenever SBMFM believes that the incremental yield on such securities is
advantageous to the Fund in comparison to the additional risk involved.
Securities rated BBB/Baa are considered medium grade obligations, neither highly
protected nor poorly secured. Interest payments and principal security of
BBB/Baa rated securities appear adequate for the present but certain protective
elements may be lacking or may be unreliable over any great length of time.
BBB/Baa rated securities lack outstanding investment characteristics and
14
<PAGE>102
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
may in fact have speculative characteristics. The yields on lower-rated fixed-
income securities generally are higher than the yields available on higher-rated
securities. See "Risk Factors and Special Considerations" below. In addition,
the Fund may enter into repurchase agreements.
INVESTMENT SECURITIES, STRATEGIES AND TECHNIQUES
The Fund has the ability to engage in a number of specialized investment
strategies and techniques designed to enable the Fund to achieve its investment
objectives. Included among these strategies are lending its portfolio
securities, selling securities "short against the box," writing covered call and
secured put options, as well as purchasing options on securities, purchasing and
selling interest rate futures contracts, options on futures contracts, stock
index put and call options and stock index futures contracts, each of which is
discussed below.
United States Government Securities. United States government securities
are obligations of, or guaranteed by, the United States government, its agencies
or instrumentalities ("U.S. government securities"). These include bills,
certificates of indebtedness, notes and bonds issued by the United States
Treasury or by agencies or instrumentalities of the United States government.
Some U.S. government securities, such as Treasury bills and bonds, are supported
by the full faith and credit of the United States; others, such as those of
Federal Home Loan Banks, are supported by the right of the issuer to borrow from
the United States Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the discretionary authority of the United
States government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. U.S. government securities generally do not
involve the credit risks associated with other types of interest-bearing
securities, although, as a result, the yields available from U.S. government
securities are generally lower than the yields available from interest-bearing
corporate securities.
Repurchase Agreements. The Fund may engage in repurchase agreements with
certain member banks of the Federal Reserve System and with certain dealers on
the Federal Reserve Bank of New York's list of reporting 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 fluctuations during the Fund's holding
15
<PAGE>103
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
period. The value of the underlying securities will be at least equal at all
times to the total amount of the repurchase obligation, including interest.
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 right 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 or Boston Advisors, acting under the
supervision of the Trust's Board of Trustees, reviews on an ongoing basis the
value of the collateral and creditworthiness of those banks and dealers with
which the Fund enters into repurchase agreements to evaluate potential risks.
Lending Portfolio Securities. The Fund is authorized to lend its portfolio
securities to brokers, dealers and other financial organizations. The Fund's
loans of securities will be collateralized by cash, letters of credit or U.S.
government securities that are maintained at all times in an amount at least
equal to the current market value of the loaned securities. By lending its
securities, the Fund seeks to generate income by continuing to receive interest
on the loaned securities, by investing the cash collateral in short-term
instruments or by obtaining yield in the form of interest paid by the borrower
when U.S. government securities are used as collateral.
Short Sales Against the Box. The Fund may make short sales (except to the
extent of 5% of the Fund's net assets) if at all times when a position is open,
the Fund owns the stock or owns preferred stock or debt securities convertible
or exchangeable without payment of further consideration for, securities of the
same issue as the securities sold short. Short sales of this kind are referred
to as "against the box." Short sales against the box are used to defer
recognition of capital gains or losses.
Options Activities. The Fund may write (that is, sell) call options
("calls") if the calls are covered throughout the life of the option. A call is
covered if the Fund (a) owns the optioned securities, (b) maintains in a
segregated account with the Trust's custodian, Boston Safe Deposit and Trust
Company ("Boston Safe"), cash, cash equivalents or U.S. government securities
with a value sufficient to meet the Fund's obligations under the call, or (c)
owns an offsetting call option. The aggregate value of the obligations
underlying calls on securities which are written by the Fund and covered with
cash, cash equivalents or U.S. government securities, together with the
aggregate value of
16
<PAGE>104
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the obligations underlying put options written by the Fund, will not exceed 50%
of the Fund's net assets. When the Fund writes a call, it receives a premium and
gives the purchaser the right to buy the underlying security at any time during
the call period (usually not more than nine months in the case of common stock
or fifteen months in the case of U.S. government securities) 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 calls on
securities. The Fund also may purchase and sell stock index calls which differ
from calls on individual securities in that they are settled in cash based on
the values of the securities in the underlying index, rather than by delivery of
the underlying securities. In writing a call on a stock index, the Fund receives
a premium and agrees that during the call period purchasers of a call, upon
exercise of the call, will receive an amount of cash if the closing level of the
stock index upon which the call is based is greater than the exercise price of
the call. When the Fund buys a call on a stock index, it pays a premium and
during the call period the Fund, upon exercise of the call, receives an amount
of cash if the closing level of the stock index upon which the call is based is
greater than the exercise price of the call.
The Fund may write and purchase put options ("puts"). When the Fund writes
a put, it receives a premium and gives the purchaser of the put the right to
sell the underlying 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 security at the exercise price at
any time during the option period. For the purchase of a put to be profitable,
the market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs, unless the put is
sold in a closing sale transaction; otherwise, the purchase of the put
effectively increases the cost of the security and thus reduces its yield. The
Fund also may purchase and sell stock index puts, which differ from puts on
individual securities in that they are settled in cash based on the values of
the securities in the underlying index, rather than by delivery of the
underlying securities. Purchase of a stock index put is designed to protect
against a decline in the value of the Fund's portfolio generally, rather than an
individual security in the portfolio. Stock index puts are sold primarily to
realize income from the premiums received on the sale of such options. If any
put is not exercised or sold, it will become worthless on its expiration date.
The Fund will not purchase puts or calls on securities if more than 5% of its
assets would be invested in premiums on puts and calls, not
17
<PAGE>105
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
including that portion of the premium which reflects the value of the securities
owned by the Fund and underlying a put at the time of purchase.
The Fund may write puts on securities 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 the
Fund, together with the aggregate value of the obligations underlying calls on
securities which are written by the Fund and covered with cash, cash equivalents
or U.S. government securities, will not exceed 50% of the Fund's net assets. The
Fund also may write "straddles," which are combinations of secured puts and
covered calls on the same 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 "Dividends,
Distributions and Taxes" below. The Fund will purchase and sell only options
which are listed on a national securities exchange and will write options only
through a national options clearing organization.
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. See the Statement of
Additional Information for a further discussion of risks involved in options
trading, and particular risks applicable to options trading on U.S. government
securities, including risks involved in options trading on Government National
Mortgage Association ("GNMA") certificates and the characteristics and risks of
stock index options transactions.
Futures Contracts--General. 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 Commission ("CFTC"), under which the Fund is excluded
from regulation as a "commodity pool." CFTC regulations require, among other
things, that (a) futures and related options be used solely for bona
18
<PAGE>106
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
fide hedging purposes (or that the underlying commodity value of the Fund's long
positions not exceed the sum of certain identified liquid investments) and (b)
the Fund not enter into futures and 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 by the Fund, an amount of cash and cash equivalents equal to the
market value of futures contracts purchased will be maintained in a segregated
account with Boston Safe. The Fund will engage only in futures contracts and
related options which are listed on a national commodities exchange.
Interest Rate Futures Contracts. The Fund may purchase and sell interest
rate futures contracts as a hedge against changes in interest rates. An interest
rate futures contract is an agreement between two parties to buy and sell a
security for a set price on a future date. Interest rate futures contracts are
traded on designated "contracts markets" which, through their clearing
corporations, guarantee performance of the contracts. Currently, there are
interest rate futures contracts based on securities such as long-term Treasury
bonds, Treasury notes, GNMA certificates and three-month Treasury bills.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into an interest rate futures
contract for the sale of securities has an effect similar to the actual sale of
securities, although sale of the interest rate 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, the Fund could, in lieu of disposing of its portfolio securities, enter
into interest rate futures contracts for the sale of similar long-term
securities. If interest rates increased and the value of the Fund's securities
declined, the value of the Fund's interest rate futures contracts would
increase, thereby protecting the Fund by preventing the net asset value from
declining as much as it otherwise would have declined. Similarly, entering into
interest rate futures contracts 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 interest rate 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 that it intends to purchase,
while continuing to hold higher-yielding short-term securities or waiting for
the long-term market to stabilize.
19
<PAGE>107
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund may purchase and sell listed put and call options on interest rate
futures contracts. An option on an interest rate futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in an
interest rate 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 interest rate futures position is accompanied by cash
representing the difference between the current market price of the interest
rate 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 interest rate
futures contract in the same manner as it purchases "protective puts" on
securities. The purchase of call options on interest rate futures contracts is
intended to serve the same purpose as the actual purchase of the futures
contract, and the Fund will set aside cash and cash equivalents sufficient to
purchase the amount of portfolio securities represented by the underlying
futures contracts. See "Options Activities" and "Dividends, Distributions and
Taxes."
Stock Index Futures Contracts. The Fund may purchase and sell stock index
futures contracts. These transactions, if any, by the Fund will be made solely
for the purpose of hedging against the effects of changes in the value of its
portfolio securities due to anticipated changes in market conditions and will be
made when the transactions are economically appropriate to the reduction of
risks inherent in the management of the Fund. A stock index futures contract is
an agreement under which two parties agree to take or make delivery of the
amount of cash based on the difference between the value of a stock index at the
beginning and at the end of the contract period. When the Fund enters into a
stock index futures contract, it must make an initial deposit, known as "initial
margin," as a partial guarantee of its performance under the contract. As the
value of the stock index fluctuates, either party to the contract is required to
make additional margin deposits, known as "variation margin," to cover any
additional obligation that it may have under the contract. The Fund may not at
any time commit more than 5% of its total assets to initial margin deposits on
futures contracts.
Successful use of stock index futures contracts by the Fund is subject to
certain special risk considerations. A liquid stock index futures market may not
be available when the Fund seeks to offset adverse market movements. In
addition, there may be an imperfect correlation between movements in the
20
<PAGE>108
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
securities included in the index and movements in the securities in the Fund.
Successful use of stock index futures contracts is further dependent on SBMFM's
ability to predict correctly movements in the direction of the stock markets and
no assurance can be given that its judgment in this respect will be correct.
Risks in the purchase and sale of stock index futures are further referred to in
the Statement of Additional Information.
Foreign Securities and American Depositary Receipts. The Fund may purchase
foreign securities or American Depositary Receipts ("ADRs"). ADRs are U.S.
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.
Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks include differences in accounting, auditing and financial reporting
standards, generally higher commission rates on foreign portfolio transactions,
the possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations, political instability which could
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. Additionally, dividends payable on foreign
securities may be subject to foreign taxes withheld prior to distribution.
Foreign securities often trade with less frequency and volume than domestic
securities and therefore may exhibit greater price volatility. Changes in
foreign exchange rates will affect the value of those securities which are
denominated or quoted in currencies other than the U.S. dollar. Many of the
foreign securities held by the Fund will not be registered with, nor will the
issuers thereof be subject to the reporting requirements of, the SEC.
Accordingly, there may be less publicly available information about the
securities and the foreign company or government issuing them than is available
about a domestic company or government entity. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payment positions.
Non-Publicly Traded and Illiquid Securities. The sale of securities that
are not publicly traded is typically restricted under the Federal securities
laws. As a result, the Fund may be forced to sell these securities at less than
fair market value or may not be able to sell them when SBMFM believes it
desirable to do so. The Fund's investments in illiquid securities are subject to
the risk that
21
<PAGE>109
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that the Fund deems representative of their value, the
value of the Fund's net assets could be adversely affected.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment restrictions with
respect to the Fund that may not be changed without approval of a majority of
the Fund's outstanding shares. The fundamental investment restrictions adopted
by the Trust prohibit the Fund from:
1. Purchasing the securities of any issuer (other than U.S. government
securities) if as a result more than 5% of the value of the Fund's total
assets would be invested in the securities of the issuer, except that up to
25% of the value of the Fund's total assets may be invested without regard
to this 5% limitation.
2. Purchasing more than 10% of the voting securities of any one issuer,
provided that this limitation shall not apply to investments in U.S.
government securities.
3. Purchasing securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts or related
options will not be deemed to be a purchase of securities on margin by the
Fund.
4. Making short sales of securities or maintaining a short position,
except to the extent of 5% of the Fund's net assets and except that the
Fund may engage in such activities without limit if, at all times when a
short position is open, the Fund owns an equal amount of the securities or
securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issuer as, and at least equal in
amount to, the securities sold short.
5. Borrowing money, including reverse repurchase agreements, except that
the Fund may borrow from banks for temporary or emergency (not leveraging)
purposes including the meeting of redemption requests that might otherwise
require the untimely disposition of securities, in an amount not exceeding
20% of the value of the Fund's total assets (including the amount borrowed)
valued at market less liabilities (not including the amount borrowed) at
the time the borrowing is made. Whenever borrow-
22
<PAGE>110
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ings exceed 5% of the value of the Fund's total assets, the Fund will not
make any additional investments.
6. Pledging, hypothecating, mortgaging or otherwise encumbering more than
10% of the value of the Fund's total assets as security for any
indebtedness. For purposes of this restriction (a) the deposit of assets in
escrow in connection with the writing of covered put or call options and
the purchase of securities on a when-issued or delayed-delivery basis and
(b) collateral arrangements with respect to (i) the purchase and sale of
stock options, options on foreign currencies and options on stock indexes
and (ii) initial or variation margin for futures contracts will not be
deemed to be pledges of the Fund's assets.
7. Investing in commodities, except that the Fund may purchase or write
futures contracts and options on futures contracts as described in this
Prospectus.
8. Making loans to others, except through the purchase of qualified debt
obligations, loans of portfolio securities and the entry into repurchase
agreements.
9. Concentrating in any industry, except that the Fund will concentrate in
excess of 25% of its assets in the securities of companies within the
utility industries.
In addition, the Fund will not purchase restricted securities, illiquid
securities (such as repurchase agreements with maturities in excess of seven
days) or other securities that are not readily marketable if more than 10% of
the total assets of the Fund would be invested in such securities.
Certain other investment restrictions, including fundamental restrictions
as well as restrictions that may be changed without a shareholder vote, adopted
by the Trust are described in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
Securities and commodities transactions on behalf of the Fund will be
executed by a number of brokers and dealers, including Smith Barney and certain
of its affiliated brokers. The Fund may use Smith Barney or a Smith Barney-
affiliated broker in connection with a purchase or sale of securities when SBMFM
believes that the charge for the transaction does not exceed usual and customary
levels. The Fund also 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 Fund commodity commissions at rates
23
<PAGE>111
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
comparable to those charged by Smith Barney to its most favored clients for
comparable trades in comparable accounts.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves special considerations, such as those
described below:
General. Investment in the Fund may involve above-average risk of loss
because of, among other things, the Fund's use of strategies and techniques that
may be considered to be speculative. The strategy followed by the Fund and
certain of the strategies and techniques used by the Fund depend on forecasts
made by Greenwich Street Advisors that may or may not prove to be correct.
Low-Rated Securities. Low-rated and comparable unrated securities (a) will
likely have some quality and protective characteristics that, in the judgment of
the rating organization, are outweighed by large uncertainties or major risk
exposures to adverse conditions and (b) are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the securities.
While the market values of low-rated and comparable unrated securities tend
to react less to fluctuations in interest rate levels than the market values of
higher-rated securities, the market values of certain low-rated and comparable
unrated securities also tend to be more sensitive to individual corporate
development and changes in economic conditions than higher-rated securities. In
addition, low-rated securities and comparable unrated securities generally
present a higher degree of credit risk. Issuers of low-rated and comparable
unrated securities are often highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because low-rated and comparable unrated
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. The Fund may incur additional expenses to the
extent it is required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings. The existence of limited
markets for low-rated and comparable unrated securities may diminish the Fund's
ability to (a) obtain accurate market quotations for purposes of valuing such
securities and calculating its net asset value and (b) sell the securities at
fair value either to meet redemption requests or to respond to changes in the
economy or in the financial markets.
24
<PAGE>112
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
thus resulting in a decreased return to the Fund.
The market for certain low-rated and comparable unrated securities is
relatively new and has not fully weathered a major economic recession. Any such
economic downturn could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
Investment in Utility Securities. Because the Fund concentrates its
investments in one sector, its portfolio may be subject to greater risk and
market fluctuations than a portfolio of securities representing a broader range
of investment alternatives. The Fund is particularly subject to risks that are
inherent to the utility industries that make up this sector, including
difficulty in obtaining an adequate return on invested capital, difficulty in
financing large construction programs during an inflationary period,
restrictions on operations and increased cost and delays attributable to
environmental considerations and regulation, difficulty in raising capital in
adequate amounts on reasonable terms in periods of high inflation and unsettled
capital markets, increased costs and reduced availability of certain types of
fuel, occasional reduced availability and high costs of natural gas for resales,
the effects of energy conservation, the effects of a national energy policy and
lengthy delays and greatly increased costs and other problems associated with
the design, construction, licensing, regulation and operation of nuclear
facilities for electric generation, including, among other considerations, the
problems associated with the use of radioactive materials and the disposal of
radioactive wastes. There are substantial differences between the regulatory
practices and policies of various jurisdictions, and any given regulatory agency
may make major shifts in policy from time to time. There is no assurance that
regulatory authorities will grant rate increases in the future or that such
increases will be adequate to permit the payment of dividends on common stocks.
Additionally, existing and possible future regulatory legislation may make it
even more difficult for these utilities to obtain adequate relief. Certain of
the issuers of securities held by the Fund may own or operate nuclear generating
facilities. Governmental authorities may from time to time review existing
policies, and impose additional requirements governing the licensing,
construction and operation of nuclear power plants.
25
<PAGE>113
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Each of the risks referred to above could adversely affect the ability and
inclination of public utilities to declare or pay dividends and the ability of
holders of common stock to realize any value from the assets of the issuer upon
liquidation or bankruptcy. All of the utilities which are issuers of the
securities held by the Fund have been experiencing one or more of these problems
in varying degrees. Moreover, price disparities within selected utility groups
and discrepancies in relation to averages and indices have occurred frequently
for reasons not directly related to the general movements or price trends of
utility common stocks. Causes of these discrepancies include changes in the
overall demand for and supply of various securities (including the potentially
depressing effect of new stock offerings), and changes in investment objectives,
market expectations or cash requirements of other purchasers and sellers of
securities.
Interest Rate Risk. The Fund will be affected by general changes in
interest rates which will result in increases or decreases in the market value
of the debt securities held by the Fund. The market value of the debt securities
held by the Fund can be expected to vary inversely to changes in prevailing
interest rates.
Options on Securities. Because option premiums paid by the Fund are small
in relation to the market value of the investments underlying the options,
buying put options can result in large amounts of leverage. The leverage offered
by trading in options could cause the Fund's net asset value to be subject to
more frequent and wider fluctuation than would be the case if the Fund did not
invest in options.
No assurance can be given that the Fund will be able to effect closing
transactions at a time when it wishes to do so. If the Fund cannot enter into a
closing transaction, the Fund will continue to be subject to the risk that a put
option it has purchased will decline in value or become worthless as a result of
any increase in the value of the underlying security. The Fund also could face
higher transaction costs, including brokerage commissions.
Lending of Portfolio Securities. The risk associated with lending
portfolio securities, as with other extensions of credit, consists of possible
loss of rights in the collateral should the borrower fail financially.
Short Sales. Possible losses from short sales differ from losses that
could be incurred from a purchase of a security, because losses from short sales
may be unlimited, whereas losses from purchases can equal only the total amount
invested.
26
<PAGE>114
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Futures Transactions. The use of futures contracts as a hedging device
involves several risks. No assurance can be given that a correlation will exist
between price movements in the stock index and price movements in the securities
that are the subject of the hedge; the risk of imperfect correlation increases
as the composition of the securities held by the Fund diverges from the
securities included in the applicable stock index. Positions in futures
contracts may be closed out only on the exchange on which they were entered into
(or through a linked exchange) and no secondary market exists for those
contracts. In addition, although the Fund intends to enter into futures
contracts only if an active market exists for the contracts, no assurance can be
given that an active market will exist for the contracts at any particular time.
Certain exchanges do not permit trading in particular contracts at prices that
represent a fluctuation in price during a single day's trading beyond a certain
set limit. If prices fluctuate during a single day's trading beyond those
limits, the Fund could be prevented from promptly liquidating unfavorable
positions and thus be subjected to losses. Losses incurred in hedging
transactions and the costs of these transactions will affect the Fund's
performance. Successful use of stock index futures by the Fund for hedging
purposes is subject to the ability of SBMFM to correctly predict movements in
the direction of the stock market.
- --------------------------------------------------------------------------------
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of
regular trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number of
shares of the Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfolio
securities which are traded primarily on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair market value of
those securities will be determined by consideration of other factors by or
under the direction of the Board of Trustees or its delegates. A security that
is traded primarily on an exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Over-
27
<PAGE>115
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
VALUATION OF SHARES (CONTINUED)
the-counter securities are valued on the basis of the bid price at the close of
business on each day. Investments in U.S. government securities (other than
short-term securities) are valued at the average of the quoted bid and asked
prices in the over-the-counter market. Short-term investments that mature in 60
days or less are valued at amortized cost whenever the Trustees determine that
amortized cost reflects fair value of those investments. An option generally is
valued at the last sale price or, in the absence of the last sale price, the
last offer price. The value of a futures contract equals the unrealized gain or
loss on the contract, which is determined by marking the contract to the current
settlement price for a like contract acquired on the day on which the stock
index futures contract is being valued. A settlement price may not be used if
the market makes a limited move with respect to a particular commodity or if the
underlying securities market experiences significant price fluctuations after
the determination of the settlement price. In such event, the futures contract
will be valued at a fair market price to be determined by or under the direction
of the Board of Trustees. Further information regarding the Trust's valuation
policies with respect to the Fund is contained in the Statement of Additional
Information.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions of
capital gains payable to shareholders.
If a shareholder does not otherwise instruct, 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. Dividends from net
investment income, if any, of the Fund will be declared each day that the Trust
is open for business and will be paid on the last day of the Smith Barney
statement month. Distributions of any net long-term capital gains earned by the
Fund will be made annually after the close of the fiscal year in which they are
earned. Distributions of short-term capital gains may be paid more frequently
with dividends from net investment income. In order to avoid the application of
a 4% nondeductible excise tax measured with respect to certain undistributed
amounts of ordinary income and capital gains, the Fund may make such additional
distributions as may be necessary to avoid the application of this tax.
28
<PAGE>116
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his or
her shares. Pursuant to the requirements of the Investment Company Act of 1940,
as amended (the "1940 Act") and other applicable laws, a notice will accompany
any distribution paid from sources other than net investment income. In the
event the Fund distributes amounts in excess of its net investment income and
net realized capital gains, such distributions may have the effect of decreasing
the Fund's total assets, which may increase the Fund's expense ratio.
The per share dividends on Class B and Class C shares may be lower than the
per share dividends on Class A and Y shares principally as a result of the
distribution fee applicable with respect to Class B and Class C shares. The per
share dividends on Class A shares of the Fund may be lower than the per share
dividends on Class Y shares principally as a result of the service fee
applicable to Class A shares. Distributions of capital gains, if any, will be in
the same amount for Class A, Class B, Class C and Class Y shares.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a "regulated investment company" under the Code. To meet
those requirements, the Fund may need to restrict the degree to which it engages
in short-term trading, short sales of securities and transactions in options. If
the Fund qualifies as a regulated investment company and meets certain
distribution requirements, the Fund will not be subject to Federal income tax on
its net investment income and net capital gains that it distributes to its
shareholders.
Dividends paid by the Fund from investment income and distributions of
short-term capital gain will be taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in
additional shares. Distributions of long-term capital gain will be taxable to
shareholders as long-term capital gain, whether paid in cash or reinvested in
additional shares, and regardless of the length of time the investor has held
his or her shares of the Fund. Generally, dividends of investment income (to the
29
<PAGE>117
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
extent derived from most types of dividends from domestic corporations) from the
Fund will qualify for the Federal dividends-received deduction for corporate
shareholders. Each shareholder of the Fund will receive a statement annually
from the Trust, which will set forth separately the aggregate dollar amount of
dividends and capital gains distributed to the shareholder by the Fund with
respect to the prior calendar year and the amount of the distributions that
qualifies for the dividends-received deduction.
Shareholders should consult their tax advisors about the status of the
Fund's dividends and distributions for Federal, state and local tax liabilities.
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
GENERAL
The Fund offers five Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or a CDSC
and are available only to investors investing a minimum of $5,000,000. Class Z
shares are offered without a sales charge, CDSC, or service or distribution fee,
exclusively to: (a) tax-exempt employee benefit and retirement plans of Smith
Barney and its affiliates and (b) certain UITs sponsored by Smith Barney and its
affiliates. Investors meeting either of these criteria who are interested in
acquiring Class Z shares should contact a Smith Barney Financial Consultant for
a Class Z Prospectus. See "Prospectus Summary--Alternative Purchase
Arrangements" for a discussion of factors to consider in selecting which Class
of shares to purchase.
Purchases of Fund shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group, except for investors purchasing shares of the Fund through a
qualified retirement plan who may do so directly through TSSG. When purchasing
shares of the Fund, investors must specify whether the purchase is for Class A,
Class B, Class C or Class Y shares. No maintenance fee will be charged by the
Fund in connection with a brokerage account through which an investor purchases
or holds shares.
30
<PAGE>118
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Investors in Class A, Class B and Class C shares may open an account by
making an initial investment of at least $1,000 for each account, or $250 for an
IRA or a Self-Employed Retirement Plan in the Fund. Investors in Class Y shares
may open an account by making an initial investment of $5,000,000. Subsequent
investments of at least $50 may be made for all Classes. For participants in
retirement plans qualified under Section 403(b)(7) or Section 401(a) of the
Code, the minimum initial investment requirement for Class A, Class B and Class
C shares and the subsequent investment requirement for all Classes in the Fund
is $25. For the Fund's Systematic Investment Plan, the minimum initial
investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes is $100. There are no minimum
investment requirements for Class A shares for employees of Travelers and its
subsidiaries, including Smith Barney, Trustees of the Trust and their spouses
and children and unitholders who invest distributions from a UIT sponsored by
Smith Barney. The Fund reserves the right to waive or change minimums, to
decline any order to purchase its shares and to suspend the offering of shares
from time to time. Shares purchased will be held in the shareholder's account by
the Fund's transfer agent, TSSG. Share certificates are issued only upon a
shareholder's written request to TSSG.
Purchase orders received by Smith Barney prior to the close of regular
trading on the NYSE, on any day the Fund calculates its net asset value, are
priced according to the net asset value determined on that day. Orders received
by dealers or Introducing Brokers prior to the close of regular trading on the
NYSE on any day the Fund calculates its net asset value, are priced according to
the net asset value determined on that day, provided the order is received by
Smith Barney prior to Smith Barney's close of business (the "trade date").
Payment for Fund shares is due on the fifth business day (the "settlement date")
after the trade date. The Fund anticipates that, in accordance with regulatory
changes, beginning on or about June 1, 1995, the settlement date will be the
third business day after the trade date.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or TSSG is authorized through
preauthorized transfers of $100 or more to charge the regular bank account or
other financial institution indicated by the shareholder on a monthly or
quarterly basis to provide systematic additions to the shareholder's Fund
31
<PAGE>119
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
account. A shareholder who has insufficient funds to complete the transfer will
be charged a fee of up to $25 by Smith Barney or TSSG. The Systematic Investment
Plan also authorizes Smith Barney to apply cash held in the shareholder's Smith
Barney brokerage account or redeem the shareholder's shares of a Smith Barney
money market fund to make additions to the account. Additional information is
available from the Fund or a Smith Barney Financial Consultant.
<TABLE>
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALERS
% OF % OF AMOUNT REALLOWANCE AS
AMOUNT OF INVESTMENT OFFERING PRICE INVESTED % OF OFFERING PRICE
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.50%
$25,000-$49,999 4.00% 4.21% 3.60%
$50,000-$99,999 3.50% 3.63% 3.15%
$100,000-$249,999 3.00% 3.09% 2.70%
$250,000-$499,999 2.00% 2.04% 1.80%
$500,000 and more * * *
------------------------------------------------------------------------------------------------
<FN>
* 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 without any initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12 months
of purchase. The CDSC on Class A shares is payable to Smith Barney, which
compensates Smith Barney Financial Consultants and other dealers whose
clients make purchases of $500,000 or more. The CDSC is waived in the same
circumstances in which the CDSC applicable to Class B and Class C shares is
waived. See "Deferred Sales Charge Alternatives" and "Waivers of CDSC."
</TABLE>
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.
The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the Fund made at one time by "any person," which includes
an individual, his or her spouse and children, or a trustee or other fiduciary
of a single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value of
all Class A shares held in funds sponsored by Smith Barney that are offered with
a sales charge listed under "Exchange Privilege."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales of Class A shares to Trustees
of
32
<PAGE>120
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
the Trust and employees of Travelers and its subsidiaries, or the spouses and
children of such persons (including the surviving spouse of a deceased Trustee
or employee, and retired Trustees or employees), or sales to any trust, pension,
profit-sharing or other benefit plan for such persons provided such sales are
made upon the assurance of the purchaser that the purchase is made for
investment purposes and that the securities will not be re-sold except through
redemption or repurchase; (b) offers of Class A shares to any other investment
company in connection with the combination of such company with the Fund by
merger, acquisition of assets or otherwise; (c) purchases of Class A shares by
any client of a newly employed Smith Barney Financial Consultant (for a period
up to 90 days from the commencement of the Financial Consultant's employment
with Smith Barney), on the condition the purchase of Class A shares is made with
the proceeds of the redemption of shares of a mutual fund which (i) was
sponsored by the Financial Consultant's prior employer, (ii) was sold to the
client by the Financial Consultant and (iii) was subject to a sales charge; (d)
shareholders who have redeemed Class A shares in the Fund (or Class A shares of
another fund of the Smith Barney Mutual Funds that are offered with a sales
charge equal to or greater than the maximum sales charge of the Fund) and who
wish to reinvest their redemption proceeds in the Fund, provided the
reinvestment is made within 60 calendar days of the redemption; (e) accounts
managed by registered investment advisory subsidiaries of Travelers; and (f)
investments from a UIT sponsored by Smith Barney. In order to obtain such
discounts, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase would qualify for the
elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregating
the dollar amount of the new purchase and the total asset value of all Class A
shares of the Fund and of funds sponsored by Smith Barney, which are offered
with a sales charge listed under "Exchange Privilege" then held by such person
and applying the sales charge applicable to such aggregate. In order to obtain
such discount, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
33
<PAGE>121
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares" and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer-or partnership-sanctioned plan meeting
certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that Smith
Barney will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A shares
at the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enable Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the members,
and must agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
34
<PAGE>122
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
LETTER OF INTENT
A Letter of Intent for amounts of $50,000 or more provides an opportunity
for an investor to obtain a reduced sales charge by aggregating investments over
a 13-month period, provided that the investor refers to such Letter when placing
orders. For purposes of a Letter of Intent, the "Amount of Investment" as
referred to in the preceding sales charge table includes purchases of all Class
A shares of the Fund and other funds of the Smith Barney Mutual Funds offered
with a sales charge over the 13-month period based on the total amount of
intended purchases plus the value of all Class A shares previously purchased and
still owned. An alternative is to compute the 13-month period starting up to 90
days before the date of execution of a Letter of Intent. Each investment made
during the period receives the reduced sales charge applicable to the total
amount of the investment goal. If the goal is not achieved within the period,
the investor must pay the difference between the sales charges applicable to the
purchases made and the charges previously paid, or an appropriate number of
escrowed shares will be redeemed. New Letters of Intent will be accepted
beginning January 1, 1995. Please contact a Smith Barney Financial Consultant or
TSSG to obtain a Letter of Intent application.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares which, when combined with Class A shares
offered with a sales charge currently held by an investor, equal or exceed
$500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the cost of the shares being redeemed or their net asset value at the time of
redemption. CDSC Shares that are redeemed will not be subject to a CDSC to the
extent that the value of such shares represents: (a) capital appreciation of
Fund assets; (b) reinvestment of dividends or capital gain distributions; (c)
with respect to Class B shares, shares redeemed more than five years after their
purchase; or (d) with respect to Class C shares and Class A shares that are CDSC
Shares, shares redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will
35
<PAGE>123
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
depend on the number of years since the shareholder made the purchase payment
from which the amount is being redeemed. Solely for purposes of determining the
number of years since a purchase payment, all purchase payments made during a
month will be aggregated and deemed to have been made on the last day of the
proceeding Smith Barney statement month. The following table sets forth the
rates of the charge for redemptions of Class B shares by shareholders, except in
the case of purchases by Participating Plans, as described below. See "Purchase
of Shares--Smith Barney 401(k) Program.
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ------------------------------------------------------------------------------
<S> <C>
First 5.00%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- -------------------------------------------------------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There also will be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend shares) owned
by the shareholder. Shareholders who held Class B shares of Smith Barney
Shearson Short-Term World Income Fund (the "Short-Term World Income Fund") that
were held on July 15, 1994 and who subsequently exchange those shares for Class
B shares of the Fund will be offered the opportunity to exchange all such Class
B shares for Class A shares of the Fund four years after the date on which those
shares were deemed to have been purchased. Holders of such Class B shares will
be notified of the pending exchange in writing approximately 30 days before the
fourth anniversary of the purchase date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the fourth anniversary
date. See "Prospectus Summary--Alternative Purchase Arrangements--Class B Shares
Conversion Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were
36
<PAGE>124
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
initially acquired in one of the other applicable Smith Barney Mutual Funds, and
Fund shares being redeemed will be considered to represent, as applicable,
capital appreciation or dividend and capital gain distribution reinvestments in
such other funds. For Federal income tax purposes, the amount of the CDSC will
reduce the gain or increase the loss, as the case may be, on the amount realized
on redemption. The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholders's shares at the time the withdrawal plan commences
(see below) (provided, however, that automatic cash withdrawals in amounts equal
to or less than 2.00% per month of the value of the shareholder's shares will be
permitted for withdrawal plans that were established prior to November 7, 1994);
(c) redemptions of shares within 12 months following the death or disability of
the shareholder; (d) redemption of shares made in connection with qualified
distributions from retirement plans or IRAs upon the attainment of age 59 1/2;
(e) involuntary redemptions; and (f) redemptions of shares in connection with a
combination of the Fund with any investment company by merger, acquisition of
assets or otherwise. In addition, a shareholder who has redeemed shares from
other funds of the Smith Barney Mutual Funds may, under certain circumstances,
reinvest all or part of the redemption proceeds within 60 days and receive pro
rata credit for any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by TSSG in the
37
<PAGE>125
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
case of all other shareholders) of the shareholder's status or holdings, as the
case may be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney 401(k)
Program, which is generally designed to assist plan sponsors in the creation and
operation of retirement plans under Section 401(a) of the Code. To the extent
applicable, the same terms and conditions are offered to all Participating Plans
in the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class B, Class C and Class
Y shares as investment alternatives under the Smith Barney 401(k) Program. Class
A, Class B and Class C shares acquired through the Smith Barney 401(k) Program
are subject to the same service and/or distribution fees as, but different sales
charge and CDSC schedules than, the Class A, Class B and Class C shares acquired
by other investors. Similar to those available to other investors, Class Y
shares acquired through the Smith Barney 401(k) Program are not subject to any
initial sales charge, CDSC or service or distribution fee. Once a Participating
Plan has made an initial investment in the Fund, all of its subsequent
investments in the Fund must be in the same Class of shares, except as otherwise
described below.
Class A Shares. Class A shares of the Fund are offered without any initial
sales charge to any Participating Plan that purchases from $500,000 to
$4,999,999 of Class A shares of one or more funds of the Smith Barney Mutual
Funds. Class A shares acquired through the Smith Barney 401(k) Program after
November 7, 1994 are subject to a CDSC of 1.00% of redemption proceeds, if the
Participating Plan terminates within four years of the date the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
Class B Shares. Class B shares of the Fund are offered to any
Participating Plan that purchases less than $250,000 of one or more funds of the
Smith Barney Mutual Funds. Class B shares acquired through the Smith Barney
401(k) Program are subject to a CDSC of 3.00% of redemption proceeds, if the
Participating Plan terminates within eight years of the date the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled in the Smith
Barney 401(k) Program, it will be offered the opportunity to exchange all of its
Class B shares for Class A shares of the Fund. Such Plans will be notified of
the pending exchange in writing approximately 60 days before the eighth
anniversary of the
38
<PAGE>126
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
enrollment date and, unless the exchange has been rejected in writing, the
exchange will occur on or about the eighth anniversary date. Once the exchange
has occurred, a Participating Plan will not be eligible to acquire additional
Class B shares of the Fund but instead may acquire Class A shares of the Fund.
If the Participating Plan elects not to exchange all of its Class B shares at
that time, each Class B share held by the Participating Plan will have the same
conversion feature as Class B shares held by other investors. See "Purchase of
Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares of the Fund are offered to any
Participating Plan that purchases from $250,000 to $499,999 of one or more funds
of the Smith Barney Mutual Funds. Class C shares acquired through the Smith
Barney 401(k) Program after November 7, 1994 are subject to a CDSC of 1.00% of
redemption proceeds, if the Participating Plan terminates within four years of
the date the Participating Plan first enrolled in the Smith Barney 401(k)
Program. In any year after the date a Participating Plan enrolled in the Smith
Barney 401(k) Program, if its total Class C holdings equal at least $500,000 as
of the calendar year-end, the Participating Plan will be offered the opportunity
to exchange all of its Class C shares for Class A shares of the Fund. Such Plans
will be notified in writing within 30 days after the last business day of the
calendar year, and unless the exchange offer has been rejected in writing, the
exchange will occur on or about the last business day of the following March.
Once the exchange has occurred, a Participating Plan will not be eligible to
acquire Class C shares of the Fund but instead may acquire Class A shares of the
Fund. Class C shares not converted will continue to be subject to the
distribution fee.
Class Y Shares. Class Y shares of the Fund are offered without any service
or distribution fees, sales charge or CDSC to any Participating Plan that
purchases $5,000,000 or more of Class Y shares of one or more funds of the Smith
Barney Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the extent that the net
asset value of the shares redeemed does not exceed the current net asset value
of the shares purchased through reinvestment of dividends or capital gain
distributions, plus (a) with respect to Class A and Class C shares, the current
net asset value of such shares purchased more than one year prior to redemption
and, with respect to Class B shares, the current net asset value of Class B
shares purchased more than eight years prior to the redemption, plus (b) with
respect to Class A and Class C shares, increases in the net asset value of the
shareholder's Class A or Class C shares above the purchase payments made during
the
39
<PAGE>127
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
preceding year and, with respect to Class B shares, increases in the net asset
value of the shareholder's Class B shares above the purchase payments made
during the preceding eight years. Whether or not the CDSC applies to a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to other shareholders, which depends on the number of
years since those shareholders made the purchase payment from which the amount
is being redeemed.
The CDSC will be waived on redemptions of CDSC Shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of: (a)
the retirement of an employee in the Participating Plan; (b) the termination of
employment of an employee in the Participating Plan; (c) the death or disability
of an employee in the Participating Plan; (d) the attainment of age 59 1/2 by an
employee in the Participating Plan; (e) hardship of an employee in the
Participating Plan to the extent permitted under Section 401(k) of the Code; or
(f) redemptions of shares in connection with a loan made by the Participating
Plan to an employee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program must purchase such shares directly from TSSG. For further
information regarding the Smith Barney 401(k) Program, investors should contact
a Smith Barney Financial Consultant.
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the
following funds of the Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence. Exchanges of Class A,
Class B and Class C shares are subject to minimum investment requirements and
all shares are subject to the other requirements of the fund into which
exchanges are made and a sales charge differential may apply.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney European Fund
40
<PAGE>128
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.-- Capital Appreciation Portfolio
Smith Barney Global Opportunities Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Income and Growth Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney World Funds, Inc.--International Balanced Portfolio
Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
* Smith Barney Funds, Inc.--Income Return Account Portfolio
Smith Barney Funds, Inc.--Monthly Payment Government Portfolio
+++ Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
Smith Barney Funds, Inc.--Utility Portfolio
Smith Barney Global Bond Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
* Smith Barney Limited Maturity Treasury Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Municipal Bond Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
* Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
41
<PAGE>129
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Massachusetts Municipals Fund
* Smith Barney Muni Funds--California Limited Term Portfolio
Smith Barney Muni Funds--California Portfolio
* Smith Barney Muni Funds--Florida Limited Term Portfolio
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
* Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New Jersey Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Ohio Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
Money Market Funds
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc.--Cash Portfolio
++ Smith Barney Money Funds, Inc.--Government Portfolio
*** Smith Barney Money Funds, Inc.--Retirement Portfolio
+++ Smith Barney Municipal Money Market Fund, Inc.
+++ Smith Barney Muni Funds--California Money Market Portfolio
+++ Smith Barney Muni Funds--New York Money Market Portfolio
- --------------------------------------------------------------------------------
[FN]
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A, Class B and Class Y shares of the
Fund. In addition, shareholders who own Class C shares of the Fund through
the Smith Barney 401(k) Program may exchange those shares for Class C
shares of this fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, shareholders who own Class C shares of the Fund through the
Smith Barney 401(k) Program may exchange those shares for Class C shares
of this fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
Class A Exchanges. Class A shares of Smith Barney Mutual Funds sold
without a sales charge or with a maximum sales charge of less than the maximum
charged by the Fund will be subject to the appropriate "sales charge
differential" upon the exchange of such shares for Class A shares of the Fund or
other funds sold with a higher sales charge. The "sales charge differential" is
limited to a percentage rate no greater than the excess of the sales charge rate
applicable to
42
<PAGE>130
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
purchases of shares of the mutual fund being acquired in the exchange over the
sales charge rate(s) actually paid on the mutual fund shares relinquished in the
exchange and on any predecessor of those shares. For purposes of the exchange
privilege, shares obtained through automatic reinvestment of dividends and
capital gain distributions are treated as having paid the same sales charges
applicable to the shares on which the dividends or distributions were paid;
however, except in the case of the Smith Barney 401(k) Program, if no sales
charge was imposed upon the initial purchase of the shares, any shares obtained
through automatic reinvestment will be subject to a sales charge differential
upon exchange.
Class B Exchanges. In the event a Class B shareholder (unless such
shareholder was a Class B shareholder of the Short-Term World Income Fund on
July 15, 1994) wishes to exchange all or a portion of his or her shares in any
of the funds imposing a higher CDSC than that imposed by the Fund, the exchanged
Class B shares will be subject to the higher applicable CDSC. Upon an exchange,
the new Class B shares will be deemed to have been purchased on the same date as
the Class B shares of the Fund that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed
to have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who wish to exchange
all or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Fund's performance and its shareholders. SBMFM may
determine that a pattern of frequent exchanges is excessive and contrary to the
best interests of the Fund's other shareholders. In this event, SBMFM will
notify Smith Barney and Smith Barney may, at its discretion, decide to limit
additional purchases and/or exchanges by a shareholder. Upon such a
determination, Smith Barney will provide notice in writing or by telephone to
the shareholder at least 15 days prior to suspending the exchange privilege and
during the 15-day period the shareholder will be required to (a) redeem his or
her shares in the Fund or (b) remain invested in the Fund or exchange into any
of the funds of the Smith Barney Mutual Funds ordinarily available, which
position the shareholder would be expected to maintain for a significant period
of time. All relevant factors will be considered in determining what constitutes
an abusive pattern of exchanges.
43
<PAGE>131
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
Exchanges will be processed at the net asset value next determined, plus
any applicable sales charge differential, after the redemption proceeds are
available. Redemption procedures discussed below are also applicable for
exchanging shares, and exchanges will be made upon receipt of all supporting
documents in proper form. If the account registration of the shares of the fund
being acquired is identical to the registration of the shares of the fund
exchanged, no signature guarantee is required. A capital gain or loss for tax
purposes will be realized upon the exchange, depending upon the cost or other
basis of shares redeemed. Before exchanging shares, investors should read the
current prospectus describing the shares to be acquired. The Fund reserves the
right to modify or discontinue exchange privileges upon 60 days' prior notice to
shareholders.
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the seventh day following receipt of
proper tender, except on any days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. The Fund anticipates that, in
accordance with regulatory changes, beginning on or about June 1, 1995, payment
will be made on the third business day after receipt of proper tender.
Generally, if the redemption proceeds are remitted to a Smith Barney brokerage
account, these funds will not be invested for the shareholder's benefit without
specific instruction and Smith Barney will benefit from the use of temporarily
uninvested funds. Redemption proceeds for shares purchased by check, other than
a certified or official bank check, will be remitted upon clearance of the
check, which may take up to ten days or more.
44
<PAGE>132
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Utilities Fund
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to TSSG together with the redemption request. Any signature
appearing on a redemption request, share certificate or stock power must be
guaranteed by an eligible guarantor institution such as a domestic bank, savings
and loan institution, domestic credit union, member bank of the Federal Reserve
System or member firm of a national securities exchange. TSSG may require
additional supporting documents for redemptions made by corporations, executors,
administrators, trustees or guardians. A redemption request will not be deemed
properly received until TSSG receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $100 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the 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 shareholder's shares subject to the
45
<PAGE>133
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
CDSC.) For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
- --------------------------------------------------------------------------------
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
this Fund, each account must satisfy the minimum account size.) The Fund,
however, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid automatic redemption.
- --------------------------------------------------------------------------------
PERFORMANCE
YIELD
From time to time, the Fund advertises the 30-day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30-day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the Class
during the period by the maximum offering price per share on the last day of the
period. This income is "annualized" by assuming that the amount of income is
generated each month over a one-year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset value.
TOTAL RETURN
From time to time the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class C and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gains distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount invested
46
<PAGE>134
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PERFORMANCE (CONTINUED)
and subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return, which provides the ending redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return for each Class may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating
current dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other investment
vehicles. The Fund may also include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. and other financial publications. The
Fund will include performance data for Class A, Class B, Class C and Class Y
shares in any advertisement or information including performance data of the
Fund.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests
with the Trust's Board of Trustees. The Trustees approve all significant
agreements between the Trust and the companies that furnish services to the
Trust and the Fund, including agreements with the Fund's distributor, investment
adviser and administrator, sub-administrator, custodian and transfer agent. The
day-to-day operations of the Fund are delegated to the Fund's investment
adviser, administrator and sub-administrator. The Statement of Additional
Information contains background information regarding each Trustee and executive
officer of the Trust.
INVESTMENT ADVISER -- SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser pursuant to a transfer of the advisory agreement,
effective November 7, 1994, from its affiliate, Mutual Management
47
<PAGE>135
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
Corp. (Mutual Management Corp. and SBMFM are both wholly owned subsidiaries of
Holdings). Investment advisory services continue to be provided to the Fund by
the same portfolio managers who had provided services under the agreement with
Mutual Management Corp. SBMFM (through predecessor entities) has been in the
investment counseling business since 1934 and is a registered investment
adviser. SBMFM renders investment advice to investment companies that had
aggregate assets under management as of September 30, 1994 in excess of $52.4
billion.
Subject to the supervision and direction of the Fund's Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the Fund's investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities and employs professional portfolio managers and
securities analysts who provide research services to the Fund. For investment
advisory services rendered to the Fund, the Fund pays SBMFM a fee at the annual
rate of 0.45% of the value of the Fund's average daily net assets.
PORTFOLIO MANAGEMENT
Jack S. Levande, an Investment Officer of SBMFM, has served as Vice
President and Investment Officer of the Fund since it commenced operations and
manages the day-to-day operations of the Fund, including making all investment
decisions.
Management's discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended July 31, 1994 is
included in the Annual Report dated July 31, 1994. A copy of the Annual Report
may be obtained upon request without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
ADMINISTRATOR
SBMFM also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered to the Fund, the
Fund pays SBMFM a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets.
SUB-ADMINISTRATOR -- BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides investment
management, investment advisory and/or administrative services to investment
companies that had aggregate assets under management as of
48
<PAGE>136
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
September 30, 1994, in excess of $48.6 billion. Boston Advisors calculates the
net asset value of the Fund's shares and generally assists SBMFM in all aspects
of the Fund's administration and operation. Boston Advisors is paid a portion of
the fee paid by the Fund to SBMFM at a rate agreed upon from time to time
between Boston Advisors and SBMFM.
- --------------------------------------------------------------------------------
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid an annual service
fee with respect to Class A, Class B and Class C shares of the Fund at the
annual rate of 0.25% of the average daily net assets of the respective Class.
Smith Barney is also paid an annual distribution fee with respect to Class B and
Class C shares at the annual rate of 0.50% and 0.45%, respectively, of the
average daily net assets attributable to these Classes. Class B shares that
automatically convert to Class A shares eight years after the date of original
purchase will no longer be subject to distribution fees. The fees are used by
Smith Barney to pay its Financial Consultants for servicing shareholder accounts
and, in the case of Class B and Class C shares, to cover expenses primarily
intended to result in the sale of those shares. These expenses include:
advertising expenses; the cost of printing and mailing prospectuses to potential
investors; payments to and expenses of Smith Barney Financial Consultants and
other persons who provide support services in connection with the distribution
of shares; interest and/or carrying charge; and indirect and overhead costs of
Smith Barney associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
Actual distribution and shareholder service expenses for Class B and Class
C shares of the Fund for any given year may exceed the fees received pursuant to
the Plan and will be carried forward and paid by the Fund in future years so
long as the Plan is in effect. Interest is accrued monthly on such carryforward
amounts at a rate comparable to that paid by Smith Barney for bank borrowings.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
49
<PAGE>137
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
DISTRIBUTOR (CONTINUED)
time of sale and, with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Trust's Board of
Trustee's will evaluate the appropriateness of the Plan and its payment terms on
a continuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985 under the laws of the
Commonwealth of Massachusetts and is an entity commonly known as a
"Massachusetts business trust." The Trust offers shares of beneficial interest
of separate series having a $.001 per share par value. Shares of beneficial
interest of the Fund are currently classified into five Classes: A, B, C, Y and
Z. When matters are submitted for shareholder vote, shareholders of each Class
will have one vote for each full share owned and a proportionate, fractional
vote for any fractional share held of that Class. Generally, shares of the Trust
vote by individual fund on all matters except (a) matters affecting only the
interest of one or more of the funds, in which case only shares of the affected
fund or funds would be entitled to vote, or (b) when the 1940 Act requires that
shares of the funds be voted in the aggregate. Similarly, shares of the Fund
will be voted generally on a Fund-wide basis except matters affecting the
interests of one Class of shares.
Each Class of Fund shares represents identical interests in the Fund's
investment portfolio. As such, they have the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees, if any, borne by each Class; (d) the expenses allocable
exclusively to each Class; (e) voting rights on matters exclusively affecting a
single Class; (f) the exchange privilege of each Class; and (g) the conversion
feature of the Class B shares. The Trust's Board of Trustees does not anticipate
that there will be any conflicts among the interests of the holders of the
different Classes. The
50
<PAGE>138
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
Trustees, on an ongoing basis, will consider whether any such conflict exists
and, if so, take appropriate action.
The Trust does not hold annual shareholder meetings. There normally will be
no meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have been
elected by shareholders.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of Mellon, is located at One Boston Place, Boston, Massachusetts 02108, and
serves as custodian of the Trust's investments.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as the Trust's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, each of which includes a list of the investment securities held by the
Fund at the end of the reporting period. In an effort to reduce the Fund's
printing and mailing costs, the Trust plans to consolidate the mailing of the
Fund's semi-annual and annual reports by household. This consolidation means
that a household having multiple accounts with the identical address of record
will receive a single copy of each report. In addition, the Trust also plans to
consolidate the mailing of the Fund's Prospectus so that a shareholder having
multiple accounts (e.g., individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. Shareholders who do not
want this consolidation to apply to their accounts should contact their Smith
Barney Financial Consultants or the Fund's transfer agent.
------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Trust or the
distributor. This Prospectus does not constitute an offer by the Trust or the
distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
51
<PAGE>139
SMITH BARNEY
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A member of Travelers Group [tiny red umbrella]
SMITH BARNEY
UTILITIES FUND
288 Greenwich Street
New York, New York 10018
Fund 178, 175, 174, 210
Recycled
Recyclable FD229J4
