<PAGE>1
As filed with the Securities and Exchange Commission
on October 3, 1995
____________________________________________________________________
Registration No. 33-61409
____________________________________________________________________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 1 [ ] Post-Effective Amendment No.
Smith Barney Income Funds
(Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (800) 224-7523
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip code)
Christina T. Sydor, Esq.
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
copies to:
Burton M. Leibert, Esq. John E. Baumgardner, Jr., Esq.
Willkie Farr & Gallagher Sullivan & Cromwell
One Citicorp Center 125 Broad Street
153 East 53rd Street New York, New York 10004
New York, New York 10022
Approximate date of proposed public offering: As soon as possible after the
effective date of this Registration Statement.
______________________________________________________________________________
<PAGE>2
Registrant has registered an indefinite amount of securities pursuant to Rule
24f-2 under the Investment Company Act of 1940, as amended; accordingly, no
fee is payable herewith. Registrant's Rule 24f-2 Notice for the fiscal period
ended July 31, 1994 was electronically filed with the Securities and Exchange
Commission on September 30, 1994.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
<PAGE>3
SMITH BARNEY INCOME FUNDS
CONTENTS OF
REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents:
Front Cover
Contents Page
Cross Reference Sheet
Letter to Shareholders
Notice of Special Meeting
Part A - Prospectus/Proxy Statement
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>4
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
and May 25, 1995
<PAGE>5
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
and May 25, 1995
Item 13. Additional Not Applicable
Information About
the Company Being
Acquired
<PAGE>6
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>7
[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>8
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>9
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>10
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>11
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>12
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>13
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>14
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
and May 25, 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 a Prospectus Supplement
dated June 26, 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>15
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>16
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>17
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>18
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>19
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>20
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>21
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 AND MAY 25, 1995, AND THE PROSPECTUS OF THE
ACQUIRED FUND DATED APRIL 28, 1995, AS SUPPLEMENTED BY A PROSPECTUS SUPPLEMENT
DATED JUNE 26, 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>22
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>23
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>24
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>25
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>26
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>27
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>28
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>29
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>30
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>31
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>32
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>33
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>34
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>35
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>36
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>37
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>38
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>39
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>40
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>41
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>42
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>43
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>44
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>45
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>46
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>47
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>48
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>49
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>50
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>51
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>52
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>53
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>54
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>55
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>56
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>57
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>58
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>59
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>60
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 a
Prospectus Supplement dated June 26, 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 a Prospectus
Supplement dated May 22, 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>61
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>62
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>63
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>64
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>65
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>66
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>67
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>68
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>69
(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>70
(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>71
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>72
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>73
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>74
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>75
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>76
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>77
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>78
(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>79
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>80
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>81
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>82
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>83
PROSPECTUS OF
SMITH BARNEY UTILITIES FUND
DATED NOVEMBER 7, 1994
AS SUPPLEMENTED BY PROSPECTUS SUPPLEMENTS
DATED MAY 22, 1995 AND MAY 25, 1995
<PAGE>84
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>85
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>86
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
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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
------------
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
<PAGE>140
STATEMENT OF ADDITIONAL INFORMATION 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 Statement of Additional Information, relating specifically to
the proposed transfer of all or substantially all of the assets of the Utility
Portfolio (the "Acquired Fund") of Smith Barney Funds, Inc. to 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, consists of this cover page and the following described
documents, each of which accompanies this Statement of Additional Information
and is incorporated herein by reference.
1. Statement of Additional Information of Smith Barney Utilities Fund
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>141
This Statement of Additional Information is not a prospectus. A
Prospectus/Proxy Statement, dated October 3, 1995, relating to the above-
referenced matter may be obtained without charge by calling or writing either
the Acquiring Fund or the Acquired Fund at the telephone numbers or addresses
set forth above or by contacting any Smith Barney Financial Consultant or by
calling toll-free (800) 224-7523. This Statement of Additional Information
should be read in conjunction with the Prospectus/Proxy Statement dated
October 3, 1995.
The date of this Statement of Additional Information is
October 3, 1995.
<PAGE>142
STATEMENT OF ADDITIONAL INFORMATION
OF
SMITH BARNEY UTILITIES FUND
DATED NOVEMBER 7, 1994
AS SUPPLEMENTED ON MAY 22, 1995
<PAGE>143
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>144
Smith Barney
INCOME FUNDS
388 Greenwich Street
New York, New York 10013
(212) 723-9218
STATEMENT OF ADDITIONAL INFORMATION NOVEMBER 7, 1994
This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectuses of Smith Barney Income
Funds (the "Trust"), relating to eight investment funds offered by the
Trust (the "Funds"), each dated November 7, 1994, as amended or supple-
mented from time to time, and should be read in conjunction with the Pro-
spectuses. The Prospectuses may be obtained from any Smith Barney Finan-
cial Consultant or by writing or calling the Trust at the address or tele-
phone number set forth above. This Statement of Additional Information,
although not in itself a prospectus, is incorporated by reference into the
Prospectuses in its entirety.
CONTENTS
For ease of reference, the same section headings are used in both the Pro-
spectuses and this Statement of Additional Information, except where shown
below:
Management of the Trust and the Funds 2
Investment Objectives and Management Policies 7
Purchase of Shares 27
Redemption of Shares 28
Distributor 29
Valuation of Shares 32
Exchange Privilege 33
Performance Data (See in the Prospectuses "Performance") 34
Taxes (See in the Prospectuses "Dividends, Distributions and Taxes") 39
Additional Information 43
Financial Statements 43
Appendix A-1
MANAGEMENT OF THE TRUST AND THE FUND
The executive officers of the Trust are employees of certain of the orga-
nizations that provide services to the Trust. These organizations are the
following:
<TABLE>
<CAPTION>
NAME SERVICE
<S> <C>
Smith Barney Inc. Distributor
("Smith Barney")
Smith Barney Mutual Funds Management Inc. Investment adviser to Convertible,
("SBMFM") High Income, Diversified Strate-
gic Income, Tax- Exempt Income,
Utilities and Exchange Reserve
Funds
Smith Barney Strategy Advisers Inc. Investment adviser to Premium Total
("Strategy Advisers") Return Fund
Smith Barney Global Capital Management Inc. Investment adviser to Global Bond
("Global Capital Management") Fund and sub-investment adviser to
Diversified Strategic Income Fund
SBMFM Administrator
<PAGE>145
The Boston Company Advisors, Inc. Sub-Administrator
("Boston Advisors")
Boston Safe Deposit and Trust Company Custodian
("Boston Safe")
The Shareholder Services Group, Inc.
("TSSG"), a subsidiary of First Data
Corporation Transfer Agent
</TABLE>
These organizations and the functions they perform for the Trust are dis-
cussed in the Prospectuses and in this Statement of Additional Informa-
tion.
TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST
The Trustees and executive officers of the Trust, together with informa-
tion as to their principal business occupations during the past five
years, are shown below. The executive officers of the Trust are employees
of organizations that provide services to the Funds. Each Trustee who is
an "interested person" of the Trust, as defined in the Investment Company
Act of 1940, as amended (the "1940 Act"), is indicated by an asterisk.
Lee Abraham, Trustee. Retired; formerly Chairman and Chief Executive Of-
ficer of Associated Merchandising Corporation, a major retail merchandis-
ing and sourcing organization. His address is 1440 Broadway, Suite 1001,
New York, New York 10018.
Antoinette C. Bentley, Trustee. Retired; formerly Senior Vice President
and Associate General Counsel of Crum and Forster, Inc., an insurance
holding company. Her address is 24 Fowler Road, Far Hills, New Jersey
07931.
Allan J. Bloostein, Trustee. Consultant; formerly Vice Chairman of the
Board of and Consultant to The May Department Stores Company; Director of
Crystal Brands, Inc., Melville Corp. and R.G. Barry Corp. His address is
Anderson Road, Sherman, Connecticut 06784.
Richard E. Hanson, Jr., Trustee. Headmaster, The Peck School, Morristown,
NJ; prior to July 1, 1994, Headmaster, Lawrence Country Day School-
Woodmere Academy, Woodmere, New York; prior to July 1, 1990, Headmaster of
Woodmere Academy. His address is 247 South Street, Morristown, New Jersey
07960.
*Heath B. McLendon, Chairman of the Board and Investment Officer. Execu-
tive Vice President of Smith Barney and Chairman of the Board of Smith
Barney Strategy Advisers Inc.; prior to July 1993, Senior Executive Vice
President of Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers"),
Vice Chairman of Shearson Asset Management; a Director of PanAgora Asset
Management, Inc. and PanAgora Asset Management Limited. His address is 388
Greenwich Street, New York, New York 10013.
Madelon DeVoe Talley, Trustee. Author; Governor at Large of the National
Association of Securities Dealers, Inc. Her address is 876 Park Avenue,
New York, New York 10021.
Stephen J. Treadway, President. Executive Vice President and Director of
Smith Barney; Director and President of Mutual Management Corp. and SBMFM
and Trustee of Corporate Realty Income Trust I. His address is 388 Green-
wich Street, New York, New York 10013.
Richard P. Roelofs, Executive Vice President. Managing Director of Smith
Barney; President of Smith Barney Strategy Advisers Inc.; prior to July
1993, Senior Vice President of Shearson Lehman Brothers and Vice President
of Shearson Lehman Investment Strategy Advisors Inc., an investment advi-
sory affiliate of Shearson Lehman Brothers. His address is 388 Greenwich
Street, New York, New York 10013.
John C. Bianchi, Vice President and Investment Officer. Managing Director
of SBMFM; prior to July 1993, Managing Director of Shearson Lehman Advi-
sors. His address is 388 Greenwich Street, New York, New York 10013.
<PAGE>146
James E. Conroy, Vice President and Investment Officer. Managing Director
of SBMFM; prior to July 1993, Managing Director of Shearson Lehman Advi-
sors. His address is 388 Greenwich Street, New York, New York 10013.
Victor S. Filatov, Investment Officer. International Strategist and Presi-
dent of Global Capital Management; prior to November 1993, Business Coor-
dinator and Head of European Fixed Income Research of J.P. Morgan Securi-
ties Inc. His address is 10 Piccadilly, London, W1V 9LA, England.
John B. Fullerton, Sr., Investment Administrator. Vice President of Boston
Advisors; Senior Vice President of The Boston Company Institutional Inves-
tors, Inc. His address is 100 Drake's Landing Road, Greenbrae, California
94904.
Jack S. Levande, Vice President and Investment Officer. Managing Director
of SBMFM; prior to July 1993, Managing Director of Shearson Lehman Advi-
sors. His address is 388 Greenwich Street, New York, New York 10013.
Karen Mahoney-Malcomson, Investment Officer. Vice President of SBMFM;
prior to July 1993, Vice President of Shearson Lehman Advisors. Her ad-
dress is 388 Greenwich Street, New York, New York 10013.
Lawrence T. McDermott, Vice President and Investment Officer. Managing Di-
rector of SBMFM; prior to July 1993, Managing Director of Shearson Lehman
Advisors. His address is 388 Greenwich Street, New York, New York 10013.
Evelyn R. Robertson, Investment Officer. Vice President and Portfolio Man-
ager of SBMFM; prior to July 1993, Vice President of Shearson Lehman Advi-
sors. Her address is 388 Greenwich Street, New York, New York 10013.
Harry Rosenbluth, Investment Administrator. Vice President of Boston Advi-
sors; Senior Vice President of The Boston Company Institutional Investors,
Inc. His address is 100 Drake's Landing Road, Greenbrae, California 94904.
Phyllis M. Zahorodny, Vice President and Investment Officer. Managing Di-
rector of SBMFM; prior to July 1993, Managing Director of Shearson Lehman
Advisors. Her address is 388 Greenwich Street, New York, New York 10013.
Patricia Zuch, Investment Administrator. Vice President of Boston Advi-
sors. Her address is 100 Drake's Landing Road, Greenbrae, California
94904.
Lewis E. Daidone, Treasurer. Managing Director and Chief Financial Officer
of Smith Barney; Director and Senior Vice President of SBMFM. His address
is 388 Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary. Managing Director of Smith Barney; General
Counsel and Secretary of SBMFM. Her address is 388 Greenwich Street, New
York, New York 10013.
Each Trustee also serves as a director, trustee and/or general partner of
certain other mutual funds for which Smith Barney serves as distributor.
Global Capital Management, SBMFM and Strategy Advisers (the "Advisers")
are "affiliated persons" of the Trust as defined in the 1940 Act by virtue
of their positions as investment advisers to the Funds. As of October 31,
1994, the Trustees and officers of the Funds, as a group, owned less than
1% of the outstanding shares of beneficial interest of each Fund.
No officer, director or employee of Smith Barney or any Smith Barney par-
ent or subsidiary receives any compensation from the Trust for serving as
an officer or Trustee of the Trust. The Trust pays each Trustee who is not
an officer, director or employee of Smith Barney or any of their affili-
ates a fee of $10,000 per annum plus $1,500 per meeting attended and reim-
burses them for travel and out-of-pocket expenses. For the fiscal year
ended July 31, 1994, such fees and expenses totalled $115,411.
INVESTMENT ADVISERS, SUB-INVESTMENT ADVISER, ADMINISTRATOR, AND SUB-
ADMINISTRATOR
Each Adviser serves as investment adviser to one or more Funds pursuant to
a separate written agreement with the relevant Fund (an "Advisory Agree-
<PAGE>147
ment"). SBMFM serves as investment adviser to its relevant Funds pursuant
to a transfer of the investment advisory agreement, effective November 7,
1994, from its affiliate, Mutual Management Corp. (Mutual Management Corp.
and SBMFM are both wholly owned subsidiaries of Smith Barney Holdings Inc.
("Holdings")). Strategy Advisers is a wholly owned subsidiary of Holdings
and Global Capital Management is an indirect wholly owned subsidiary of
Holdings. Holdings is a wholly owned subsidiary of The Travelers Inc. The
Advisory Agreements were most recently approved by the Board of Trustees,
including a majority of the Trustees who are not "interested persons" of
the Trust or the Advisers ("Independent Trustees"), on August 10, 1994,
with the exception of Premium Total Return Fund and Global Bond Fund,
which were approved on April 4, 1994 and January 20,1994, respectively.
SBMFM also serves as administrator to each Fund pursuant to a separate
written agreement dated May 4, 1994 (the "Administration Agreement") which
was most recently approved by the Board of Trustees, including a majority
of the Independent Trustees, on August 10, 1994. Global Capital Management
also serves as sub-investment adviser to Diversified Strategic Income
Fund, pursuant to a written agreement dated March 21, 1994 which was ap-
proved by the Fund's Board of Trustees, including a majority of the Inde-
pendent Trustees, on January 20, 1994 and by the Fund's shareholders on
April 29, 1994. Prior to March 21, 1994, Lehman Brothers Global Asset Man-
agement Limited ("LBGAM") acted in the capacity as the Fund's sub-
investment adviser.
Boston Advisors serves as sub-administrator to the Funds pursuant to a
written agreement (the "Sub-Administration Agreement") dated May 4, 1994,
which was most recently approved by the Trust's Board of Trustees, includ-
ing the Independent Trustees, on May 4, 1994. Prior to that date, Boston
Advisors served as administrator to the Funds, and prior to April 4, 1994,
also served as investment advisor to Premium Total Return Fund. Boston Ad-
visors is a wholly owned subsidiary of The Boston Company, Inc. ("TBC"), a
financial services holding company, which is in turn an indirect wholly
owned subsidiary of Mellon Bank Corporation ("Mellon").
Certain of the services provided to the Trust by the Advisers, Global Cap-
ital Management, SBMFM and Boston Advisors are described in the Prospec-
tuses under "Management of the Trust and the Fund." Each Adviser, SBMFM,
as administrator, and Boston Advisors, as sub-administrator, pay the sala-
ries of all officers and employees who are employed by both it and the
Trust, and maintain office facilities for the Trust. In addition to those
services, Boston Advisors pays the salaries of all officers and employees
who are employed by both it and the Trust, maintains office facilities for
the Trust, furnishes the Trust with statistical and research data, cleri-
cal help and accounting, data processing, bookkeeping, internal auditing
and legal services and certain other services required by the Trust, pre-
pares reports to the Funds' shareholders and prepares tax returns, reports
to and filings with the Securities and Exchange Commission (the "SEC") and
state Blue Sky authorities. The Advisers, Global Capital Management, SBMFM
and Boston Advisors bear all expenses in connection with the performance
of their services.
For the fiscal years ended July 31, 1992, 1993 and 1994, the Funds paid
investment advisory fees to their respective Advisers as follows:
<TABLE>
<CAPTION>
FUND 1992 1993 1994
<S> <C> <C> <C>
Premium Total Return Fund $ 2,776,638 $4,803,717 $8,506,930
Tax-Exempt Income Fund 2,884,333 3,978,637 4,561,779
Convertible Fund 305,154 329,323 425,505
Global Bond Fund 301,528 356,324 466,389
High Income Fund 1,313,890 2,659,448 3,771,643
Diversified Strategic Income Fund 3,346,434 6,226,342 8,761,857
Utilities Fund 4,272,080 10,317,792 10,896,883
Exchange Reserve Fund 970,662 612,812 622,203
</TABLE>
For the fiscal years ended July 31, 1992, 1993 and 1994, the Funds paid
administrative fees to Boston Advisors or SBMFM as follows:
<PAGE>148
<TABLE>
<CAPTION>
BOSTON ADVISORS SBMFM
FOR THE FISCAL FOR THE FISCAL
PERIOD FROM PERIOD FROM
8/1/93 THROUGH 5/4/94 THROUGH
FUND 1992 1993 5/3/94 7/31/94
<S> <C> <C> <C> <C>
Premium Total Return
Fund $ 1,009,687 $1,746,806 $2,639,140 $454,284
Tax-Exempt Income Fund 1,442,166 1,989,319 1,971,064 309,826
Convertible Fund 122,062 131,729 145,717 24,485
Global Bond Fund 100,509 118,434 134,269 21,556
High Income Fund 525,556 1,063,779 1,297,678 210,979
Diversified Strategic
Income Fund 1,912,279 3,557,910 4,289,630 717,145
Utilities Fund 1,898,703 4,584,796 4,256,098 586,961
Exchange Reserve Fund 647,081 408,842 341,472 73,330
</TABLE>
For the fiscal years ended July 31, 1992, 1993 and the period ended March
20, 1994, Diversified Strategic Income Fund paid LBGAM $956,195,
$1,778,955 and $1,562,892, respectively, in sub- investment advisory fees.
For the period from March 21, 1994 through July 31, 1994, Diversified
Strategic Income Fund paid Global Capital Management $940,496 in sub-
investment advisory fees.
Each Adviser, SBMFM, as administrator, and Boston Advisors, as sub-
administrator, have agreed that if in any fiscal year the aggregate ex-
penses of the Fund that it serves (including fees payable pursuant to its
Advisory Agreement and Administration Agreement, but excluding interest,
taxes, brokerage, distribution and service fees and, if permitted by the
relevant state securities commission, extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over the Fund, the Ad-
viser, SBMFM and Boston Advisors will, to the extent required by state
law, reduce their fees by the amount of such excess expenses, such amount
to be allocated between them in the proportion that their respective fees
bear to the aggregate of the fees paid by the Fund. Such fee reduction, if
any, will be estimated and reconciled on a monthly basis. The most re-
strictive state expense limitation applicable to any Fund is 2.5% of the
first $30 million of the Fund's average daily net assets, 2% of the next
$70 million of the average daily net assets and 1.5% of the remaining av-
erage daily net assets of each Fund. No such fee reduction was required
for the fiscal years ended July 31, 1992, 1993 and 1994.
The Fund bears expenses incurred in its operation, including: taxes, in-
terest, brokerage fees and commissions, if any; fees of Trustees who are
not officers, directors, shareholders or employees of Smith Barney, SBMFM
or Boston Advisors; SEC fees and state Blue Sky qualification fees;
charges of custodians; transfer and dividend disbursing agent fees; cer-
tain insurance premiums; outside auditing and legal expenses; costs of
maintaining corporate existence; costs of investor services (including al-
located telephone and personnel expenses); costs of preparing and printing
of prospectuses for regulatory purposes and for distribution to existing
shareholders; costs of shareholders' reports and shareholder meetings; and
meetings of the officers or Board of Trustees of the Trust.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as legal counsel to the Trust. The Trust-
ees who are not "interested persons" of the Fund have selected Stroock &
Stroock & Lavan as their legal counsel.
KPMG Peat Marwick LLP, independent accountants, 345 Park Avenue, New York,
New York 10154. serve as auditors of the Trust and will render an opinion
on the Trust's financial statements annually. Prior to October 20, 1994,
Coopers & Lybrand L.L.P., independent accountants, served as auditors of
the Trust and rendered an opinion on the Trust's financial statements for
the fiscal year ended July 31, 1994.
In the interest of economy and convenience, certificates representing
shares in the Trust are not physically issued except upon specific request
<PAGE>149
made by a shareholder to TSSG. TSSG maintains a record of each sharehold-
er's ownership of Trust shares. Shares do not have cumulative voting
rights, which means that holders of more than 50% of the shares voting for
the election of Trustees can elect all of the Trustees. Shares are trans-
ferable but have no preemptive or subscription rights. Shareholders gener-
ally vote by Fund, except with respect to the election of Trustees and the
selection of independent public accountants.
Massachusetts law provides that, under certain circumstances, shareholders
could be held personally liable for the obligations of the Trust. However,
the Trust Agreement disclaims shareholder liability for acts or obliga-
tions of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the
Trust or a Trustee. The Trust Agreement provides for indemnification from
the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability
is limited to circumstances in which the Trust would be unable to meet its
obligations, a possibility that the Trust's management believes is remote.
Upon payment of any liability incurred by the Trust, the shareholder pay-
ing the liability will be entitled to reimbursement from the general as-
sets of the Trust. The Trustees intend to conduct the operations of the
Trust in such a way so as to avoid, as far as possible, ultimate liability
of the shareholders for liabilities of the Trust.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Prospectuses discuss the investment objectives of the Funds and the
policies to be employed to achieve those objectives. This section contains
supplemental information concerning the types of securities and other in-
struments in which the Funds may invest, the investment policies and port-
folio strategies that the Funds may utilize and certain risks attendant to
such investments, policies and strategies.
U.S. Government Securities (All Funds). United States government securi-
ties include debt obligations of varying maturities issued or guaranteed
by the United States government or its agencies or instrumentalities
("U.S. government securities"). U.S. government securities include not
only direct obligations of the United States Treasury, but also securities
issued or guaranteed by the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("GNMA"), General
Services Administration, Central Bank for Cooperatives, Federal Intermedi-
ate Credit Banks, Federal Land Banks, Federal National Mortgage Associa-
tion ("FNMA"), Maritime Administration, Tennessee Valley Authority, Dis-
trict of Columbia Armory Board, Student Loan Marketing Association, Inter-
national Bank for Reconstruction and Development and Resolution Trust
Corporation. Certain U.S. government securities, such as those issued or
guaranteed by GNMA, FNMA and Federal Home Loan Mortgage Corporation
("FHLMC"), are mortgage-related securities. Because the United States gov-
ernment is not obligated by law to provide support to an instrumentality
that it sponsors, a Fund will invest in obligations issued by such an in-
strumentality only if its Adviser determines that the credit risk with re-
spect to the instrumentality does not make its securities unsuitable for
investment by the Fund.
Bank Obligations (All Funds). Domestic commercial banks organized under
Federal law are supervised and examined by the Comptroller of the Currency
and are required to be members of the Federal Reserve System and to be in-
sured by the Federal Deposit Insurance Corporation (the "FDIC"). Domestic
banks organized under state law are supervised and examined by state bank-
ing authorities but are members of the Federal Reserve System only if they
elect to join. Most state banks are insured by the FDIC (although such in-
surance may not be of material benefit to a Fund, depending upon the prin-
cipal amount of certificates of deposit ("CDs") of each held by the Fund)
and are subject to Federal examination and to a substantial body of Fed-
eral law and regulation. As a result of Federal and state laws and regula-
tions, domestic branches of domestic banks are, among other things, gener-
ally required to maintain specified levels of reserves, and are subject to
other supervision and regulation designed to promote financial soundness.
Obligations of foreign branches of U.S. banks, such as CDs and time depos-
<PAGE>150
its ("TDs"), may be general obligations of the parent bank in addition to
the issuing branch, or may be limited by the terms of a specific obliga-
tion and governmental regulation. Obligations of foreign branches of U.S.
banks and foreign banks are subject to different risks than are those of
U.S. banks or U.S. branches of foreign banks. These risks include foreign
economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the obliga-
tions, foreign exchange controls and foreign withholding and other taxes
on interest income. Foreign branches of U.S. banks are not necessarily
subject to the same or similar regulatory requirements that apply to U.S.
banks, such as mandatory reserve requirements, loan limitations and ac-
counting, auditing and financial recordkeeping requirements. In addition,
less information may be publicly available about a foreign branch of a
U.S. bank than about a U.S. bank. CDs issued by wholly owned Canadian sub-
sidiaries of U.S. banks are guaranteed as to repayment of principal and
interest, but not as to sovereign risk, by the U.S. parent bank.
Obligations of U.S. branches of foreign banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by
the terms of a specific obligation and by Federal and state regulation as
well as governmental action in the country in which the foreign bank has
its head office. A U.S. branch of a foreign bank with assets in excess of
$1 billion may or may not be subject to reserve requirements imposed by
the Federal Reserve System or by the state in which the branch is located
if the branch is licensed in that state. In addition, branches licensed by
the Comptroller of the Currency and branches licensed by certain states
("State Branches") may or may not be required to: (a) pledge to the regu-
lator by depositing assets with a designated bank within the state, an
amount of its assets equal to 5% of its total liabilities; and (b) main-
tain assets within the state in an amount equal to a specified percentage
of the aggregate amount of liabilities of the foreign bank payable at or
through all of its agencies or branches within the state. The deposits of
State Branches may not necessarily be insured by the FDIC. In addition,
there may be less publicly available information about a U.S. branch of a
foreign bank than about a U.S. bank.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign banks and foreign branches of U.S. banks, a Fund's
Adviser will carefully evaluate such investments on a case-by-case basis.
Exchange Reserve Fund may purchase a CD issued by a bank, savings and loan
association or other banking institution with less than $1 billion in as-
sets (a "Small Issuer CD") so long as the issuer is a member of the FDIC
or Office of Thrift Supervision and is insured by the Savings Association
Insurance Fund ("SAIF") and so long as the principal amount of the Small
Issuer CD is fully insured and is no more than $100,000. Exchange Reserve
Fund will at any one time hold only one Small Issuer CD from any one is-
suer.
Savings and loan associations whose CDs may be purchased by the Funds are
members of the Federal Home Loan Bank and are insured by the SAIF. As a
result, such savings and loan associations are subject to regulation and
examination.
When-Issued Securities and Delayed-Delivery Transactions (Global Bond,
High Income, Premium Total Return, Diversified Strategic Income and Tax-
Exempt Income Funds). To secure an advantageous price or yield, these
Funds may purchase certain securities on a when-issued basis or purchase
or sell securities for delayed delivery. A Fund will enter into such
transactions for the purpose of acquiring portfolio securities and not for
the purpose of leverage. Delivery of the securities in such cases occurs
beyond the normal settlement periods, but no payment or delivery is made
by a Fund prior to the reciprocal delivery or payment by the other party
to the transaction. In entering into a when-issued or delayed- delivery
transaction, a Fund will rely on the other party to consummate the trans-
action and may be disadvantaged if the other party fails to do so.
U.S. government securities and Municipal Securities (as defined below)
normally are subject to changes in value based upon changes, real or an-
ticipated, in the level of interest rates and, although to a lesser extent
in the case of U.S. government securities, the public's perception of the
creditworthiness of the issuers. In general, U.S. government securities
<PAGE>151
and Municipal Securities tend to appreciate when interest rates decline
and depreciate when interest rates rise. Purchasing these securities on a
when-issued or delayed-delivery basis, therefore, can involve the risk
that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. Simi-
larly, the sale of U.S. government securities for delayed delivery can in-
volve the risk that the prices available in the market when the delivery
is made may actually be higher than those obtained in the transaction it-
self.
In the case of the purchase by a Fund of securities on a when-issued or
delayed-delivery basis, a segregated account in the name of the Fund con-
sisting of cash or liquid debt securities equal to the amount of the when-
issued or delayed-delivery commitments will be established at Boston Safe.
For the purpose of determining the adequacy of the securities in the ac-
counts, the deposited securities will be valued at market or fair value.
If the market or fair value of the securities declines, additional cash or
securities will be placed in the account daily so that the value of the
account will equal the amount of such commitments by the Fund involved. On
the settlement date, a Fund will meet its obligations from then-available
cash flow, the sale of securities held in the segregated account, the sale
of other securities or, although it would not normally expect to do so,
from the sale of the securities purchased on a when-issued or delayed-
delivery basis (which may have a value greater or less than the Fund's
payment obligations).
Lending of Portfolio Securities (Premium Total Return, Utilities, Convert-
ible, Global Bond, High Income and Diversified Strategic Income Fund-
s). These Funds have the ability to lend portfolio securities to brokers,
dealers and other financial organizations. Such loans, if and when made,
may not exceed 20% (33 1/3 % in the case of Diversified Strategic Income
Fund) of a Fund's total assets taken at value. A Fund will not lend port-
folio securities to Smith Barney unless it has applied for and received
specific authority to do so from the SEC. Loans of portfolio securities
will be collateralized by cash, letters of credit or U.S. government secu-
rities which are maintained at all times in an amount at least equal to
the current market value of the loaned securities. From time to time, a
Fund may pay a part of the interest earned from the investment of collat-
eral received for securities loaned to the borrower and/or a third party
which is unaffiliated with the Fund and is acting as a "finder."
By lending its securities, a Fund can increase its income by continuing to
receive interest on the loaned securities as well as by either investing
the cash collateral in short-term instruments or obtaining yield in the
form of interest paid by the borrower when U.S. government securities are
used as collateral. A Fund will comply with the following conditions when-
ever its portfolio securities are loaned: (a) the Fund must receive at
least 100% cash collateral or equivalent securities from the borrower; (b)
the borrower must increase such collateral whenever the market value of
the securities loaned rises above the level of such collateral; (c) the
Fund must be able to terminate the loan at any time; (d) the Fund must re-
ceive reasonable interest on the loan, as well as any dividends, interest
or other distributions on the loaned securities, and any increase in mar-
ket value; (e) the Fund may pay only reasonable custodian fees in connec-
tion with the loan; and (f) voting rights on the loaned securities may
pass to the borrower; provided, however, that if a material event ad-
versely affecting the investment in the loaned securities occurs, the
Trust's Board of Trustees must terminate the loan and regain the right to
vote the securities. The risks in lending portfolio securities, as with
other extensions of secured credit, consist of a possible delay in receiv-
ing additional collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially.
Loans will be made to firms deemed by each Fund's Adviser to be of good
standing and will not be made unless, in the judgment of the Adviser, the
consideration to be earned from such loans would justify the risk.
Options on Securities (Premium Total Return, Convertible, Global Bond, Di-
versified Strategic Income and High Income Funds). These Funds may engage
in transactions in options on securities, which, depending on the Fund,
may include the writing of covered put options and covered call options,
the purchase of put and call options and the entry into closing transac-
tions.
<PAGE>152
The principal reason for writing covered call options on securities is to
attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. Diversified Strategic Income
Fund, however, may engage in option transactions only to hedge against ad-
verse price movements in the securities that it holds or may wish to pur-
chase and the currencies in which certain portfolio securities may be de-
nominated. In return for a premium, the writer of a covered call option
forfeits the right to any appreciation in the value of the underlying se-
curity above the strike price for the life of the option (or until a clos-
ing purchase transaction can be effected). Nevertheless, the call writer
retains the risk of a decline in the price of the underlying security.
Similarly, the principal reason for writing covered put options is to re-
alize income in the form of premiums. The writer of a covered put option
accepts the risk of a decline in the price of the underlying security. The
size of the premiums that a Fund may receive may be adversely affected as
new or existing institutions, including other investment companies, engage
in or increase their option-writing activities.
Options written by a Fund normally will have expiration dates between one
and nine months from the date written. The exercise price of the options
may be below, equal to or above the market values of the underlying secu-
rities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money"
and "out-of-the-money," respectively. A Fund with option-writing authority
may write (a) in-the-money call options when its Adviser expects that the
price of the underlying security will remain flat or decline moderately
during the option period, (b) at-the-money call options when its Adviser
expects that the price of the underlying security will remain flat or ad-
vance moderately during the option period and (c) out-of-the-money call
options when its Adviser expects that the price of the underlying security
may increase but not above a price equal to the sum of the exercise price
plus the premiums received from writing the call option. In any of the
preceding situations, if the market price of the underlying security de-
clines and the security is sold at this lower price, the amount of any re-
alized loss will be offset wholly or in part by the premium received. Out-
of-the-money, at-the-money and in-the-money put options (the reverse of
call options as to the relation of exercise price to market price) may be
utilized in the same market environments that such call options are used
in equivalent transactions.
So long as the obligation of a Fund as the writer of an option continues,
the Fund may be assigned an exercise notice by the broker-dealer through
which the option was sold, requiring the Fund to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security
against payment of the exercise price. This obligation terminates when the
option expires or the Fund effects a closing purchase transaction. A Fund
can no longer effect a closing purchase transaction with respect to an op-
tion once it has been assigned an exercise notice. To secure its obliga-
tion to deliver the underlying security when it writes a call option, or
to pay for the underlying security when it writes a put option, a Fund
will be required to deposit in escrow the underlying security or other as-
sets in accordance with the rules of the Options Clearing Corporation (the
"Clearing Corporation") or similar foreign clearing corporation and of the
securities exchange on which the option is written.
The Global Bond and Diversified Strategic Income Funds may purchase and
<PAGE>153
sell put, call and other types of option securities that are traded on do-
mestic or foreign exchanges or the over-the-counter market including, but
not limited to, "spread" options, "knock-out" options, "knock-in" options
and "average rate" or "look-back" options.
"Spread" options are dependent upon the difference between the price of
two securities or futures contracts, "Knock-out" options are cancelled if
the price of the underlying asset reaches a trigger level prior to expira-
tion, "Knock-in" options only have value if the price of the underlying
asset reaches a trigger level and, "average rate" or "look-back" options
are options where at expiration, the option's strike price is set based on
either the average, maximum or minimum price of the asset over the period
of the option.
The Global Bond and Diversified Strategic Income Funds may utilize up to
15% of their assets to purchase options and may do so at or about the same
time that they purchase the underlying security or at a later time. In
purchasing options on securities, the Funds will trade only with counter-
parties of high status in terms of credit quality and commitment to the
market.
An option position may be closed out only where there exists a secondary
market for an option of the same series on a recognized securities ex-
change or in the over-the-counter market. In light of this fact and cur-
rent trading conditions, the Funds expect to purchase only call or put op-
tions issued by the Clearing Corporation. The Funds with option-writing
authority expect to write options only on U.S. securities exchanges, ex-
cept that the Global Bond and Diversified Strategic Income Funds also may
write options on foreign exchanges and in the over-the-counter market.
A Fund may realize a profit or loss upon entering into a closing transac-
tion. In cases in which a Fund has written an option, it will realize a
profit if the cost of the closing purchase transaction is less than the
premium received upon writing the original option and will incur a loss if
the cost of the closing purchase transaction exceeds the premium received
upon writing the original option. Similarly, when a Fund has purchased an
option and engages in a closing sale transaction, whether the Fund real-
izes a profit or loss will depend upon whether the amount received in the
closing sale transaction is more or less than the premium that the Fund
initially paid for the original option plus the related transaction costs.
Although a Fund generally will purchase or write only those options for
which its Adviser believes there is an active secondary market so as to
facilitate closing transactions, there is no assurance that sufficient
trading interest to create a liquid secondary market on a securities ex-
change will exist for any particular option or at any particular time, and
for some options no such secondary market may exist. A liquid secondary
market in an option may cease to exist for a variety of reasons. In the
past, for example, higher than anticipated trading activity or order flow,
or other unforeseen events, have at times rendered inadequate certain of
the facilities of the Clearing Corporation and U.S. and foreign securities
exchanges and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading
halts or suspensions in one or more options. There can be no assurance
that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it
might not be possible to effect closing transactions in particular op-
tions. If as a covered call option writer a Fund is unable to effect clos-
ing purchase transaction in a secondary market, it will not be able to
sell the underlying security until the option expires or it delivers the
underlying security upon exercise.
Securities exchanges generally have established limitations governing the
maximum number of calls and puts of each class which may be held or writ-
ten, or exercised within certain time periods, by an investor or group of
investors acting in concert (regardless of whether the options are written
on the same or different securities exchanges or are held, written or ex-
ercised in one or more accounts or through one or more brokers). It is
possible that the Funds with authority to engage in options transactions
and other clients of their respective Advisers and certain of their affil-
iates may be considered to be such a group. A securities exchange may
order the liquidation of positions found to be in violation of these lim-
its and it may impose certain other sanctions.
In the case of options written by a Fund that are deemed covered by virtue
of the Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stocks with respect to which the Fund
has written options may exceed the time within which the Fund must make
delivery in accordance with an exercise notice. In these instances, a Fund
may purchase or borrow temporarily the underlying securities for purposes
of physical delivery. By so doing, the Fund will not bear any market risk
because the Fund will have the absolute right to receive from the issuer
of the underlying security an equal number of shares to replace the bor-
rowed stock, but the Fund may incur additional transaction costs or inter-
est expenses in connection with any such purchase or borrowing.
<PAGE>154
Additional risks exist with respect to certain of the U.S. government se-
curities for which a Fund may write covered call options. If a Fund writes
covered call options on mortgage-backed securities, the securities that it
holds as cover may, because of scheduled amortization or unscheduled pre-
payments, cease to be sufficient cover. The Fund will compensate for the
decline in the value of the cover by purchasing an appropriate additional
amount of those securities.
Stock Index Options (Premium Total Return and Utilities Funds). The Pre-
mium Total Return and Utilities Funds may purchase and write put and call
options on U.S. stock indexes listed on U.S. exchanges for the purpose of
hedging its portfolio. A stock index fluctuates with changes in the market
values of the stocks included in the index. Some stock index options are
based on a broad market index such as the NYSE Composite Index or a nar-
rower market index such as the Standard & Poor's 100. Indexes also are
based on an industry or market segment such as the AMEX Oil and Gas Index
or the Computer and Business Equipment Index.
Options on stock indexes are similar to options on stock except that (a)
the expiration cycles of stock index options are monthly, while those of
stock options currently are quarterly, and (b) the delivery requirements
are different. Instead of giving the right to take or make delivery of
stock at a specified price, an option on a stock index gives the holder
the right to receive a cash "exercise settlement amount" equal to (a) the
amount, if any, by which the fixed exercise price of the option exceeds
(in the case of a put) or is less than (in the case of a call) the closing
value of the underlying index on the date of exercise, multiplied by (b) a
fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the stock index upon which the option is based being
greater than, in the case of a call, or less than, in the case of a put,
the exercise price of the option. The amount of cash received will be
equal to such difference between the closing price of the index and the
exercise price of the option expressed in dollars times a specified multi-
ple. The writer of the option is obligated, in return for the premium re-
ceived, to make delivery of this amount. The writer may offset its posi-
tion in stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
The effectiveness of purchasing or writing stock index options as a hedg-
ing technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price move-
ments of the stock index selected. Because the value of an index option
depends upon movements in the level of the index rather than the price of
a particular stock, whether the Premium Total Return and Utilities Funds
will realize a gain or loss from the purchase or writing of options on an
index depends upon movements in the level of stock prices in the stock
market generally or, in the case of certain indexes, in an industry or
market segment, rather than movements in the price of a particular stock.
Accordingly, successful use by a Fund of options on stock indexes will be
subject to its Adviser's ability to predict correctly movements in the di-
rection of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the
prices of individual stocks.
The Premium Total Return and Utilities Funds will engage in stock index
options transactions only when determined by their respective Advisers to
be consistent with the Funds' efforts to control risk. There can be no as-
surance that such judgment will be accurate or that the use of these port-
folio strategies will be successful. When a Fund writes an option on a
stock index, the Fund will establish a segregated account with Boston Safe
in an amount equal to the market value of the option and will maintain the
account while the option is open.
Mortgage-Related Securities (Diversified Strategic Income Fund). The av-
erage maturity of pass- through pools of mortgage-related securities var-
ies with the maturities of the underlying mortgage instruments. In addi-
tion, a pool's stated maturity may be shortened by unscheduled payments on
the underlying mortgages. Factors affecting mortgage prepayments include
the level of interest rates, general economic and social conditions, the
location of the mortgaged property and age of the mortgage. Because pre-
payment rates of individual pools vary widely, it is not possible to accu-
rately predict the average life of a particular pool. Common practice is
<PAGE>155
to assume that prepayments will result in an average life ranging from 2
to 10 years for pools of fixed-rate 30-year mortgages. Pools of mortgages
with other maturities or different characteristics will have varying aver-
age life assumptions.
Mortgage-related securities may be classified as private, governmental or
government-related, depending on the issuer or guarantor. Private
mortgage-related securities represent pass-through pools consisting prin-
cipally of conventional residential mortgage loans created by non-
governmental issuers, such as commercial banks, savings and loan associa-
tions and private mortgage insurance companies. Governmental mortgage- re-
lated securities are backed by the full faith and credit of the United
States. GNMA, the principal guarantor of such securities, is a wholly
owned United States government corporation within the Department of Hous-
ing and Urban Development. Government-related mortgage-related securities
are not backed by the full faith and credit of the United States govern-
ment. Issuers of such securities include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders,
which is subject to general regulation by the Secretary of Housing and
Urban Development. Pass-through securities issued by FNMA are guaranteed
as to timely payment of principal and interest by FNMA. FHLMC is a corpo-
rate instrumentality of the United States, the stock of which is owned by
the Federal Home Loan Banks. Participation certificates representing in-
terests in mortgages from FHLMC's national portfolio are guaranteed as to
the timely payment of interest and ultimate collection of principal by
FHLMC.
Private, U.S. governmental or government-related entities create mortgage
loan pools offering pass- through investments in addition to those de-
scribed above. The mortgages underlying these securities may be alterna-
tive mortgage instruments, that is, mortgage instruments whose principal
or interest payments may vary or whose terms to maturity may be shorter
than previously customary. As new types of mortgage-related securities are
developed and offered to investors, Diversified Strategic Income Fund,
consistent with its investment objective and policies, will consider mak-
ing investments in such new types of securities.
Currency Transactions (Global Bond, Diversified Strategic Income and High
Income Funds). The Funds' dealings in forward currency exchange transac-
tions will be limited to hedging involving either specific transactions or
portfolio positions. Transaction hedging is the purchase or sale of for-
ward currency contracts with respect to specific receivables or payables
of the Fund generally arising in connection with the purchase or sale of
its securities. Position hedging, generally, is the sale of forward cur-
rency contracts with respect to portfolio security positions denominated
or quoted in the currency. A Fund may not position hedge with respect to a
particular currency to an extent greater than the aggregate market value
at any time of the security or securities held in its portfolio denomi-
nated or quoted in or currently convertible (such as through exercise of
an option or consummation of a forward currency contract) into that par-
ticular currency, except that Global Bond Fund may utilize forward cur-
rency contracts denominated in the European Currency Unit to hedge portfo-
lio security positions when a security or securities are denominated in
currencies of member countries in the European Monetary System. If a Fund
enters into a transaction hedging or position hedging transaction, it will
cover the transaction through one or more of the following methods: (a)
ownership of the underlying currency or an option to purchase such cur-
rency; (b) ownership of an option to enter into an offsetting forward cur-
rency contract; (c) entering into a forward contract to purchase currency
being sold or to sell currency being purchased, provided that such cover-
ing contract is itself covered by any one of these methods unless the cov-
ering contract closes out the first contract; or (d) depositing into a
segregated account with the custodian or a sub-custodian of the Fund cash
or readily marketable securities in an amount equal to the value of the
Fund's total assets committed to the consummation of the forward currency
contract and not otherwise covered. In the case of transaction hedging,
any securities placed in the account must be liquid debt securities. In
any case, if the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account so
that the value of the account will equal the above amount. Hedging trans-
actions may be made from any foreign currency into dollars or into other
appropriate currencies.
<PAGE>156
At or before the maturity of a forward contract, a Fund either may sell a
portfolio security and make delivery of the currency, or retain the secu-
rity and offset its contractual obligation to deliver the currency by pur-
chasing a second contract pursuant to which the relevant Fund will obtain,
on the same maturity date, the same amount of the currency which it is ob-
ligated to deliver. If a Fund retains the portfolio security and engages
in an offsetting transaction, the Fund, at the time of execution of the
offsetting transaction, will incur a gain or loss to the extent movement
has occurred in forward contract prices. Should forward prices decline
during the period between a Fund's entering into a forward contract for
the sale of a currency and the date that it enters into an offsetting con-
tract for the purchase of the currency, the Fund will realize a gain to
the extent that the price of the currency it has agreed to sell exceeds
the price of the currency it has agreed to purchase. Should forward prices
increase, the Fund will suffer a loss to the extent the price of the cur-
rency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The cost to a Fund of engaging in currency transactions varies with fac-
tors such as the currency involved, the length of the contract period and
the market conditions then prevailing. Because transactions in currency
exchange are usually conducted on a principal basis, no fees or commis-
sions are involved. The use of forward currency contracts does not elimi-
nate fluctuations in the underlying prices of the securities, but it does
establish a rate of exchange that can be achieved in the future. In addi-
tion, although forward currency contracts limit the risk of loss due to a
decline in the value of the hedged currency, at the same time, they limit
any potential gain that might result should the value of the currency in-
crease.
If a devaluation is generally anticipated, the Global Bond, Diversified
Strategic Income and High Income Funds may not be able to contract to sell
the currency at a price above the devaluation level they anticipate.
Foreign Currency Options (Global Bond, Diversified Strategic Income and
High Income Funds) With the exception of High Income Fund which may only
purchase put and call options on foreign currencies, these Funds may pur-
chase or write put and call options on foreign currencies for the purpose
of hedging against changes in future currency exchange rates. Foreign cur-
rency options generally have three, six and nine month expiration cycles.
Put options convey the right to sell the underlying currency at a price
which is anticipated to be higher than the spot price of the currency at
the time the option expires. Call options convey the right to buy the un-
derlying currency at a price which is expected to be lower than the spot
price of the currency at the time that the option expires.
The Fund may use foreign currency options under the same circumstances
that it could use forward currency exchange transactions. A decline in the
dollar value of a foreign currency in which a Fund's securities are denom-
inated, for example, will reduce the dollar value of the securities, even
if their value in the foreign currency remains constant. In order to pro-
tect against such diminutions in the value of securities that it holds,
the Fund may purchase put options on the foreign currency. If the value of
the currency does decline, the Fund will have the right to sell the cur-
rency for a fixed amount in dollars and will thereby offset, in whole or
in part, the adverse effect on its securities that otherwise would have
resulted. Conversely, if a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby poten-
tially increasing the cost of the securities, the Fund may purchase call
options on the particular currency. The purchase of these options could
offset, at least partially, the effects of the adverse movements in ex-
change rates. The benefit to the Fund derived from purchases of foreign
currency options, like the benefit derived from other types of options,
will be reduced by the amount of the premium and related transaction
costs. In addition, if currency exchange rates do not move in the direc-
tion or to the extent anticipated, the Fund could sustain losses on trans-
actions in foreign currency options that would require it to forego a por-
tion or all of the benefits of advantageous changes in the rates.
Foreign Government Securities (Diversified Strategic Income and Global
<PAGE>157
Bond Funds). Among the foreign government securities in which these Funds
may invest are those issued by countries with developing economies, which
are countries in the initial stages of their industrialization cycles. In-
vesting in securities of countries with developing economies involves ex-
posure to economic structures that are generally less diverse and less ma-
ture, and to political systems that can be expected to have less stabil-
ity, than those of developed countries. The markets of countries with
developing economies historically have been more volatile than markets of
the more mature economies of developed countries, but often have provided
higher rates of return to investors.
Municipal Securities (Tax-Exempt Income Fund). Municipal securities gen-
erally are understood to include debt obligations issued to obtain funds
for various public purposes, including the construction of a wide range of
public facilities, refunding of outstanding obligations, payment of gen-
eral operating expenses and extensions of loans to public institutions and
facilities ("Municipal Securities"). Private activity bonds that are is-
sued by or on behalf of public authorities to finance privately operated
facilities are considered to be Municipal Securities if the interest paid
thereon qualifies as excluded from gross income (but not necessarily from
alternative minimum taxable income) for Federal income tax purposes in the
opinion of bond counsel to the issuer.
Municipal bonds may be issued to finance life care facilities. Life care
facilities are an alternative form of long-term housing for the elderly
which offer residents the independence of condominium life style and, if
needed, the comprehensive care of nursing home services. Bonds to finance
these facilities have been issued by various state industrial development
authorities. Because the bonds are secured only by the revenues of each
facility and not by state or local government tax payments, they are sub-
ject to a wide variety of risks, including a drop in occupancy levels, the
difficulty of maintaining adequate financial reserves to secure estimated
actuarial liabilities, the possibility of regulatory cost restrictions ap-
plied to health care delivery and competition from alternative health care
or conventional housing facilities.
Municipal leases are Municipal Securities that may take the form of a
lease or an installment purchase contract issued by state and local gov-
ernmental authorities to obtain funds to acquire a wide variety of equip-
ment and facilities such as fire and sanitation vehicles, computer equip-
ment and other capital assets. These obligations have evolved to make it
possible for state and local government authorities to acquire property
and equipment without meeting constitutional and statutory requirements
for the issuance of debt. Thus, municipal leases have special risks not
normally associated with municipal bonds. These obligations frequently
contain "non-appropriation" clauses providing that the governmental issuer
of the obligation has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
legislative body on a yearly or other periodic basis. In addition to the
"non-appropriation" risk, municipal leases represent a type of financing
that has not yet developed the depth of marketability associated with mu-
nicipal bonds; moreover, although the obligations will be secured by the
leased equipment, the disposition of the equipment in the event of fore-
closure might prove to be difficult. In order to limit the risks, Tax-
Exempt Income Fund proposes to purchase either (a) municipal leases rated
in the four highest categories by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P") or (b) unrated munic-
ipal leases purchased principally from domestic banks or other responsible
third parties which enter into an agreement with the Fund providing the
seller will either remarket or repurchase the municipal lease within a
short period after demand by the Fund.
Temporary Investments (Tax-Exempt Income Fund). When the Tax-Exempt In-
come Fund is maintaining a defensive position, the Fund may invest in
short-term investments ("Temporary Investments") consisting of: (a) the
following tax-exempt securities: (i) tax-exempt notes of municipal issuers
having, at the time of purchase, a rating of MIG 1 through MIG 4 by
Moody's or rated SP-1 or SP-2 by S&P or, if not rated, of issuers having
an issue of outstanding Municipal Securities rated within the four highest
grades by Moody's or S&P; (ii) tax-exempt commercial paper having, at the
time of purchase, a rating not lower than A-2 by S&P or Prime-2 by
Moody's; and (iii) variable rate demand notes rated at the time of pur-
chase within the two highest ratings by any major rating service or deter-
<PAGE>158
mined to be of comparable quality to instruments with such rating; and (b)
the following taxable securities: (i) U.S. government securities, includ-
ing repurchase agreements with respect to such securities; (ii) other debt
securities rated within the four highest grades by Moody's or S&P; (iii)
commercial paper rated in the highest grade by either of these rating ser-
vices; and (iv) certificates of deposit of domestic banks with assets of
$1 billion or more. Among the tax-exempt notes in which the Fund may in-
vest are Tax Anticipation Notes, Bond Anticipation Notes and Revenue An-
ticipation Notes which are issued in anticipation of receipt of tax funds,
proceeds of bond placements or other revenues, respectively. At no time
will more than 20% of the Fund's total assets be invested in Temporary In-
vestments unless the Fund has adopted a defensive investment policy in an-
ticipation of a market decline. The Fund intends, however, to purchase
tax-exempt Temporary Investments pending the investment of the proceeds of
the sale of shares of the Fund and of its portfolio securities, or in
order to have highly liquid securities available to meet anticipated re-
demptions.
Investing in Utilities (Utilities Fund). Each of the risks referred to in
Utilities Fund's Prospectus could adversely affect the ability and incli-
nation 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 se-
lected utility groups and discrepancies in relation to averages and indi-
ces have occurred frequently for reasons not directly related to the gen-
eral movements or price trends of utility common stocks. Causes of these
discrepancies include changes in the overall demand for and supply of var-
ious 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.
Ratings as Investment Criteria (All Funds). In general, the ratings of
nationally recognized statistical rating organizations ("NRSROs") repre-
sent the opinions of these agencies as to the quality of securities that
they rate. Such ratings, however, are relative and subjective, and are not
absolute standards of quality and do not evaluate the market value risk of
the securities. These ratings will be used by the Funds as initial crite-
ria for the selection of portfolio securities, but the Funds also will
rely upon the independent advice of their respective Advisers to evaluate
potential investments. Among the factors that will be considered are the
long-term ability of the issuer to pay principal and interest and general
economic trends. The Appendix to this Statement of Additional Information
contains further information concerning the rating categories of NRSROs
and their significance.
Subsequent to its purchase by a Fund, an issue of securities may cease to
be rated or its rating may be reduced below the minimum required for pur-
chase by the Fund. In addition, it is possible that an NRSRO might not
change its rating of a particular issue to reflect subsequent events. None
of these events will require sale of such securities by a Fund, but the
Fund's Adviser will consider such events in its determination of whether
the Fund should continue to hold the securities. In addition, to the ex-
tent that the ratings change as a result of changes in such organizations
or their rating systems, or due to a corporate reorganization, a Fund will
attempt to use comparable ratings as standards for its investments in ac-
cordance with its investment objective and policies.
Futures Activities (High Income, Utilities and Tax-Exempt Income Fund-
s). These Funds may enter into futures contracts and/or options on fu-
tures contracts that are traded on a United States exchange or board of
trade. These investments may be made by a Fund solely for the purpose of
hedging against the effects of changes in the value of its portfolio secu-
rities due to anticipated changes in interest rates, currency values
and/or market conditions, and not for purposes of speculation. In the case
of Tax-Exempt Income Fund, investments in futures contracts will be made
only in unusual circumstances, such as when the Fund's Adviser anticipates
an extreme change in interest rates or market conditions. See "Taxes"
below.
Futures Contracts. The purpose of the acquisition or sale of a futures
contract by a Fund is to mitigate the effects of fluctuations in interest
rates or currency or market values, depending on the type of contract, on
<PAGE>159
securities or their values without actually buying or selling the securi-
ties. For example, if Tax-Exempt Income Fund owns long-term bonds and tax-
exempt rates are expected to increase, the Fund might enter into a short
position in municipal bond index futures contracts. Such a sale would have
much the same effect as the Fund's selling some of the long-term bonds in
its portfolio. If tax-exempt rates increase as anticipated, the value of
certain long-term Municipal Securities in the Fund would decline, but the
value of the Fund's futures contracts would increase at approximately the
same rate, thereby keeping the net asset value of the Fund from declining
as much as it otherwise would have. Of course, because the value of port-
folio securities will far exceed the value of the futures contracts sold
by a Fund, an increase in the value of the futures contracts could only
mitigate -- but not totally offset -- the decline in the value of the
Fund.
The Global Bond and Diversified Strategic Income Funds may enter into fu-
tures contracts or related options on futures contracts that are traded on
a domestic or foreign exchange or in the over-the-counter market. These
investments may be made solely for the purpose of hedging against changes
in the value of its portfolio securities due to anticipated changes in in-
terest rates, currency values and/or market conditions when the transac-
tions are economically appropriate to the reduction of risks inherent in
the management of the Fund and not for purposes of speculation. The abil-
ity of the Funds to trade in futures contracts may be limited by the re-
quirements of the Internal Revenue Code of 1986 as amended (the "Code"),
applicable to a regulated investment company.
No consideration is paid or received by a Fund upon entering into a fu-
tures contract. Initially, a Fund will be required to deposit with its
custodian an amount of cash or cash equivalents equal to approximately 1%
to 10% of the contract amount (this amount is subject to change by the
board of trade on which the contract is traded and members of such board
of trade may charge a higher amount). This amount, known as initial mar-
gin, is in the nature of a performance bond or good faith deposit on the
contract and is returned to a Fund upon termination of the futures con-
tract, assuming that all contactual obligations have been satisfied. Sub-
sequent payments, known as variation margin, to and from the broker, will
be made daily as the price of the securities, currency or index underlying
the futures contract fluctuates, making the long and short positions in
the futures contract more or less valuable, a process known as "marking-
to- market." At any time prior to expiration of a futures contract, a Fund
may elect to close the position by taking an opposite position, which will
operate to terminate the Fund's existing position in the contract.
Several risks are associated with the use of futures contracts as a hedg-
ing device. Successful use of futures contracts by a Fund is subject to
the ability of its Adviser to predict correctly movements in interest
rates, stock or bond indices or foreign currency values. These predictions
involve skills and techniques that may be different from those involved in
the management of the portfolio being hedged. In addition, there can be no
assurance that there will be a correlation between movements in the price
of the underlying securities, currency or index and movements in the price
of the securities which are the subject of the hedge. A decision of
whether, when and how to hedge involves the exercise of skill and judg-
ment, and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected trends in interest rates or cur-
rency values.
Although the Funds with authority to engage in futures activity intend to
enter into futures contracts only if there is an active market for such
contracts, there is no assurance that an active market will exist for the
contracts at any particular time. Most futures exchanges and boards of
trade limit the amount of fluctuation permitted in futures contract prices
during a single trading day. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price beyond that
limit. It is possible that futures contract prices could move to the daily
limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting
some futures traders to substantial losses. In such event, and in the
event of adverse price movements, a Fund would be required to make daily
cash payments of variation margin, and an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
<PAGE>160
offset losses on the futures contract. As described above, however, there
is no guarantee that the price of the securities being hedged will, in
fact, correlate with the price movements in a futures contract and thus
provide an offset to losses on the futures contract.
If a Fund has hedged against the possibility of a change in interest rates
or currency or market values adversely affecting the value of securities
held in its portfolio and rates or currency or market values move in a di-
rection opposite to that which the Fund has anticipated, the Fund will
lose part or all of the benefit of the increased value of securities which
it has hedged because it will have offsetting losses in its futures posi-
tions. In addition, in such situations, if the Fund had insufficient cash,
it may have to sell securities to meet daily variation margin requirements
at a time when it may be disadvantageous to do so. These sales of securi-
ties may, but will not necessarily, be at increased prices which reflect
the change in interest rates or currency values, as the case may be.
Options on Futures Contracts. An option on an interest rate futures con-
tract, as contrasted with the direct investment in such a contract, gives
the purchaser the right, in return for the premium paid, to assume a posi-
tion in the underlying interest rate futures contract at a specified exer-
cise price at any time prior to the expiration date of the option. An op-
tion on a foreign currency futures contract, as contrasted with the direct
investment in such a contract, gives the purchaser the right, but not the
obligation, to assume a long or short position in the relevant underlying
future currency at a predetermined exercise price at a time in the future.
Upon exercise of an option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin ac-
count, which represents the amount by which the market price of the fu-
tures contract exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the futures contract.
The potential for loss related to the purchase of an option on futures
contracts is limited to the premium paid for the option (plus transaction
costs). Because the value of the option is fixed at the point of sale,
there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily
and that change would be reflected in the net asset value of a Fund in-
vesting in the options.
Several risks are associated with options on futures contracts. The abil-
ity to establish and close out positions on such options will be subject
to the existence of a liquid market. In addition, the purchase of put or
call options on interest rate and foreign currency futures will be based
upon predictions by a Fund's Adviser as to anticipated trends in interest
rates and currency values, as the case may be, which could prove to be in-
correct. Even if the expectations of an Adviser are correct, there may be
an imperfect correlation between the change in the value of the options
and of the portfolio securities or the currencies being hedged.
Foreign Investments. Investors should recognize that investing in foreign
companies involves certain considerations which are not typically associ-
ated with investing in U.S. issuers. Since the Fund will be investing in
securities denominated in currencies other than the U.S. dollar, and since
the Fund may temporarily hold funds in bank deposits or other money market
investments denominated in foreign currencies, the Fund may be affected
favorably or unfavorably by exchange control regulations or changes in the
exchange rate between such currencies and the dollar. A change in the
value of a foreign currency relative to the U.S. dollar will result in a
corresponding change in the dollar value of the Fund's assets denominated
in that foreign currency. Changes in foreign currency exchange rates may
also affect the value of dividends and interest earned, gains and losses
realized on the sale of securities and net investment income and gain, if
any, to be distributed to shareholders by the Fund.
The rate of exchange between the U.S. dollar and other currencies is de-
termined by the forces of supply and demand in the foreign exchange mar-
kets. Changes in the exchange rate may result over time from the interac-
tion of many factors directly or indirectly affecting economic conditions
and political developments in other countries. Of particular importance
are rates of inflation, interest rate levels, the balance of payments and
the extent of government surpluses or deficits in the Unites States and
<PAGE>161
the particular foreign country, all of which are in turn sensitive to the
monetary, fiscal and trade policies pursued by the governments of the
United States and other foreign countries important to international trade
and finance. Governmental intervention may also play a significant role.
National governments rarely voluntarily allow their currencies to float
freely in response to economic forces. Sovereign governments use a variety
of techniques, such as intervention by a country's central bank or imposi-
tion of regulatory controls or taxes, to affect the exchange rates of
their currencies.
Many of the securities held by the Fund will not be registered with, nor
the issuers thereof be subject to reporting requirements of, the SEC. Ac-
cordingly, there may be less publicly available information about the se-
curities and about the foreign company or government issuing them than is
available about a domestic company or government entity. Foreign issuers
are generally not subject to uniform financial reporting standards, prac-
tices and requirements comparable to those applicable to U.S. issuers. In
addition, with respect to some foreign countries, there is the possibility
of expropriation or confiscatory taxation, limitations on the removal of
funds or other assets of the Fund, political or social instability, or do-
mestic developments which could affect U.S. investments in those coun-
tries. Moreover, individual foreign economies may differ favorably or un-
favorably from the U.S. economy in such respects as growth of gross na-
tional product, rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments positions. The Fund may invest in
securities of foreign governments (or agencies or instrumentalities
thereof), and many, if not all, of the foregoing considerations apply to
such investments as well.
Securities of some foreign companies are less liquid and their prices are
more volatile than securities of comparable domestic companies. Certain
foreign countries are known to experience long delays between the trade
and settlement dates of securities purchased or sold. Due to the increased
exposure to the Fund of market and foreign exchange fluctuations brought
about by such delays, and due to the corresponding negative impact on Fund
liquidity, the Fund will avoid investing in countries which are known to
experience settlement delays which may expose the Fund to unreasonable
risk of loss.
The interest payable on the Fund's foreign securities may be subject to
foreign withholding taxes, and while investors may be able to claim some
credit or deductions for such taxes with respect to their allocated shares
of such foreign tax payments, the general effect of these taxes will be to
reduce the Fund's income. Additionally, the operating expenses of the Fund
can be expected to be higher than that of an investment company investing
exclusively in U.S. securities, since the expenses of the Fund, such as
custodial costs, valuation costs and communication costs, as well as the
rate of the investment advisory fees, though similar to such expenses of
some other international funds, are higher than those costs incurred by
other investment companies.
Short Sales (Utilities Fund). Utilities Fund may from time to time sell
securities short, but the value of securities sold short will not exceed
5% of the value of the Fund's assets. In addition, the Fund may not (a)
sell short the securities of a single issuer to the extent of more than 2%
of the value of the Fund's net assets and (b) sell short the securities of
any class of an issuer to the extent of more than 2% of the outstanding
securities of the class at the time of the transaction. A short sale is a
transaction in which the Fund sells securities that it does not own (but
has borrowed) in anticipation of a decline in the market price of the se-
curities.
When the Fund makes a short sale, the proceeds it receives from the sale
are retained by a broker until the Fund replaces the borrowed securities.
To deliver the securities to the buyer, the Fund must arrange through a
broker to borrow the securities and, in so doing, the Fund becomes obli-
gated to replace the securities borrowed at their market price at the time
of replacement, whatever that price may be. The Fund may have to pay a
premium to borrow the securities and must pay any dividends or interest
payable on the securities until they are replaced.
The Fund's obligation to replace the securities borrowed in connection
<PAGE>162
with a short sale will be secured by collateral deposited with the broker
that consists of cash or U.S. government securities. In addition, the Fund
will place in a segregated account with its custodian an amount of cash or
U.S. government securities equal to the difference, if any, between (a)
the market value of the securities sold at the time they were sold short
and (b) any cash or U.S. government securities deposited as collateral
with the broker in connection with the short sale (not including the pro-
ceeds of the short sale). Until it replaces the borrowed securities, the
Fund will maintain the segregated account daily at a level so that the
amount deposited in the account plus the amount deposited with the broker
(not including the proceeds from the short sale) (a) will equal the cur-
rent market value of the securities sold short and (b) will not be less
than the market value of the securities at the time they were sold short.
Short Sales Against the Box (Premium Total Return, Convertible and Utili-
ties Funds). These Funds may enter into a short sale of common stock such
that when the short position is open the Fund involved owns an equal
amount of preferred stocks or debt securities, convertible or exchange-
able, without payment of further consideration, into an equal number of
shares of the common stock sold short. This kind of short sale, which is
described as "against the box," will be entered into by a Fund for the
purpose of receiving a portion of the interest earned by the executing
broker from the proceeds of the sale. The proceeds of the sale will be
held by the broker until the settlement date when the Fund delivers the
convertible securities to close out its short position. Although prior to
delivery a Fund will have to pay an amount equal to any dividends paid on
the common stock sold short, the Fund will receive the dividends from the
preferred stock or interest from the debt securities convertible into the
stock sold short, plus a portion of the interest earned from the proceeds
of the short sale. The Funds will deposit, in a segregated account with
their custodian, convertible preferred stock or convertible debt securi-
ties in connection with short sales against the box.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 14 below (other than re-
striction number 10 as applied to Utilities Fund) have been adopted by the
Trust with respect to the Funds as fundamental policies. Under the 1940
Act, a fundamental policy may not be changed without the vote of a major-
ity of the outstanding voting securities of a Fund, as defined in the 1940
Act. Majority is defined in the 1940 Act as the lesser of (a) 67% or more
of the shares present at a shareholder meeting, if the holders of more
than 50% of the outstanding shares of the Trust are present or represented
by proxy, or (b) more than 50% of the outstanding shares. Investment re-
strictions 15 through 20, and number 10 as applied to Utilities Fund, may
be changed by vote of a majority of the Board of Trustees at any time.
The investment policies adopted by the Trust prohibit a 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 re-
gard to this 5% limitation.
2. Purchasing (a) more than 10% of the voting securities of any one is-
suer, (b) more than 10% of the securities of any class of any one issuer
or (c) more than 10% of the outstanding debt securities of any one issuer,
except that limitation (c) does not apply to the Exchange Reserve and Di-
versified Strategic Income Funds and limitations (b) and (c) do not apply
to the Utilities Fund; provided that this limitation shall not apply to
investment 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 re-
lated options will not be deemed to be a purchase of securities on margin
by any Fund permitted to engage in transactions in futures contracts or
related options.
4. Making short sales of securities or maintaining a short position ex-
<PAGE>163
cept that (a) the Premium Total Return, Utilities and Convertible Funds
may engage in such activities if, at all times when a short position is
open, the relevant Fund owns an equal amount of the 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 se-
curities sold short, and if, with respect to the Premium Total Return and
Convertible Funds, not more than 10% of the relevant Fund's net assets
(taken at current value) is held as collateral for such sales at any one
time and (b) Utilities Fund may make short sales or maintain a short posi-
tion to the extent of 5% of its net assets.
5. Borrowing money, except that (a) 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 10% (20% for Utilities Fund) of
the value of the Fund's total assets (including the amount borrowed) val-
ued at market less liabilities (not including the amount borrowed) at the
time the borrowing is made, (b) Diversified Strategic Income Fund may
enter into reverse repurchase agreements and forward roll transactions and
(c) one or more Funds may enter into futures contracts. Except for Diver-
sified Strategic Income Fund, whenever borrowings described in (a) exceed
5% of the value of a Fund's total assets, the Fund will not make any addi-
tional investments. Immediately after any borrowing (including reverse re-
purchase agreements and forward roll transactions), Diversified Strategic
Income Fund will maintain an asset coverage of at least 300% with respect
to all its borrowings.
6. Pledging, hypothecating, mortgaging or otherwise encumbering more than
10% of the value of the Fund's total assets. For purposes of this restric-
tion, (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 re-
spect to (i) the purchase and sale of stock options, options on foreign
currencies and options on stock indexes and (ii) initial or variation mar-
gin for futures contracts, will not be deemed to be pledges of a Fund's
assets.
7. Underwriting the securities of other issuers, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933, as
amended, by virtue of disposing of portfolio securities.
8. Purchasing or selling real estate or interests in real estate, except
that the 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.
9. Investing in commodities, except that (a) the Global Bond, High In-
come, Diversified Strategic Income, Utilities and Tax-Exempt Income Funds
may invest in futures contracts and options on futures contracts as de-
scribed in their Prospectuses and (b) upon 60 days' notice given to its
shareholders, the Premium Total Return and Convertible Funds may engage in
hedging transactions involving futures contracts and related options, in-
cluding stock index futures contracts and financial futures contracts.
10. Investing in oil, gas or other mineral exploration or development
programs, except that the Premium Total Return, Convertible, Diversified
Strategic Income, Global Bond, Utilities and High Income Funds may invest
in the securities of companies that invest in or sponsor those programs.
11. Making loans to others, except through the purchase of qualified debt
obligations, the entry into repurchase agreements and, with respect to
Funds other than the Exchange Reserve Fund, loans of portfolio securities
consistent with the Fund's investment objective.
12. Investing in securities of other investment companies registered or
required to be registered under the 1940 Act, except as they may be ac-
quired as part of a merger, consolidation, reorganization, acquisition of
assets or an offer of exchange.
13. Purchasing any securities which would cause more than 25% of the
value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities
<PAGE>164
in the same industry, except that Exchange Reserve Fund and Utilities Fund
will invest in excess of 25% of their respective assets in the securities
of companies within the banking industry and utility industry, respec-
tively; provided that there shall be no limit on the purchase of (a) U.S.
government securities or (b) for Funds other than the Exchange Reserve and
Utilities Funds, Municipal Securities issued by governments or political
subdivisions of governments.
14. Writing or selling puts, calls, straddles, spreads or combinations
thereof, except, with respect to Funds other than Exchange Reserve Fund,
as permitted under the Fund's investment objective and policies.
15. Purchasing restricted securities, illiquid securities (such as repur-
chase agreements with maturities in excess of seven days and, in the case
of Exchange Reserve Fund, time deposits maturing from two business days
through seven calendar days) or other securities that are not readily mar-
ketable if more than 10% or, in the case of the High Income, Global Bond
and Diversified Strategic Income Funds, 15% of the total assets of the
Fund would be invested in such securities.
16. Purchasing any security if as a result the 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 fewer than three
years; provided that in the case of private activity bonds purchased for
Tax-Exempt Income Fund, this restriction shall apply to the entity supply-
ing the revenues from which the issue is to be paid.
17. Making investments for the purpose of exercising control or manage-
ment.
18. Purchasing or retaining securities of any company if, to the knowl-
edge of the Trust, any of the Trust's officers or Trustees or any officer
or director of an Adviser individually owns more than 1/2 of 1% of the
outstanding securities of such company and together they own beneficially
more than 5% of the securities.
19. Investing in warrants (except as permitted under a Fund's investment
objective and policies or other than warrants acquired by the Fund as part
of a unit or attached to securities at the time of purchase) if, as a re-
sult, the investments (valued at the lower of cost or market) would exceed
5% of the value of the Fund's net assets of which not more than 2% of the
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 appli-
cable state securities laws.
20. With respect to Utilities Fund only, purchasing in excess of 5% of
the voting securities of a public utility or public utility holding com-
pany, so as to become a public utility holding company as defined in the
Public Utility Holding Company Act of 1935, as amended.
The Trust has adopted two additional investment restrictions applicable to
Exchange Reserve Fund, the first of which is a fundamental policy, which
prohibit Exchange Reserve Fund from:
1. Investing in common stocks, preferred stocks, warrants, other equity
securities, corporate bonds or debentures, state bonds, municipal bonds or
industrial revenue bonds.
2. Investing more than 10% of its assets in variable rate master demand
notes providing for settlement upon more than seven days' notice by the
Fund.
For purposes of the investment restrictions described above, the issuer of
a Municipal Security is deemed to be the entity (public or private) ulti-
mately responsible for the payment of the principal of and interest on the
security. For purposes of investment restriction number 13, private activ-
ity bonds (other than those issued for charitable, educational and certain
other purposes), the payment of principal and interest on which is the ul-
timate responsibility of companies within the same industry, are grouped
together as an industry. The Trust may make commitments more restrictive
than the restrictions listed above with respect to a Fund so as to permit
<PAGE>165
the sale of shares of the Fund in certain states. Should the Trust deter-
mine that any such commitment is no longer in the best interests of the
Fund and its shareholders, the Trust will revoke the commitment by termi-
nating the sale of shares of the Fund in the state involved. The percent-
age limitations contained in the restrictions listed above apply at the
time of purchases of securities.
PORTFOLIO TURNOVER
The Funds do not intend to seek profits through short-term trading. Never-
theless, the Funds will not consider portfolio turnover rate a limiting
factor in making investment decisions.
Under certain market conditions, a Fund authorized to engage in transac-
tions in options may experience increased portfolio turnover as a result
of its investment strategies. For instance, the exercise of a substantial
number of options written by a Fund (due to appreciation of the underlying
security in the case of call options on securities or depreciation of the
underlying security in the case of put options on securities) could result
in a turnover rate in excess of 100%. A portfolio turnover rate of 100%
also would occur, for example, if all of a Fund's securities that are in-
cluded in the computation of turnover were replaced once during a period
of one year. A Fund's turnover rate is calculated by dividing the lesser
of purchases or sales of its portfolio securities for the year by the
monthly average value of the portfolio securities. Securities or options
with remaining maturities of one year or less on the date of acquisition
are excluded from the calculation.
Certain other practices which may be employed by a Fund also could result
in high portfolio turnover. For example, portfolio securities may be sold
in anticipation of a rise in interest rates (market decline) or purchased
in anticipation of a decline in interest rates (market rise) and later
sold. In addition, a security may be sold and another of comparable qual-
ity purchased at approximately the same time to take advantage of what a
Fund's Adviser believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities may occur
for reasons not directly related to the investment quality of particular
issues or the general movement of interest rates, such as changes in the
overall demand for, or supply of, various types of securities.
For the fiscal years ended July 31, 1993 and 1994, the portfolio turnover
rates were as follows:
<TABLE>
<CAPTION>
FUND 1993 1994
<S> <C> <C>
Premium Total Return Fund 55% 34%
Tax-Exempt Income Fund 34% 39%
Convertible Fund 95% 54%
High Income Fund 95% 98%
Global Bond Fund 216% 257%
Diversified Strategic Income Fund 116% 93%
Utilities Fund 37% 28%
</TABLE>
For regulatory purposes the turnover rate of Exchange Reserve Fund is
zero.
PORTFOLIO TRANSACTIONS
Most of the purchases and sales of securities for a Fund, whether trans-
acted on a securities exchange or over-the-counter, will be effected in
the primary trading market for the securities, except for Eurobonds which
are principally traded over-the-counter. The primary trading market for a
given security is generally located in the country in which the issuer has
its principal office. Decisions to buy and sell securities for a Fund are
made by its Adviser, which also is responsible for placing these transac-
tions, subject to the overall review of the Trust's Trustees. With respect
to Diversified Strategic Income Fund, decisions to buy and sell domestic
securities for the Fund are made by SBMFM, which is also responsible for
placing these transactions; the responsibility to make investment deci-
sions with respect to foreign securities and to place these transactions
<PAGE>166
rests with Global Capital Management. Although investment decisions for
each Fund are made independently from those of the other accounts managed
by its Adviser, investments of the type that the Fund may make also may be
made by those other accounts. When a Fund and one or more other accounts
managed by its Adviser are prepared to invest in, or desire to dispose of,
the same security, available investments or opportunities for sales will
be allocated in a manner believed by the Adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or re-
ceived by a Fund or the size of the position obtained or disposed of by
the Fund.
Transactions on domestic stock exchanges and some foreign stock exchanges
involve the payment of negotiated brokerage commissions. On exchanges on
which commissions are negotiated, the cost of transactions may vary among
different brokers. Commissions generally are fixed on most foreign ex-
changes. There is generally no stated commission in the case of securities
traded in U.S. or foreign over-the-counter markets, but the prices of
those securities include undisclosed commissions or mark-ups. The cost of
securities purchased from underwriters includes an underwriting commission
or concession, and the prices at which securities are purchased from and
sold to dealers include a dealer's mark-up or mark-down. U.S. government
securities generally are purchased from underwriters or dealers, although
certain newly issued U.S. government securities may be purchased directly
from the United States Treasury or from the issuing agency or instrumen-
tality. The following table sets forth certain information regarding each
Fund's payment of brokerage commissions:
<TABLE>
<CAPTION>
PREMIUM DIVERSIFIED
TOTAL HIGH STRATEGIC
FISCAL RETURN CONVERTIBLE INCOME UTILITIES INCOME
YEAR FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C>
Total Brokerage Commissions 1992 $ 762,101 $51,993 $11,296 $ 562,710 --
1992* -- -- -- $ 774,306 --
1993 $1,933,587 $75,836 $17,225 $1,810,481 $ 19,446
1994 $1,767,577 $60,818 $96,670 $2,006,028 $106,421
Commissions paid to 1992 $ 283,190 $ 2,700 $ 22,419 $ 28,848 --
Shearson Lehman Brothers 1992* -- -- -- $ 51,828 --
or Smith Barney 1993 $ 355,027 -- -- $ 97,740 --
1994 $ 280,686 -- -- $ 174,858 --
% of Total Brokerage 1994 15.88% -- -- 8.70% --
Commissions paid to
Smith Barney
% of Total Transactions 1994 14.92% -- -- 8.10% --
involving Commissions paid
to Smith Barney
<FN>
* Periods disclosed for Utilities Fund are for fiscal year ended February
29, 1992 and the period from March 1, 1992 through July 31, 1992.
</TABLE>
In selecting brokers or dealers to execute securities transactions on be-
half of a Fund, the Fund's Adviser seeks the best overall terms available.
In assessing the best overall terms available for any transaction, each
Adviser will consider the factors that it deems relevant, including the
breadth of the market in the security, the price of the security, the fi-
nancial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and
on a continuing basis. In addition, each Advisory Agreement between the
Trust and an Adviser authorizes the Adviser, in selecting brokers or deal-
ers to execute a particular transaction and in evaluating the best overall
terms available, to consider the brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934)
provided to the Trust, the other Funds and/or other accounts over which
the Adviser or its affiliates exercise investment discretion. The fees
under the Advisory Agreements and the Sub-Advisory and/or Administration
<PAGE>167
Agreements are not reduced by reason of their receiving such brokerage and
research services. Further, Smith Barney will not participate in commis-
sions brokerage given by the Fund to other brokers or dealers and will not
receive any reciprocal brokerage business resulting therefrom. The Trust's
Board of Trustees periodically will review the commissions paid by the
Funds to determine if the commissions paid over representative periods of
time were reasonable in relation to the benefits inuring to the Trust.
To the extent consistent with applicable provisions of the 1940 Act and
the rules and exemptions adopted by the SEC thereunder, the Trust's Board
of Trustees has determined that transactions for a Fund may be executed
through Smith Barney and other affiliated broker-dealers if, in the judg-
ment of the Fund's Adviser, the use of such broker-dealer is likely to re-
sult in price and execution at least as favorable as those of other quali-
fied broker-dealers, and if, in the transaction, such broker-dealer
charges the Fund a rate consistent with that charged to comparable unaf-
filiated customers in similar transactions. In addition, under rules re-
cently adopted by the SEC, Smith Barney may directly execute such transac-
tions for the Funds on the floor of any national securities exchange, pro-
vided (a) the Trust's Board of Trustees has expressly authorized Smith
Barney to effect such transactions, and (b) Smith Barney annually advises
the Trust of the aggregate compensation it earned on such transactions.
Over-the-counter purchases and sales are transacted directly with princi-
pal market makers except in those cases in which better prices and execu-
tions may be obtained elsewhere.
The Funds will not purchase any security, including U.S. government secu-
rities or Municipal Securities, during the existence of any underwriting
or selling group relating thereto of which Smith Barney is a member, ex-
cept to the extent permitted by the SEC.
The Funds may use Smith Barney as a commodities broker in connection with
entering into futures contracts and options on futures contracts. Smith
Barney has agreed to charge the Funds commodity commissions at rates com-
parable to those charged by Smith Barney to its most favored clients for
comparable trades in comparable accounts.
PURCHASE OF SHARES
VOLUME DISCOUNTS
The schedule of sales charges on Class A shares described in the Prospec-
tuses applies to purchases made by any "purchaser," which is defined to
include the following: (a) an individual; (b) an individual's spouse and
his or her children purchasing shares for his or her own account; (c) a
trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account; (d) a pension, profit-sharing or other employee
benefit plan qualified under Section 401(a) of the Code and qualified em-
ployee benefit plans of employers who are "affiliated persons" of each
other within the meaning of the 1940 Act; (e) tax-exempt organizations
enumerated in Section 501(c)(3) or (13) of the Code; (f) any other orga-
nized group of persons, provided that the organization has been in exist-
ence for at least six months and was organized for a purpose other than
the purchase of investment company securities at a discount; or (g) a
trustee or other professional fiduciary (including a bank, or an invest-
ment adviser registered with the SEC under the Investment Advisers Act of
1940) purchasing shares of the Fund for one or more trust estates or fidu-
ciary accounts. Purchasers who wish to combine purchase orders to take ad-
vantage of volume discounts on Class A shares should contact a Smith Bar-
ney Financial Consultant.
COMBINED RIGHT OF ACCUMULATION
Reduced sales charges, in accordance with the schedules in the Prospec-
tuses, apply to any purchase of Class A shares if the aggregate investment
in Class A shares of the relevant Fund and in Class A shares of other
funds of the Smith Barney Mutual Funds that are offered with a sales
charge, including the purchase being made, of any "purchaser" (as defined
above) is $25,000 or more. The reduced sales charge is subject to confir-
mation of the shareholder's holdings through a check of appropriate
records. The Trust reserves the right to terminate or amend the combined
right of accumulation at any time after written notice to shareholders.
<PAGE>168
For further information regarding the rights of accumulation, shareholders
should contact a Smith Barney Financial Consultant.
DETERMINATION OF PUBLIC OFFERING PRICES
The Trust offers shares of the Funds to the public on a continuous basis.
The public offering price for a Class A, Class Y and Class Z share of the
Fund is equal to the net asset value per share at the time of purchase,
plus for Class A shares an initial sales charge based on the aggregate
amount of the investment. The public offering price for a Class B and
Class C share (and Class A share purchases, including applicable rights of
accumulation, equaling or exceeding $500,000), is equal to the net asset
value per share at the time of purchase and no sales charge is imposed at
the time of purchase. A contingent deferred sales charge ("CDSC"), how-
ever, is imposed on certain redemptions of Class B and Class C shares and
of Class A shares when purchased in amounts exceeding $500,000. The method
of computation of the public offering price is shown in the Funds' finan-
cial statements incorporated by reference in their entirety into this
Statement of Additional Information.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of a Fund is included in its
Prospectus. The right of redemption of shares of a Fund may be suspended
or the date of payment postponed (a) for any periods during which the New
York Stock Exchange, Inc. (the "NYSE") is closed (other than for customary
weekend and holiday closings), (b) when trading in the markets the Fund
normally utilizes is restricted, or an emergency exists, as determined by
the SEC, so that disposal of the Fund's investments or determination of
its net asset value is not reasonably practicable or (c) for such other
periods as the SEC by order may permit for the protection of the Fund's
shareholders.
Distributions in Kind. If the Board of Trustees of the Trust determines
that it would be detrimental to the best interests of the remaining share-
holders to make a redemption payment wholly in cash, the Trust may pay, in
accordance with SEC rules, any portion of a redemption in excess of the
lesser of $250,000 or 1% of the Fund's net assets by distribution in kind
of portfolio securities in lieu of cash. Securities issued as a distribu-
tion in kind may incur brokerage commissions when shareholders subse-
quently sell those securities.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan (the
"Withdrawal Plan") is available to shareholders who own shares of a Fund
with a value of at least $10,000 ($5,000 for retirement plan accounts) and
who wish to receive specific amounts of cash monthly or quarterly. With-
drawals of at least $100 may be made under the Withdrawal Plan by redeem-
ing as many shares of the Fund as may be necessary to cover the stipulated
withdrawal payment. Any applicable CDSC will not be waived on amounts
withdrawn by shareholders that exceed 1.00% per month of the value of a
shareholder's shares at the time the Withdrawal Plan commences. (With re-
spect to Withdrawal Plans in effect prior to November 7, 1994, any appli-
cable CDSC will be waived on amounts withdrawn that do not exceed 2.00%
per month of the value of a shareholder's shares at the time the With-
drawal Plan commences). To the extent that withdrawals exceed dividends,
distributions and appreciation of a shareholder's investment in the Fund,
there will be a reduction in the value of the shareholder's investment and
continued withdrawal payments may reduce the shareholder's investment and
ultimately exhaust it. Withdrawal payments should not be considered as in-
come from investment in a Fund. Furthermore, as it generally would not be
advantageous to a shareholder to make additional investments in a Fund at
the same time he or she is participating in the Withdrawal Plan with re-
spect to that Fund, purchases by such shareholders of additional shares in
the Fund in amounts less than $5,000 will not ordinarily be permitted.
<PAGE>169
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates of
the Fund from which withdrawals will be made with TSSG, as agent for With-
drawal Plan members. All dividends and distributions on shares in the
Withdrawal Plan are reinvested automatically at net asset value in addi-
tional shares of the Fund involved. Effective November 7, 1994, Withdrawal
Plans should be set up with a Smith Barney Financial Consultant. All ap-
plications for participation in the Withdrawal Plan must be received by
TSSG as Plan Agent no later than the eighth day of each month to be eligi-
ble for participation beginning with that month's withdrawal. For addi-
tional information regarding the Withdrawal Plan, contact your Smith Bar-
ney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Trust's distributor on a best efforts basis
pursuant to a distribution agreement (the "Distribution Agreement").
When payment is made by the investor before the settlement date, unless
otherwise directed by the investor, the funds will be held as a free
credit balance in the investor's brokerage account, and Smith Barney may
benefit from the temporary use of the funds. The investor may designate
another use for the funds prior to settlement date, such as an investment
in a money market fund (other than Smith Barney Exchange Reserve Fund) of
the Smith Barney Mutual Funds. If the investor instructs Smith Barney to
invest the funds in a Smith Barney money market fund, the amount of the
investment will be included as part of the average daily net assets of
both the relevant Fund and the Smith Barney money market fund, and affili-
ates of Smith Barney that serve the funds in an investment advisory or ad-
ministrative capacity will benefit from the fact they are receiving fees
from both such investment companies for managing these assets computed on
the basis of their average daily net assets. The Trust's Board of Trustees
has been advised of the benefits to Smith Barney resulting from these set-
tlement procedures and will take such benefits into consideration when re-
viewing the Advisory, Administration and Distribution Agreements for con-
tinuance.
DISTRIBUTION ARRANGEMENTS
Shares of the Trust are distributed on a best efforts basis by Smith Bar-
ney as exclusive sales agent of the Trust pursuant to the Distribution
Agreement. To compensate Smith Barney for the services it provides and for
the expense it bears under the Distribution Agreement, the Trust has
adopted a services and distribution plan (the "Plan") pursuant to Rule
12b-1 under the 1940 Act. Under the Plan, each Fund pays Smith Barney a
service fee, accrued daily and paid monthly, calculated at the annual rate
of .25% (.15% in the case of Tax-Exempt Income Fund) of the value of the
Fund's average daily net assets attributable to the Class A, Class B and
Class C shares. In addition, the Fund pays Smith Barney a distribution fee
with respect to the Class B and Class C shares primarily intended to com-
pensate Smith Barney for its initial expense of paying Financial Consult-
ants a commission upon sales of those shares. The Class B and Class C dis-
tribution fees, accrued daily and paid monthly, are calculated at the an-
nual rate of .50% of the value of a Fund's average daily net assets
attributable to the shares of the respective Class.
During the fiscal years ended July 31, 1992 and 1993, Shearson Lehman
Brothers, the Funds' distributor prior to Smith Barney, received
$35,428,596 and $48,427,224, respectively, in the aggregate from the Trust
under the Plan. For the fiscal year ended July 31, 1994, Smith Barney re-
ceived $61,280,961, in the aggregate from the Trust under the Plan. For
the same period, Smith Barney incurred distribution expenses totaling ap-
proximately $105,372,000, consisting of approximately $732,000 for adver-
tising, $814,000 for printing and mailing of Prospectuses, $44,025,000 for
support services, $45,777,000 to Smith Barney Financial Consultants, and
$14,024,000 in accruals for interest on the excess of Smith Barney ex-
penses incurred in distributing the Trust's shares over the sum of the
distribution fees and CDSC received by Smith Barney from the Trust.
The following expenses were incurred during the periods indicated:
SALES CHARGES (paid to Smith Barney or Shearson Lehman Brothers, its pre-
decessor).
<TABLE>
<CAPTION>
CLASS A
FOR PERIOD
<PAGE>170
FROM 11/6/92 FISCAL YEAR
NAME OF FUND THROUGH 7/31/93 ENDED 7/31/94
<S> <C> <C>
Premium Total Return $399,065 $546,635
Tax-Exempt Income 103,757 176,786
Convertible 13,105 14,561
High Income 324,552 507,890
Global Bond 12,570 13,847
Diversified Strategic Income 629,705 818,088
Utilities 572,895 364,556
</TABLE>
CDSC (paid to Smith Barney or Shearson Lehman Brothers, its predecessor).
<TABLE>
<CAPTION>
CLASS B
FISCAL YEAR FISCAL YEAR FISCAL YEAR
NAME OF FUND ENDED 7/31/92 ENDED 7/31/93 ENDED 7/31/94
<S> <C> <C> <C>
Premium Total Return $330,726 $492,148 $2,133,023
Tax-Exempt Income 883,630 713,191 1,570,424
Convertible 126,725 107,519 87,160
High Income 560,013 562,214 743,718
Global Bond 79,361 48,463 109,733
Diversified Strategic Income 2,485,544 4,531,241 5,301,256
Utilities 2,001,692 2,489,562 8,429,876
</TABLE>
SERVICE FEES
<TABLE>
<CAPTION>
CLASS A
FOR PERIOD
FROM 11/6/92 FISCAL YEAR
NAME OF FUND THROUGH 7/31/93 ENDED 7/31/94
<S> <C> <C>
Premium Total Return $32,902 $138,713
Tax-Exempt Income 5,963 26,737
Convertible 1,212 5,556
High Income 401,688 593,011
Global Bond 2,302 10,579
Diversified Strategic Income 38,096 169,673
Utilities 46,507 125,227
</TABLE>
<TABLE>
<CAPTION>
CLASS B
FISCAL YEAR FISCAL YEAR
NAME OF FUND ENDED 7/31/93 ENDED 7/31/94
<S> <C> <C>
Premium Total Return $1,760,462 $3,725,474
Tax-Exempt Income 1,125,371 1,683,930
Convertible 124,907 207,197
High Income 673,903 1,238,239
Global Bond 108,768 183,065
Diversified Strategic Income 2,303,022 6,054,604
Utilities 4,480,226 5,877,824
</TABLE>
<TABLE>
<CAPTION>
CLASS C
(FORMERLY DESIGNATED AS CLASS D)
FOR PERIOD
FROM 11/6/92 FISCAL YEAR
NAME OF FUND THROUGH 7/31/93 ENDED 7/31/94
<S> <C> <C>
Premium Total Return $137 $2,600
Tax-Exempt Income -- --
Convertible -- --
<PAGE>171
High Income -- --
Global Bond 12 48
Diversified Strategic Income 4 980
Utilities 112 2,828
</TABLE>
DISTRIBUTION FEES
<TABLE>
<CAPTION>
CLASS B
FISCAL YEAR FISCAL YEAR FISCAL YEAR
NAME OF FUND ENDED 7/31/92 ENDED 7/31/93 ENDED 7/31/94
<S> <C> <C> <C>
Premium Total Return $3,786,350 $4,691,152 $7,450,948
Tax-Exempt Income 5,408,124 5,554,513 5,613,101
Convertible 457,731 365,443 414,394
High Income 1,970,780 1,998,175 2,476,479
Global Bond 376,910 330,220 365,230
Diversified Strategic Income 7,171,314 10,875,236 12,109,208
Utilities 4,556,871 12,484,195 11,755,647
</TABLE>
<TABLE>
<CAPTION>
CLASS C
(FORMERLY DESIGNATED AS CLASS D)
FOR PERIOD
FROM 11/6/92 FISCAL YEAR
NAME OF FUND THROUGH 7/31/93 ENDED 7/31/94
<S> <C> <C>
Premium Total Return $274 $5,199
Tax-Exempt Income -- --
Convertible -- --
High Income -- --
Global Bond 24 96
Diversified Strategic Income 8 1,960
Utilities 225 5,656
</TABLE>
Under its terms, the Plan continues from year to year, provided such con-
tinuance is approved annually by vote of the Trust's Board of Trustees,
including a majority of the Independent Trustees who have no direct or in-
direct financial interest in the operation of the Plan. The Plan may not
be amended to increase the amount to be spent for the services provided by
Smith Barney without shareholder approval, and all amendments of the Plan
also must be approved by the Trustees in the manner described above. The
Plan may be terminated with respect to a Class at any time, without pen-
alty, by vote of a majority of the Independent Trustees or, with respect
to any Fund, by vote of a majority of the outstanding voting securities of
the Class (as defined in the 1940 Act). Pursuant to the Plan, Smith Barney
will provide the Trust's Board of Trustees with periodic reports of
amounts expended under the Plan and the purpose for which such expendi-
tures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except days on which the NYSE is closed. The NYSE cur-
rently is scheduled to be closed on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas, and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively. Because of the
differences in distribution fees and Class-specific expenses, the per
share net asset value of each Class may differ. The following is a de-
scription of procedures used by a Fund in valuing its assets.
Because of the need to obtain prices as of the close of trading on various
exchanges throughout the world, the calculation of the net asset value of
Funds investing in foreign securities may not take place contemporaneously
with the determination of the prices of many of their respective portfolio
securities used in such calculation. A security which is listed or traded
<PAGE>172
on more than one exchange is valued at the quotation on the exchange de-
termined to be the primary market for such security. All assets and lia-
bilities initially expressed in foreign currency values will be converted
into U.S. dollar values at the mean between the bid and offered quotations
of such currencies against U.S. dollars as last quoted by any recognized
dealer. If such quotations are not available, the rate of exchange will be
determined in good faith by the Trust's Board of Trustees. In carrying out
the Board's valuation policies, SBMFM, as administrator, may consult with
an independent pricing service (the "Pricing Service") retained by the
Trust.
Debt securities of United States issuers (other than U.S. government secu-
rities and short-term investments), including Municipal Securities held by
Tax-Exempt Income Fund, are valued by SBMFM, as administrator, after con-
sultation with the Pricing Service approved by the Trust's Board of Trust-
ees. When, in the judgment of the Pricing Service, quoted bid prices for
investments are readily available and are representative of the bid side
of the market, these investments are valued at the mean between the quoted
bid prices and asked prices. Investments for which, in the judgment of the
Pricing Service, there are no readily obtainable market quotations are
carried at fair value as determined by the Pricing Service. The procedures
of the Pricing Service are reviewed periodically by the officers of the
Trust under the general supervision and responsibility of the Board of
Trustees.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any fund of the Smith Barney Mutual
Funds may exchange all or part of their shares for shares of the same
Class of other funds of the Smith Barney Mutual Funds, to the extent such
shares are offered for sale in the shareholder's state of residence, on
the basis of relative net asset value per share at the time of exchange as
follows:
A. Class A shares of any fund purchased with a sales charge may be ex-
changed for Class A shares of any of the other funds, and the sales charge
differential, if any, will be applied. Class A shares of any fund may be
exchanged without a sales charge for shares of the funds that are offered
without a sales charge. Class A shares of any fund purchased without a
sales charge may be exchanged for shares sold with a sales charge, and the
appropriate sales charge differential will be applied.
B. Class A shares of any fund acquired by a previous exchange of shares
purchased with a sales charge may be exchanged for Class A shares of any
of the other funds, and the sales charge differential, if any, will be ap-
plied.
C. Class B shares of any fund may be exchanged without a sales charge.
Class B shares of a Fund exchanged for Class B shares of another fund will
be subject to the higher applicable CDSC of the two funds and, for pur-
poses of calculating CDSC rates and conversion periods, will be deemed to
have been held since the date the shares being exchanged were deemed to be
purchased.
Dealers other than Smith Barney must notify TSSG of the investor's prior
ownership of Class A shares of Smith Barney High Income Fund and the ac-
count number in order to accomplish an exchange of shares of Smith Barney
High Income Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares of the same
Class in a fund with different investment objectives when they believe
that a shift between funds is an appropriate investment decision. This
privilege is available to shareholders residing in any state in which the
fund shares being acquired may legally be sold. Prior to any exchange, the
shareholder should obtain and review a copy of the current prospectus of
each fund into which an exchange is being considered. Prospectuses may be
obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting docu-
ments, shares submitted for exchange are redeemed at the then-current net
asset value and, subject to any applicable CDSC, the proceeds are immedi-
ately invested, at a price as described above, in shares of the fund being
<PAGE>173
acquired. Smith Barney reserves the right to reject any exchange request.
The exchange privilege may be modified or terminated at any time after
written notice to shareholders.
PERFORMANCE DATA
From time to time, the Trust may quote yield or total return of the Funds
in advertisements or in reports and other communications to shareholders.
The Fund may include comparative performance information in advertising or
marketing the Fund's shares. Such performance information may include the
following industry and financial publications: Barron's, Business Week,
CDA Investment Technologies, Inc., Changing Times, Forbes, Fortune, Insti-
tutional Investor, Investors Daily, Money, Morningstar Mutual Fund Values,
The New York Times, USA Today and The Wall Street Journal. To the extent
any advertisement or sales literature of the Trust describes the expenses
or performance of Class A, Class B, Class C or Class Y, it will also dis-
close such information for the other Classes.
YIELD
Exchange Reserve Fund. The current yield for the Fund is computed by (a)
determining the net change in the value of a hypothetical pre-existing ac-
count in the Fund having a balance of one share at the beginning of a
seven-calendar-day period for which yield is to be quoted, (b) dividing
the net change by the value of the account at the beginning of period to
obtain the base period return and (c) annualizing the results (i.e., mul-
tiplying the base period return by 365/7). The net change in the value of
the account reflects the value of additional shares purchased with divi-
dends declared on the original share and any such additional shares, but
does not include realized gains and losses or unrealized appreciation and
depreciation. In addition, the Fund may calculate a compound effective an-
nualized yield by adding 1 to the base period return (calculated as de-
scribed above), raising the sum to a power equal to 365/7 and subtracting
1.
For the seven-day period ended July 31, 1994, the annualized yield was
3.09%, and the compound effective yield was 3.13%. As of July 31, 1994,
the Fund's average portfolio maturity was 32 days.
Other Funds. The 30-day yield figure of a Fund other than Exchange Re-
serve Fund is calculated according to a formula prescribed by the SEC. The
formula can be expressed as follows:
YIELD =2 [ ( a-bcd +1)6--1]
Where: a =dividends and interest earned during the period.
b =expenses accrued for the period (net of waiver and reimburse-
ment).
c =the average daily number of shares outstanding during the pe-
riod that were entitled to receive dividends.
d =the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a Fund at a discount
or premium, the formula generally calls for amortization of the discount
or premium; the amortization schedule will be adjusted monthly to reflect
changes in the market values of the debt obligations.
The Class A yields for the 30-day period ended July 31, 1994 for the High
Income, Diversified Strategic Income, Global Bond and Utilities Funds were
9.70%, 8.02%, 4.73% and 6.26%, respectively.
The Class B yields for the 30-day period ended July 31, 1994 for the High
Income, Diversified Strategic Income, Global Bond and Utilities Funds were
9.66%, 7.91%, 4.53% and 6.13%, respectively.
The Class C yields for the 30-day period ended July 31, 1994 for the High
Income, Diversified Strategic Income, Global Bond and Utilities Funds were
<PAGE>174
11.32%, 7.85%, 4.63% and 6.21%, respectively.
The Class A and Class B yield for Tax-Exempt Income Fund for the 30-day
period ended July 31, 1994, was 5.32% and 5.07%, respectively, and the
equivalent taxable yield for that period was 7.39%, and 7.04%, respec-
tively, assuming payment of Federal income taxes at a rate of 28%.
Investors should recognize that, in periods of declining interest rates, a
Fund's yield will tend to be somewhat higher than prevailing market rates,
and in periods of rising interest rates the Fund's yield will tend to be
somewhat lower. In addition, when interest rates are falling, the inflow
of net new money to the Fund from the continuous sale of its shares will
likely be invested in portfolio instruments producing lower yields than
the balance of such Fund's investments, thereby reducing the current yield
of the Fund. In periods of rising interest rates, the opposite can be ex-
pected to occur.
AVERAGE ANNUAL TOTAL RETURN
The "average annual total return" figures for each Fund, other than Ex-
change Reserve Fund, are computed according to a formula prescribed by the
SEC. The formula can be expressed as follows:
P (1+T)n = ERV
Where: P =a hypothetical initial payment of $1,000.
T =average annual total return.
n =number of years.
ERV =Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of the 1-, 5- or 10-year period at
the end of the 1-, 5- or 10-year period (or fractional por-
tion thereof), assuming reinvestment of all dividends and
distributions.
The average annual total returns (with fees waived and without sales
charge) of the Fund's Class A shares were as follows for the periods indi-
cated:
Class A Shares:
<TABLE>
<CAPTION>
PER ANNUM FOR
THE PERIOD FROM
ONE YEAR COMMENCEMENT OF
PERIOD ENDED OPERATIONS* THROUGH
NAME OF FUND 7/31/94 7/31/94
<S> <C> <C>
Premium Total Return 8.65% 11.01%
Tax-Exempt Income 1.14 6.48
Convertible 1.99 8.37
High Income 2.11 10.97
Global Bond (0.67) 3.97
Diversified Strategic Income 1.16 5.97
Utilities (8.99) 3.69
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
</TABLE>
The average annual total returns (with fees waived and without CDSC) of
the Fund's Class B shares were as follows for the periods indicated:
Class B Shares:
<TABLE>
<CAPTION>
PER ANNUM PER ANNUM FOR
FOR THE THE PERIOD FROM
<PAGE>175
ONE YEAR FIVE YEAR COMMENCEMENT OF
PERIOD ENDED PERIOD ENDED OPERATIONS THROUGH
NAME OF FUND 7/31/94 7/31/94 7/31/94
<S> <C> <C> <C>
Premium Total Return(1) 8.12% 11.42% 12.49%
Tax-Exempt Income(1)(6) 0.60 6.86 8.76
Convertible(2) 1.50 6.82 7.76
High Income(2)(6) 1.60 8.20 8.49
Global Bond(3)(6) (1.19) 7.47 8.39
Diversified Strategic
Income(4)(6) 0.66 -- 8.92
Utilities(5) (9.52) 7.63 9.36
<FN>
(1) Fund commenced operations on September 16, 1985.
(2) Fund commenced operations on September 2, 1986.
(3) Fund commenced operations on October 27, 1986.
(4) Fund commenced operations on December 28, 1989.
(5) Fund commenced operations on March 28, 1988.
(6) Prior to November 6, 1992 the maximum CDSC imposed on redemptions was
5.00%.
</TABLE>
The average annual total returns (with fees waived) of the Fund's Class C
shares were as follows for the periods indicated:
Class C Shares:
<TABLE>
<CAPTION>
PER ANNUM FOR
THE PERIOD FROM
ONE YEAR COMMENCEMENT OF
PERIOD ENDED OPERATIONS THROUGH
NAME OF FUND 7/31/94 7/31/94
<S> <C> <C>
Premium Total Return* 8.12% 9.33%
Tax-Exempt Income -- --
Convertible -- --
High Income -- --
Global Bond* (1.19) 3.29
Diversified Strategic Income** 0.66 2.98
Utilities*** (9.52) (1.49)
<FN>
* The Fund commenced selling Class C shares (previously designated as
Class D shares) on November 6, 1992.
** The Fund commenced selling Class C shares (previously designated as
Class D shares) on March 19, 1993.
*** The Fund commenced selling Class C shares (previously designated as
Class D shares) on February 4, 1993.
</TABLE>
A Class' total return figures calculated in accordance with the above for-
mula assume that the maximum sales charge or maximum applicable CDSC, as
the case may be, has been deducted for the hypothetical $1,000 initial in-
vestment at the time of purchase.
AGGREGATE TOTAL RETURN
The aggregate total return figures for each Fund, other than Exchange Re-
serve Fund, represent the cumulative change in the value of an investment
in the Class for the specified period and are computed by the following
formula:
ERV-P P
Where: P =a hypothetical initial payment of $10,000.
ERV =Ending Redeemable Value of a hypothetical $10,000 invest-
ment made at the beginning of the 1-, 5- or 10-year period
at the end of the 1-, 5- or 10-year period (or fractional
<PAGE>176
portion thereof), assuming reinvestment of all dividends
and distributions.
The aggregate total returns (with fees waived) of the Class B shares of
the Funds indicated were as follows for the periods indicated:
<TABLE>
<CAPTION>
NO LOAD LOAD
ONE YEAR FIVE YEAR PERIOD FROM ONE YEAR FIVE YEAR PERIOD FROM
PERIOD PERIOD COMMENCEMENT PERIOD PERIOD COMMENCEMENT
ENDED ENDED OF OPERATIONS ENDED ENDED OF OPERATIONS
JULY 31, JULY 31, THROUGH JULY 31, JULY 31, THROUGH
NAME OF FUND 1994* 1994* JULY 31, 1994* 1994** 1994** JULY 31, 1994**
<S> <C> <C> <C> <C> <C> <C>
Premium Total Return(1) 8.12% 71.75% 184.18% 3.12% 70.75% 184.18%
Tax-Exempt Income(1)(6) 0.60 39.36 110.72 (3.66) 38.36 110.72
Convertible(2) 1.50 39.07 80.61 (3.35) 38.07 80.61
High Income(2)(6) 1.60 48.28 90.58 (2.59) 47.45 90.58
Global Bond(3)(6) (1.19) 43.34 86.85 (5.32) 42.43 86.85
Diversified Strategic
Income(4)(6) 0.66 -- 48.02 (3.49) -- 47.05
Utilities(5) (9.52) 44.46 76.38 (13.68) 43.47 76.38
<FN>
* Figures do not include the effect of the maximum sales charge or maxi-
mum applicable CDSC. If they had been included, it would have the ef-
fect of lowering the returns shown.
** Figures include the effect of the maximum sales charge or maximum ap-
plicable CDSC.
(1) Fund commenced operations on September 16, 1985.
(2) Fund commenced operations on September 2, 1986.
(3) Fund commenced operations on October 27, 1986.
(4) Fund commenced operations on December 28, 1989.
(5) Fund commenced operations on March 28, 1988.
(6) Prior to November 6, 1992 the maximum CDSC imposed on redemptions was
5%.
</TABLE>
The aggregate total returns (with fees waived) of the Class A and Class C
shares of the Funds indicated were as follows for the periods indicated:
<TABLE>
<CAPTION>
NO LOAD LOAD NO LOAD LOAD
PERIOD FROM PERIOD FROM
ONE YEAR ONE YEAR NOVEMBER 6, 1992 NOVEMBER 6, 1992
PERIOD ENDED PERIOD ENDED THROUGH THROUGH
NAME OF FUND JULY 31, 1994* JULY 31, 1994** JULY 31, 1994* JULY 31, 1994**
<S> <C> <C> <C> <C>
Premium Total Return
Class A 8.65% 3.22% 19.85% 13.86%
Class C 8.12 7.12 10.94 10.94
Tax-Exempt Income
Class A 1.14 (2.91) 11.49 7.03
Class C -- -- -- --
Convertible
Class A 1.99 (3.11) 14.87 9.13
Class C -- -- -- --
High Income
Class A 2.11 (2.48) 19.77 14.38
Class C -- -- -- --
Global Bond
Class A (0.67) (5.14) 6.98% 2.17%
Class C (1.19) (2.10) 4.93 4.93
Diversified Strategic Income
<PAGE>177
Class A 1.16 (3.39) 10.57 5.60
Class C+ 0.66 (0.27) 4.09 4.09
Utilities
Class A 8.99 (13.54) 6.48 1.16
Class C++ (9.52) (10.35) (2.21) (2.21)
<FN>
* Figures do not include the effect of the maximum sales charge or maxi-
mum applicable CDSC.
** Figures include the effect of the maximum sales charge or maximum ap-
plicable CDSC.
+ The Fund commenced selling Class C shares (previously designated as
Class D shares) on March 19, 1993.
++ The Fund commenced selling Class C shares (previously designated as
Class D shares) on February 4, 1993.
</TABLE>
It is important to note that the yield and total return figures set forth
above are based on historical earnings and are not intended to indicate
future performance.
A Class' performance will vary from time to time depending upon market
conditions, the composition of the relevant Fund's portfolio and operating
expenses and the expenses exclusively attributable to that Class. Conse-
quently, any given performance quotation should not be considered repre-
sentative of the Class' performance for any specified period in the fu-
ture. Because performance will vary, it may not provide a basis for com-
paring an investment in the Class with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing a Class' performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
company's portfolio securities.
TAXES
The following is a summary of certain Federal income tax considerations
that may affect the Trust and its shareholders. This summary is not in-
tended as a substitute for individual tax advice and investors are urged
to consult their own tax advisors as to the tax consequences of an invest-
ment in any Fund of the Trust.
TAX STATUS OF THE FUNDS
Each Fund will be treated as a separate taxable entity for Federal income
tax purposes.
Each Fund has qualified and the Trust intends that each Fund continue to
qualify separately each year as a "regulated investment company" under the
Code. A qualified Fund will not be liable for Federal income taxes to the
extent its taxable net investment income and net realized capital gains
are distributed to its shareholders, provided that each Fund distributes
at least 90% of its net investment income. One of the several requirements
for qualification is that a Fund receive at least 90% of its gross income
each year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of equity or debt secu-
rities or foreign currencies, or other income (including but not limited
to gains from options, futures, or forward contracts) derived with respect
to the Fund's investment in such stock, securities, or currencies. The
Trust does not expect any Fund to have difficulty meeting this test.
To qualify as a regulated investment company, a Fund also must earn less
than 30% of its gross income from the disposition of securities held for
less than three months. The 30% test will limit the extent to which a Fund
may sell securities held for less than three months; effect short sales of
securities held for less than three months; write options which expire in
less than three months; and effect closing transactions with respect to
call or put options that have been written or purchased within the preced-
ing three months. (If a Fund purchases a put option for the purpose of
hedging an underlying portfolio security, the acquisition of the option is
treated as a short sale of the underlying security unless the option and
the security are acquired on the same date.) Finally, as discussed below,
thi
<PAGE>178
s requirement also may limit investments by certain Funds in options on
stock indexes, options on nonconvertible debt securities, futures con-
tracts and options on futures contracts, and foreign currencies (or op-
tions, futures or forward contracts on foreign currencies) but only to the
extent that such foreign currencies are not directly related to the
Trust's principal business of investing in securities.
TAXATION OF INVESTMENT BY THE FUNDS
Gains or losses on sales of securities by a Fund generally will be long-
term capital gains or losses if the Fund has held the securities for more
than one year. Gains or losses on sales of securities held for not more
than one year generally will be short-term. If a Fund acquires a debt se-
curity at a substantial discount, a portion of any gain upon sale or re-
demption will be taxed as ordinary income, rather than capital gain, to
the extent that it reflects accrued market discount.
Options and Futures Transactions. The tax consequences of options trans-
actions entered into by a Fund will vary depending on the nature of the
underlying security, whether the option is written or purchased, and
whether the "straddle" rules, discussed separately below, apply to the
transaction. When a Fund writes a call or put option on an equity or con-
vertible debt security, it will receive a premium that will, subject to
the straddle rules, be treated as follows for tax purposes. If the option
expires unexercised, or if the Fund enters into a closing purchase trans-
action, the Fund will realize a gain (or loss if the cost of the closing
purchase transaction exceeds the amount of the premium) without regard to
any unrealized gain or loss on the underlying security. Any such gain or
loss will be a short-term capital gain or loss, except that any loss on a
"qualified" covered call stock option that is not treated as a part of a
straddle may be treated as long-term capital loss. If a call option writ-
ten by a Fund is exercised, the Fund will recognize a capital gain or loss
from the sale of the underlying security, and will treat the premium as
additional sales proceeds. Whether the gain or loss will be long-term or
short-term will depend on the holding period of the underlying security.
If a put option written by a Fund is exercised, the amount of the premium
will reduce the tax basis of the security that the Fund then purchases.
If a put or call option that a Fund has purchased on an equity or convert-
ible debt security expires unexercised, the Fund will realize capital loss
equal to the cost of the option. If the Fund enters into a closing sale
transaction with respect to the option, it will realize a capital gain or
loss (depending on whether the proceeds from the closing transaction are
greater or less than the cost of the option). The gain or loss will be
short-term or long-term, depending on the Fund's holding period in the op-
tion. If the Fund exercises such a put option, it will realize a short-
term capital gain or loss (long-term if the Fund holds the underlying se-
curity for more than one year before it purchases the put) from the sale
of the underlying security measured by the sales proceeds decreased by the
premium paid. If the Fund exercises such a call option, the premium paid
for the option will be added to the tax basis of the security purchased.
One or more Funds may invest in section 1256 contracts, and the Code im-
poses a special "mark-to-market" system for taxing these contracts. These
contracts generally include options on nonconvertible debt securities (in-
cluding United States government securities), options on stock indexes,
futures contracts, options on futures contracts and certain foreign cur-
rency contracts. Options on foreign currency, futures contracts on foreign
currency and options on foreign currency futures will qualify as "section
1256" contracts if the options or futures are traded on or subject to the
rules of a qualified board or exchange. Generally, most of the foreign
currency options and foreign currency futures and related options in which
certain Funds may invest will qualify as section 1256 contracts. In gen-
eral, gain or loss on section 1256 contracts will be taken into account
for tax purposes when actually realized (by a closing transaction, by ex-
ercise, by taking delivery or by other termination). In addition, any sec-
tion 1256 contracts held at the end of a taxable year will be treated as
sold at their year-end fair market value (that is, marked to the market),
and the resulting gain or loss will be recognized for tax purposes. Pro-
vided that section 1256 contracts are held as capital assets and are not
part of a straddle, both the realized and the unrealized year-end gain or
loss from these investment positions (including premiums on options that
<PAGE>179
expire unexercised) will be treated as 60% long-term and 40% short-term
capital gain or loss, regardless of the period of time particular posi-
tions actually are held by a Fund.
A portion of the mark-to-market gain on instruments held for less than
three months at the close of a Fund's taxable year may represent a gain on
securities held for less than three months for purposes of the 30% test
discussed above. Accordingly, a Fund may have to restrict its fourth-
quarter transactions in section 1256 contracts.
Straddles. While the mark-to-market system is limited to section 1256
contracts, the Code contains other rules applicable to transactions which
create positions which offset positions in section 1256 or other invest-
ment contracts. Those rules, applicable to "straddle" transactions, are
intended to eliminate any special tax advantages for such transactions.
"Straddles" are defined to include "offsetting positions" in actively-
traded personal property. Under current law, it is not clear under what
circumstances one investment made by a Fund, such as an option or futures
contract, would be treated as "offsetting" another investment also held by
the Fund, such as the underlying security (or vice versa) and, therefore,
whether the Fund would be treated as having entered into a straddle. In
general, investment positions may be "offsetting" if there is a substan-
tial diminution in the risk of loss from holding one position by reason of
holding one or more other positions (although certain "qualified" covered
call stock options written by a Fund may be treated as not creating a
straddle). Also, the forward currency contracts entered into by a Fund may
result in the creation of "straddles" for Federal income tax purposes.
If two (or more) positions constitute a straddle, a realized loss from one
position (including a mark-to-market loss) must be deferred to the extent
of unrecognized gain in an offsetting position. Also, the holding period
rules described above may be modified to recharacterize long-term gain as
short-term gain, or to recharacterize short-term loss as long-term loss,
in connection with certain straddle transactions. Furthermore, interest
and other carrying charges allocable to personal property that is part of
a straddle must be capitalized. In addition, "wash sale" rules apply to
straddle transactions to prevent the recognition of loss from the sale of
a position at a loss where a new offsetting position is or has been ac-
quired within a prescribed period. To the extent that the straddle rules
apply to positions established by a Fund, losses realized by the Fund may
be either deferred or recharacterized as long-term losses, and long-term
gains realized by the Fund may be converted to short-term gains.
If a Fund chooses to identify particular offsetting positions as being
components of a straddle, a realized loss will be recognized, but only
upon the liquidation of all of the components of the identified straddle.
Special rules apply to the treatment of "mixed" straddles (that is, strad-
dles consisting of a section 1256 contract and an offsetting position that
is not a section 1256 contract). If a Fund makes certain elections, the
section 1256 contract components of such straddles will not be subject to
the "60%/40%" mark-to-market rules. If any such election is made, the
amount, the nature (as long-or short-term) and the timing of the recogni-
tion of the Fund's gains or losses from the affected straddle positions
will be determined under rules that will vary according to the type of
election made.
Section 988. Foreign currency gain or loss from transactions in (a) bank
forward contracts not traded in the interbank market and (b) futures con-
tracts traded on a foreign exchange may be treated as ordinary income or
loss under Code section 988. A Fund may elect to have section 988 apply to
section 1256 contracts. Pursuant to that election, foreign currency gain
or loss from these transactions would be treated entirely as ordinary in-
come or loss when realized. A Fund will make the election necessary to
gain such treatment if the election is otherwise in the best interests of
the Fund.
TAXATION OF THE TRUST'S SHAREHOLDERS
Dividends paid by a Fund from investment income and distributions of
short-term capital gains will be taxable to shareholders as ordinary in-
come for Federal income tax purposes, whether received in cash or rein-
vested in additional shares. Distributions of long-term capital gains will
<PAGE>180
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
that the shareholder has held his or her shares of the Fund.
Dividends of investment income (but not capital gains) from any Fund gen-
erally will qualify for the Federal dividends-received deduction for do-
mestic corporate shareholders to the extent that such dividends do not ex-
ceed the aggregate amount of dividends received by the Fund from domestic
corporations. If securities held by a Fund are considered to be "debt-
financed" (generally, acquired with borrowed funds), are held by the Fund
for less than 46 days (91 days in the case of certain preferred stock), or
are subject to certain forms of hedges or short sales, the portion of the
dividends paid by the Fund which corresponds to the dividends paid with
respect to such securities will not be eligible for the corporate
dividends-received deduction.
If a shareholder (a) incurs a sales charge in acquiring or redeeming Fund
shares and (b) disposes of those shares and acquires within 90 days after
the original acquisition, or (c) acquires within 90 days of the redemp-
tion, shares in a mutual fund for which the otherwise applicable sales
charge is reduced by reason of a reinvestment right (i.e., exchange privi-
lege), the original sales charge increases the shareholder's tax basis in
the original shares only to the extent the otherwise applicable sales
charge for the second acquisition is not reduced. The portion of the orig-
inal sales charge that does not increase the shareholder's tax basis in
the original shares would be treated as incurred with respect to the sec-
ond acquisition and, as a general rule, would increase the shareholder's
tax basis in the newly acquired shares. Furthermore, the same rule also
applies to a disposition of the newly acquired or redeemed shares made
within 90 days of the second acquisition. This provision prevents a share-
holder from immediately deducting the sales charge by shifting his or her
investment in a family of mutual funds.
Capital Gains Distribution. As a general rule, a shareholder who redeems
or exchanges his or her shares will recognize long-term capital gain or
loss if the shares have been held for more than one year, and will recog-
nize short-term capital gain or loss if the shares have been held for one
year or less. However, if a shareholder receives a distribution taxable as
long-term capital gain with respect to shares of a Fund and redeems or ex-
changes the shares before he or she has held them for more than six
months, any loss on such redemption or exchange that is less than or equal
to the amount of the distribution will be treated as a long-term capital
loss.
Backup Withholding. If a shareholder fails to furnish a correct taxpayer
identification number, fails to fully report dividend or interest income,
or fails to certify that he or she has provided a correct taxpayer identi-
fication number and that he or she is not subject to such withholding,
then the shareholder may be subject to a 31% "backup withholding tax" with
respect to (a) any taxable dividends and distributions and (b) any pro-
ceeds of any redemption of Trust shares. An individual's taxpayer identi-
fication number is his or her social security number. The backup withhold-
ing tax is not an additional tax and may be credited against a sharehold-
er's regular Federal income tax liability.
Tax-Exempt Income Fund Because Tax-Exempt Income Fund will distribute
exempt-interest dividends, interest on indebtedness incurred by sharehold-
ers, directly or indirectly, to purchase or carry shares of the Fund will
not be deductible for Federal income tax purposes. If a shareholder re-
deems or exchanges shares of the Fund with respect to which he receives an
exempt-interest dividend before holding the shares for more than six
months, no loss will be allowed on the redemption or exchange to the ex-
tent of the dividend received. Also, that portion of any dividend from the
Fund which represents income from private activity bonds other than those
issued for charitable, educational and certain other purposes held by the
Fund may not retain its tax-exempt status in the hands of a shareholder
who is a "substantial user" of a facility financed by such bonds or a per-
son "related" to a substantial user. Investors should consult their own
tax advisors to see whether they may be substantial users or related per-
sons with respect to a facility financed by bonds in which the Fund may
invest. Moreover, investors receiving social security or certain other re-
<PAGE>181
tirement benefits should be aware that tax-exempt interest received from
the Fund may under certain circumstances cause up to one-half of such re-
tirement benefits to be subject to tax. If the Fund receives taxable in-
vestment income, it will designate as taxable the same percentage of each
dividend as the actual taxable income bears to the total investment income
earned during the period for which the dividend is paid. The percentage of
each dividend designated as taxable, if any, may, therefore, vary. Divi-
dends derived from interest from Municipal Securities which are exempt
from Federal tax also may be exempt from personal income taxes in the
state where the issuer is located, but in most cases will not be exempt
under the tax laws of other states or local authorities. Annual statements
will set forth the amount of interest from Municipal Securities earned by
the Fund in each state or possession in which issuers of portfolio securi-
ties are located.
ADDITIONAL INFORMATION
The Trust was organized as an unincorporated business trust under the laws
of the Commonwealth of Massachusetts pursuant to a Master Trust Agreement
dated March 12, 1985, as amended from time to time, and on November 5,
1992 the Trust filed an Amended and Restated Master Trust Agreement (the
"Trust Agreement"). The Trust commenced business as an investment company
on September 16, 1985, under the name Shearson Lehman Special Portfolios.
On February 21, 1986, December 6, 1988, August 27, 1990, November 5, 1992,
July 30, 1993 and October 14, 1994, the Trust changed its name to Shearson
Lehman Special Income Portfolios, SLH Income Portfolios, Shearson Lehman
Brothers Income Portfolios, Shearson Lehman Brothers Income Funds, Smith
Barney Shearson Income Funds and Smith Barney Income Funds, respectively.
Boston Safe, an indirect, wholly owned subsidiary of Mellon, is located at
One Boston Place, Boston, Massachusetts 02108, and serves as the custodian
of the Trust. Under its custodian agreement with the Trust, Boston Safe is
authorized to establish separate accounts for foreign securities owned by
the Trust to be held with foreign branches of other U.S. banks as well as
with certain foreign banks and securities depositaries. For its custody
services to the Trust, Boston Safe receives monthly fees based upon the
month-end aggregate net asset value of the Trust, plus certain charges for
securities transactions including out-of-pocket expenses, and costs of any
foreign and domestic sub-custodians. The assets of the Trust are held
under bank custodianship in compliance with the 1940 Act.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as the Trust's transfer agent. Under the transfer agency agreement, TSSG
maintains the shareholder account records for the Trust, handles certain
communications between shareholders and the Trust and distributes divi-
dends and distributions payable by each Fund. For these services TSSG re-
ceives from each Fund a monthly fee computed on the basis of the number of
shareholder accounts maintained during the year for each Fund and is reim-
bursed for certain out-of-pocket expenses.
FINANCIAL STATEMENTS
The Funds' Annual Reports for the fiscal year ended July 31, 1994, accom-
pany this Statement of Additional Information and are incorporated herein
by reference in their entirety.
APPENDIX
Description of Ratings
DESCRIPTION OF S&P CORPORATE BOND RATINGS
AAA
Bonds rated AAA have the highest rating assigned by S&P to a debt obliga-
tion. Capacity to pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay prin-
cipal and differ from the highest rated issues only in small degree.
A
<PAGE>182
Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay inter-
est and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
BB, B AND CCC
Bonds rated BB and B are regarded, on balance, as predominantly specula-
tive with respect to capacity to pay interest and repay principal in ac-
cordance with the terms of the obligation. BB represents a lower degree of
speculation than B and CCC, the highest degrees of speculation. While such
bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa
Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective ele-
ments are likely to change, such changes as can be visualized are most un-
likely to impair the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all stan-
dards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because mar-
gins of protection may not be as large as in Aaa securities, or fluctua-
tion of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A
Bonds which are rated A possess favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the fu-
ture.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest pay-
ments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of in-
terest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B
<PAGE>183
Bonds which are rated B generally lack characteristics of desirable in-
vestments. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa
Bonds that are rated Caa are of poor standing. These issues may be in de-
fault or present elements of danger may exist with respect to principal or
interest.
Moody's applies the numerical modifier 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the secu-
rity ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
DESCRIPTION OF S&P MUNICIPAL BOND RATINGS
AAA
Prime -- These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligation Bonds -- In a period of economic stress, the issuers
will suffer the smallest declines in income and will be least susceptible
to autonomous decline. Debt burden is moderate. A strong revenue structure
appears more than adequate to meet future expenditure requirements. Qual-
ity of management appears superior.
Revenue Bonds -- Debt service coverage has been, and is expected to re-
main, substantial. Stability of the pledged revenues is also exceptionally
strong due to the competitive position of the municipal enterprise or to
the nature of the revenues. Basic security provisions (including rate cov-
enant, earnings test for issuance of additional bonds, debt service re-
serve requirements) are rigorous. There is evidence of superior manage-
ment.
AA
High Grade -- The investment characteristics of bonds in this group are
only slightly less marked than those of the prime quality issues. Bonds
rated AA have the second strongest capacity for payment of debt service.
A
Good Grade -- Principal and interest payments on bonds in this category
are regarded as safe although the bonds are somewhat more susceptible to
the adverse affects of changes in circumstances and economic conditions
than bonds in higher rated categories. This rating describes the third
strongest capacity for payment of debt service. Regarding municipal bonds,
the ratings differ from the two higher ratings because:
General Obligation Bonds -- There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and expen-
ditures, or in quality of management. Under certain adverse circumstances,
any one such weakness might impair the ability of the issuer to meet debt
obligations at some future date.
Revenue Bonds -- Debt service coverage is good, but not exceptional. Sta-
bility of the pledged revenues could show some variations because of in-
creased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB
Medium Grade -- Of the investment grade ratings, this is the lowest. Bonds
in this group are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection pa-
rameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
<PAGE>184
General Obligation Bonds -- Under certain adverse conditions, several of
the above factors could contribute to a lesser capacity for payment of
debt service. The difference between A and BBB ratings is that the latter
shows more than one fundamental weakness, or one very substantial funda-
mental weakness, whereas the former shows only one deficiency among the
factors considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged rev-
enues could show substantial variations, with the revenue flow possibly
being subject to erosion over time. Basic security provisions are no more
than adequate. Management performance could be stronger.
BB, B, CCC AND CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal
in accordance with the terms of the obligation. BB includes the lowest de-
gree of speculation and CC the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C
The rating C is reserved for income bonds on which no interest is being
paid.
D
Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating cat-
egories, except in the AAA-Prime Grade category.
DESCRIPTION OF S&P MUNICIPAL NOTE RATINGS
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, -2 or -3) to distinguish more clearly the
credit quality of notes as compared to bonds. Notes rated SP-1 have a very
strong or strong capacity to pay principal and interest. Those issues de-
termined to possess overwhelming safety characteristics are given the des-
ignation of SP-1+. Notes rated SP-2 have satisfactory capacity to pay
principal and interest.
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS
Aaa
Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an excep-
tionally stable margin and principal is secure. While the various protec-
tive elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all stan-
dards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because mar-
gins of protection may not be as large as in Aaa securities, or fluctua-
tion of protective elements may be of greater amplitude, or there may be
other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving se-
<PAGE>185
curity to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest pay-
ments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of in-
terest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterize bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be in de-
fault or there may be present elements of danger with respect to principal
or interest.
Ca
Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked short-
comings.
C
Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the secu-
rity ranks in the higher end of its generic ratings category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic ratings category.
DESCRIPTION OF MOODY'S MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short- and long-term credit
risk. Loans bearing the designation MIG 1/VMIG 1 are the best quality, en-
joying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for re-
financing, or both. Loans bearing the designation MIG 2/VMIG 2 are of high
quality, with margins of protection ample, although not as large as the
preceding group. Loans bearing the designation MIG 3/VMIG 3 are of favor-
able quality, with all security elements accounted for but lacking the un-
deniable strength of the preceding grades. Market access for refinancing,
in particular, is likely to be less well established. Loans bearing the
designation MIG 4/VMIG 4 are of adequate quality. Protection commonly re-
garded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
<PAGE>186
The rating A-1+ is the highest, and A-1 the second highest, commercial
paper rating assigned by S&P. Paper rated A-1+ must have either the direct
credit support of an issuer or guarantor that possesses excellent long-
term operating and financial strength combined with strong liquidity char-
acteristics (typically, such issuers or guarantors would display credit
quality characteristics which would warrant a senior bond rating of A- or
higher) or the direct credit support of an issuer or guarantor that pos-
sesses above average long-term fundamental operating and financing capa-
bilities combined with ongoing excellent liquidity characteristics. Paper
rated A-1 must have the following characteristics: liquidity ratios are
adequate to meet cash requirements; long-term senior debt is rated A or
better; the issuer has access to at least two additional channels of bor-
rowing; basic earnings and cash flow have an upward trend with allowance
made for unusual circumstances; typically, the issuer's industry is well
established and the issuer has a strong position within the industry; and
the reliability and quality of management are unquestioned.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are
the following: (a) evaluation of the management of the issuer; (b) eco-
nomic evaluation of the issuer's industry or industries and an appraisal
of speculative-type risks which may be inherent in certain areas; (c)
evaluation of the issuer's products in relation to competition and cus-
tomer acceptance; (d) liquidity; (e) amount and quality of long-term debt;
(f) trend of earnings over a period of ten years; (g) financial strength
of parent company and the relationships which exist with the issue; and
(h) recognition by the management of obligations which may be present or
may arise as a result of public interest questions and preparations to
meet such obligations.
Short-term obligations, including commercial paper, rated A-1+ by IBCA
Limited or its affiliate IBCA Inc. are obligations supported by the high-
est capacity for timely repayment. Obligations rated A-1 have a very
strong capacity for timely repayment. Obligations rated A-2 have a strong
capacity for timely repayment, although such capacity may be susceptible
to adverse changes in business, economic and financial conditions.
Thomson BankWatch employs the rating "TBW-1" as its highest category,
which indicates that the degree of safety regarding timely repayment of
principal and interest is very strong. "TBW-2" is its second highest rat-
ing category. While the degree of safety regarding timely repayment of
principal and interest is strong, the relative degree of safety is not as
high as for issues rated "TBW-1."
Fitch Investors Services, Inc. employs the rating F-1+ to indicate issues
regarded as having the strongest degree of assurance of timely payment.
The rating F-1 reflects an assurance of timely payment only slightly less
in degree than issues rated F-1+, while the rating F-2 indicated a satis-
factory degree of assurance of timely payment although the margin of
safety is not as great as indicated by the F-1+ and F-1 categories.
Duff & Phelps Inc. employs the designation of Duff 1 with respect to top
grade commercial paper and bank money instruments. Duff 1+ indicated the
highest certainty of timely payment: short-term liquidity is clearly out-
standing and safety is just below risk-free U.S. Treasury short-term obli-
gations. Duff 1- indicates high certainty of timely payment. Duff 2 indi-
cates good certainty of timely payment: liquidity factors and company fun-
damentals are sound.
Various NRSROs utilize rankings within ratings categories indicated by a +
or -. The Funds, in accordance with industry practice, recognize such rat-
ings within categories as gradations, viewing for example S&P's rating of
A-1+ and A-1 as being in S&P's highest rating category.
SMITH BARNEY
INCOME FUNDS
388 Greenwich Street
New York, New York 10013
Smith Barney
INCOME FUNDS
<PAGE>187
PREMIUM TOTAL RETURN FUND
CONVERTIBLE FUND
GLOBAL BOND FUND
HIGH INCOME FUND
DIVERSIFIED STRATEGIC
INCOME FUND
TAX-EXEMPT INCOME FUND
UTILITIES FUND
EXCHANGE RESERVE FUND
STATEMENT OF
ADDITIONAL INFORMATION
NOVEMBER 7, 1994
<PAGE>188
ANNUAL REPORT
OF
SMITH BARNEY UTILITIES FUND
FOR THE FISCAL YEAR ENDED JULY 31, 1995
<PAGE>189
- --------------------------------------------------------------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
1995
1995
1995
1995
1995
Smith Barney
Utilities Fund
------------------------------------------------
July 31, 1995
[LOGO OF SMITH BARNEY MUTUAL FUNDS APPEARS HERE]
Investing for your future
Everyday.
<PAGE>190
- ---------------------------
Smith Barney Utilities Fund
- ---------------------------
DEAR SHAREHOLDER:
We are pleased to present the annual report for the Smith Barney Utilities
Fund for the year ended July 31, 1995.
During the past fiscal year, the financial markets provided both fixed-income
and equity investors with substantial total returns. The catalyst for these
positive returns was the pre-emptive 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 our view, this
reinforces the benefits of long-term investing and the importance of a
balanced investment portfolio. During the past fiscal year, the 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 9.79% to investors in Class B shares (the
Fund's oldest investment class). For additional performance information,
please see the Average Annual Total Return chart on page 6 of this report. In
our 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, we believe that utilities
are a suitable alternative for more conservative investors.
We have a positive long-term outlook for the financial markets but our
expectations are realistic. We do not see the current pace continuing without
a period of consolidation or possibly several short-term market declines.
Over the next several quarters we envision sustainable 2% to 3% economic
growth
1
<PAGE>191
without inflationary pressures, 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. We expect 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.
2
<PAGE>192
PORTFOLIO STRATEGY
Our portfolio strategy remains focused on solid fundamental analysis and
attractive relative valuations in the selection of investments. We combine
both fixed-income and equity investments, which gives us access to market
opportunities in both areas as long-term interest rates change. Our current
portfolio mix as of the date of this letter is 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 continues 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
us to increase our cash holdings by taking profits in selected issues that
appear to be fully valued. We intend 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. Our 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. We feel that companies with
solid management and service-territory growth will provide attractive total
returns and achieve higher market valuations. During the past fiscal year, we
have changed our focus to more long-term growth. We have initiated or added
the following to our holdings: American Electric Power, Baltimore Gas and
Electric, FPL Group Inc., DPL Inc., Portland General, and Houston Industries.
We have sold or reduced our holdings in: Allegheny Power Systems, Dominion
Resources, Florida Progress, Long Island Lighting, Pacific Gas and Electric,
and Pacificorp. We have maintained our 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. We will continue to monitor this sector and will increase our holdings if
the demand/supply relationship for the industry improves. We slightly reduced
our 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. We will review this industry as the legislation moves closer
to approval and may add to our growth-oriented holdings such as GTE Corporation
and Bell South Corporation.
The portfolio's fixed-income holdings are relatively unchanged and benefited
from the rally in long-term bonds. Our 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
<PAGE>193
3
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 we intend to retain our higher-quality holdings
this should not affect the portfolio. The substantial income received from this
sector of the portfolio has enabled us 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 our opinion, careful stock selection,
diversification and professional management will help to reduce the risks. We
appreciate your continued support and confidence and will use all of our
resources to assist in achieving your investment goals.
Sincerely,
/s/ Heath B. McLendon /s/ Jack S. Levande
Heath B. McLendon Jack S. Levande
Chairman and Vice President and
Investment Officer Investment Officer
August 18, 1995
4
<PAGE>194
Smith Barney Utilities Fund
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- -----------------------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Return of Total
Year Ended of Year of Year Dividends Distributions Capital Returns/(1)/
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/95 $13.28 $14.03 $0.82 $0.08 $0.02 13.24%
- -----------------------------------------------------------------------------------------------
7/31/94 15.97 13.28 0.83 0.50 0.00 (8.99)
- -----------------------------------------------------------------------------------------------
Inception*
- 7/31/93 14.36 15.97 0.64 0.13 0.00 17.01
===============================================================================================
Total $2.29 $0.71 $0.02
===============================================================================================
<CAPTION>
- -----------------------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- -----------------------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Return of Total
Year Ended of Year of Year Dividends Distributions Capital Returns/(1)/
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/95 $13.28 $14.02 $0.76 $0.08 $0.02 12.62%
- -----------------------------------------------------------------------------------------------
7/31/94 15.97 13.28 0.75 0.50 0.00 (9.52)
- -----------------------------------------------------------------------------------------------
7/31/93 14.83 15.97 0.80 0.15 0.00 14.69
- -----------------------------------------------------------------------------------------------
7/31/92 + 13.95 14.83 0.35 0.00 0.01 8.98
- -----------------------------------------------------------------------------------------------
2/28/92 13.21 13.95 0.84 0.15 0.03 13.63
- -----------------------------------------------------------------------------------------------
2/28/91 12.93 13.21 0.90 0.10 0.00 10.46
- -----------------------------------------------------------------------------------------------
2/28/90 12.09 12.93 0.90 0.21 0.00 16.34
- -----------------------------------------------------------------------------------------------
Inception*
- 2/28/89 12.00 12.09 0.57 0.15 0.00 6.80
===============================================================================================
Total $5.87 $1.34 $0.06
===============================================================================================
<CAPTION>
- -----------------------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- -----------------------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Return of Total
Year Ended of Year of Year Dividends Distributions Capital Returns/(1)/
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/95 $13.28 $14.02 $0.76 $0.08 $0.02 12.62%
- -----------------------------------------------------------------------------------------------
7/31/94 15.97 13.28 0.75 0.50 0.00 (9.52)
- -----------------------------------------------------------------------------------------------
Inception*
- 7/31/93 15.17 15.97 0.39 0.02 0.00 8.08
===============================================================================================
Total $1.90 $0.60 $0.02
===============================================================================================
</TABLE>
5
<PAGE>195
Smith Barney Utilities Fund
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Historical Performance -- Class Z Shares
- -----------------------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Return of Total
Year Ended of Year of Year Dividends Distributions Capital Returns/(1)/
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/95 $13.28 $14.02 $0.87 $0.08 $0.02 13.55%
- -----------------------------------------------------------------------------------------------
7/31/94 15.97 13.28 0.87 0.50 0.00 (8.78)
- -----------------------------------------------------------------------------------------------
Inception*
- 7/31/93 14.36 15.97 0.66 0.14 0.00 17.21
===============================================================================================
Total $2.40 $0.72 $0.02
===============================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge/(1)/
-------------------------------------------
Class A Class B Class C Class Z
================================================================================
<S> <C> <C> <C> <C>
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* through 7/31/95 7.09 9.79 3.95 7.35
- --------------------------------------------------------------------------------
<CAPTION>
With Sales Charge/(2)/
-------------------------------------------
Class A Class B Class C Class Z
================================================================================
<S> <C> <C> <C> <C>
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* through 7/31/95 5.08 9.79 3.95 7.35
- --------------------------------------------------------------------------------
</TABLE>
6
<PAGE>196
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge/(1)/
-------------------------
<S> <C>
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 gain distributions at net
asset value and does not reflect deduction of the applicable sales charge
with respect to Class A shares or the applicable contingent deferred sales
charges ("CDSC") with respect to Class B and Class C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions at net
asset value. In addition, Class A shares reflect the deduction of the
maximum initial sales charge of 5.00%, and Class B shares reflect the
deduction of a 5.00% CDSC which applies if shares are redeemed less than
one year from initial purchase. This CDSC declines by 1.00% thereafter
until no CDSC charge is incurred. Class C shares reflect the deduction of a
1.00% CDSC which applies if shares are redeemed within the first year of
purchase.
+ For the period from March 1, 1992 to July 31, 1992 which reflects a change
in the fiscal year end of the Fund.
* Inception dates for Class A, B, C and Z shares are November 6, 1992, March
28, 1988, February 4, 1993 and November 6, 1992, respectively.
</TABLE>
<PAGE>197
7
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares of
the Smith Barney Utilities Fund
vs. the Standard & Poor's 500 Index and Lipper Utilities Average/+/
(unaudited)
- --------------------------------------------------------------------------------
March 1988 - July 1995
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Smith Barney Utilities S&P 500 Lipper Utilities Average
<S> <C> <C> <C>
3/28/88 10,000 10,000 10,000
7/89 12,210 14,019 13,152
7/90 12,785 14,931 13,654
7/91 14,362 16,837 15,089
7/92 16,997 18,990 18,063
7/93 19,494 20,649 21,096
7/94 17,636 21,714 19,855
7/95 19,861 27,383 21,853
<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 Index") 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 it 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 Fund's peer group of mutual funds (13 funds as of July 31,
1995) investing in utilities securities. The performance of the 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 value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
</TABLE>
8
<PAGE>198
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) July 31, 1995
- --------------------------------------------------------------------------------
Portfolio Breakdown
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Percentage of
Total Investments
- --------------------------------------------------------------------------------
<S> <C>
Top Five Equity Holdings
Southern Co. 3.8%
Houston Industries 3.1
American Electric Power 2.9
Texas Utilities Co. 2.4
Bellsouth Corp. 2.3
Top Five Bond Holdings
Pacific Gas & Electric 2.7%
Commonwealth Edison 2.2
Utilicorp. United Inc. 1.4
Philadelphia Electric 1.6
Hydro-Quebec 1.2
</TABLE>
<PAGE>199
9
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Schedule of Investments July 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 51.7%
Electric & Gas -- 41.9%
1,500,000 American Electric Power Inc. $ 51,750,000
200,000 Baltimore Gas & Electric Co. 4,975,000
250,000 Boston Edison Co. 6,250,000
1,000,000 Central & Southwest Corp. 25,500,000
1,200,000 Cinergy Corp. 31,200,000
600,000 Consolidated Edison Company of New York Inc. 17,400,000
1,200,000 DPL Inc. 26,700,000
1,000,000 Detroit Edison Co. 29,500,000
750,000 Entergy Corp. 17,812,500
1,000,000 FPL Group Inc. 38,250,000
800,000 General Public Utilities Corp. 23,100,000
1,250,000 Houston Industries Inc. 54,687,500
350,000 MCN Corp. 6,650,000
1,000,000 NIPSCO Industry Inc. 32,625,000
700,000 New England Electric Systems 23,537,500
359,500 New York State Electric & Gas Corp. 8,403,313
250,000 Northeast Utilities 5,625,000
300,000 Oklahoma Gas & Electric Co. 10,200,000
1,100,000 Peco Energy Co. 31,487,500
500,000 Pacificorp 9,187,500
750,000 Panhandle Eastern Corp. 18,281,250
550,000 Pinnacle West Capital Corp. 13,406,250
100,000 Portland General Corp. 2,300,000
800,000 Public Service Company of Colorado 25,300,000
1,000,000 Public Service Enterprise Group 27,750,000
275,000 San Diego Gas & Electric Co. 5,878,125
800,000 SCANA Corp. 17,300,000
1,000,000 SCE Corp. 17,125,000
3,000,000 Southern Co. 66,000,000
650,000 Tenneco Inc. 32,175,000
1,250,000 Texas Utilities Co. 42,343,750
500,000 Westcoast Energy Co. 7,562,500
- --------------------------------------------------------------------------------
730,262,688
- --------------------------------------------------------------------------------
Telephone -- 9.8%
500,000 American Telephone & Telegraph Corp. 26,375,000
600,000 Bellsouth Corp. 40,650,000
550,000 GTE Corp. 19,525,000
750,000 NYNEX Corp. 30,937,500
</TABLE>
See Notes to Financial Statements.
10
<PAGE>200
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
Telephone -- 9.8% (continued)
1,100,000 Unicom Corp. $ 30,525,000
550,000 U.S. West Inc. 23,581,250
- --------------------------------------------------------------------------------
171,593,750
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $855,059,093) 901,856,438
- --------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- 43.0%
Electric & Gas -- 42.2%
Arizona Public Service Co.:
$ 8,800,000 7.250% due 8/01/23 8,008,000
2,000,000 8.000% due 2/01/25 1,980,000
5,000,000 Arkansas Power & Light Co., 8.700% due 11/01/22 5,425,000
Atlantic City Electric Co.:
16,000,000 7.000% due 9/01/23 14,460,000
15,000,000 7.000% due 8/01/28 13,500,000
Boston Edison Co.:
8,000,000 7.800% due 3/15/23 7,430,000
7,000,000 8.250% due 9/15/22 6,676,250
5,000,000 9.875% due 6/01/23 5,543,750
Carolina Power & Light Co.:
10,000,000 8.200% due 7/01/22 10,387,500
11,950,000 8.625% due 9/15/21 13,249,562
2,000,000 Central Illinois Light Co., 8.200% due 1/15/22 2,082,500
4,000,000 Central Power & Light Co., 7.500% due 4/01/23 3,890,000
Cincinnati Gas & Electric Co.:
2,700,000 7.200% due 10/01/23 2,460,375
2,800,000 8.500% due 9/01/22 2,859,500
3,000,000 Cleveland Electric Illuminating Co., 9.000% due 7/01/23 2,745,000
3,500,000 Columbus Southern Power Co., 8.700% due 7/01/22 3,688,125
10,000,000 Consolidated Edison Co., 7.500% due 6/15/23 9,612,500
Commonwealth Edison Co.:
2,000,000 7.500% due 7/01/13 1,910,000
3,100,000 7.625% due 4/15/13 2,999,250
10,850,000 7.750% due 7/15/23 10,416,000
14,250,000 8.375% due 9/15/22 14,499,375
7,000,000 9.875% due 6/15/20 7,892,500
</TABLE>
See Notes to Financial Statements.
<PAGE>201
11
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<C> <S> <C>
Electric & Gas -- 42.2% (continued)
Duquesne Light Co.:
$12,000,000 7.550% due 6/15/25 $11,430,000
3,000,000 7.625% due 4/15/23 2,868,750
2,500,000 8.750% due 5/15/22 2,615,625
10,000,000 Florida Power Corp., 8.625% due 11/01/21 10,987,500
15,100,000 Houston Lighting & Power Co., 9.150% due 3/15/21 17,553,750
Hydro-Quebec:
20,000,000 8.250% due 1/15/27 20,700,000
5,000,000 8.625% due 6/15/29 5,375,000
11,800,000 Idaho Power Co., 8.750% due 3/15/27 12,788,250
8,000,000 Illinois Power Co., 7.500% due 7/15/25 7,630,000
10,500,000 Interstate Power Co., 8.625% due 9/15/21 11,313,750
12,400,000 Iowa Electric Light & Power Co., 7.000% due 10/01/23 11,392,500
Iowa Illinois Gas & Electric Co.:
8,500,000 6.950% due 10/15/25 7,841,250
3,500,000 7.450% due 3/15/23 3,434,375
20,000,000 Jersey Central Power & Light Co., 6.750% due 11/01/25 17,375,000
15,500,000 Kentucky Utilities Co., 8.550% due 5/15/27 16,546,250
Long Island Lighting Co.:
11,000,000 9.000% due 11/01/22 10,230,000
8,000,000 9.625% due 7/01/24 7,980,000
10,000,000 Madison Gas & Electric Co., 7.700% due 2/15/22 9,812,500
2,000,000 Midwest Power System Inc., 8.000% due 2/15/22 2,070,000
13,000,000 Mississippi Power & Light Co., 8.650% due 1/15/23 13,747,500
Monongahela Power Co.:
14,000,000 7.625% due 5/01/25 13,807,500
5,500,000 8.625% due 11/01/21 5,795,625
3,000,000 Montana Power Co., 8.950% due 2/01/22 3,258,750
2,000,000 Narragansett Power Co., 9.125% due 5/01/21 2,257,500
3,000,000 Nevada Power & Light Co., 8.500% due 1/01/23 3,082,500
18,450,000 New Orleans Public Service Inc., 8.000% due 3/01/23 18,403,875
New York State Electric & Gas Co.:
2,250,000 7.450% due 7/15/23 2,120,625
11,750,000 8.300% due 12/15/22 12,073,125
Niagara Mohawk Power Corp.:
6,275,000 7.785% due 4/01/24 5,851,438
5,000,000 8.500% due 7/01/23 4,956,250
5,000,000 8.750% due 4/01/22 5,062,500
1,920,000 Northern States Power Co., 9.125% due 4/01/21 2,040,000
14,000,000 Oklahoma Gas & Electric Co., 8.875% due 12/01/20 15,557,500
10,000,000 Old Dominion Electric Co., 7.780% due 12/01/23 10,050,000
</TABLE>
See Notes to Financial Statements.
12
<PAGE>202
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
Electric & Gas -- 42.2% (continued)
Pacific Gas & Electric Co.:
$14,250,000 6.750% due 10/01/23 $ 12,468,750
13,500,000 7.050% due 3/01/24 12,285,000
19,000,000 7.250% due 3/01/26 17,527,500
4,000,000 8.800% due 5/01/24 4,455,000
7,500,000 Pennsylvania Power & Light Co., 8.500% due 5/01/22 7,809,375
Philadelphia Electric Co.:
13,000,000 7.750% due 5/01/23 12,252,500
14,300,000 8.750% due 4/01/22 14,907,750
6,000,000 Portland General Electric Co., 7.750% due 4/15/23 5,880,000
5,000,000 Potomac Edison Co., 7.750% due 2/01/23 5,018,750
5,000,000 Potomac Electric Power Co., 8.500% due 5/15/27 5,243,750
10,000,000 Public Service Co. of Colorado, 8.750% due 3/01/22 10,462,500
6,700,000 Public Service Co. of Oklahoma, 7.375% due 4/01/23 6,457,125
7,000,000 Public Service Electric & Gas Co., 9.250% due 6/01/21 7,945,000
2,000,000 Rochester Gas & Electric Co., 9.375% due 4/01/21 2,155,000
12,500,000 San Diego Gas & Electric Co., 8.500% due 4/01/22 13,421,875
9,000,000 South Carolina Electric & Gas Co., 7.625% due 6/01/23 8,865,000
5,000,000 Southern California Edison Co., 7.125% due 7/15/25 4,568,750
15,000,000 Southwestern Electric Power Co., 6.875% due 10/01/25 13,650,000
10,500,000 Tampa Electric Co., 7.750% due 11/01/22 10,539,375
Texas Utilities Electric Co.:
12,000,000 7.875% due 3/01/23 11,760,000
5,000,000 7.875% due 4/01/24 4,900,000
7,000,000 9.750% due 5/01/21 7,927,500
Utilicorp United Inc.:
13,000,000 8.000% due 3/01/23 12,545,000
23,000,000 9.000% due 11/15/21 24,523,750
5,000,000 Virginia Electric Power Co., 8.250% due 3/01/25 5,168,750
11,500,000 Western Pennsylvania Power Co., 8.875% due 2/01/21 12,204,375
4,500,000 Western Resources Inc., 8.500% due 7/01/22 4,719,375
5,000,000 Wisconsin Electric Power, 7.700% due 12/15/27 4,806,250
3,700,000 Wisconsin Power & Light Co., 8.600% due 3/15/27 3,935,875
6,900,000 Wisconsin Public Service Corp., 8.800% due 9/01/21 7,417,500
- --------------------------------------------------------------------------------
735,545,750
- --------------------------------------------------------------------------------
Miscellaneous -- 0.2%
3,000,000 Selkirk Cogen Funding Corp., 8.980% due 6/26/12 3,187,500
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>203
13
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
Telephone -- 0.6%
GTE Corp.:
$ 5,000,000 7.830% due 5/01/23 $ 4,856,250
5,000,000 8.750% due 11/01/21 5,387,500
- --------------------------------------------------------------------------------
10,243,750
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES
(Cost -- $742,561,705) 748,977,000
================================================================================
REPURCHASE AGREEMENTS -- 5.3%
50,000,000 First Boston Inc., 5.730% due 8/01/95; Proceeds at
maturity--$50,007,959; (Fully collateralized by
U.S. Treasury Note, 8.500% due 7/15/97; Market
value -- $51,022,125) 50,000,000
42,548,000 Chemical Securities Inc., 5.769% due 8/01/95;
Proceeds at maturity--$42,554,818; (Fully
collateralized by U.S. Treasury Note, 7.375% due
11/15/97; Market value -- $43,402,877) 42,548,000
- --------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $92,548,000) 92,548,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $1,690,168,798*) $1,743,381,438
================================================================================
<FN>
* Aggregate cost for Federal income tax purposes is substantially the same.
</TABLE>
See Notes to Financial Statements.
14
<PAGE>204
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities July 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $1,690,168,798) $1,743,381,438
Cash 905
Receivable for Fund shares sold 990,250
Receivable for securities sold 454,735
Dividends and interest receivable 21,400,512
- -------------------------------------------------------------------------------
Total Assets 1,766,227,840
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares purchased 1,241,677
Investment advisory fees payable 1,355,629
Administration fees payable 599,298
Distribution costs payable 1,843,951
Payable for securities purchased 179,487
Accrued expenses 866,297
- -------------------------------------------------------------------------------
Total Liabilities 6,086,339
- -------------------------------------------------------------------------------
Total Net Assets $1,760,141,501
===============================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 125,549
Capital paid in excess of par value 1,740,317,555
Accumulated net realized loss on investments (33,514,243)
Net unrealized appreciation of investments 53,212,640
- -------------------------------------------------------------------------------
Total Net Assets $1,760,141,501
===============================================================================
Shares Outstanding:
Class A 12,046,494
-----------------------------------------------------------------------------
Class B 112,179,525
-----------------------------------------------------------------------------
Class C 279,981
-----------------------------------------------------------------------------
Class Z 1,043,265
-----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $14.03
-----------------------------------------------------------------------------
Class B* $14.02
-----------------------------------------------------------------------------
Class C** $14.02
-----------------------------------------------------------------------------
Class Z (and redemption price) $14.02
-----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $14.77
===============================================================================
<FN>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed less than one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
</TABLE>
See Notes to Financial Statements.
15
<PAGE>205
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended July 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends $ 66,683,372
Interest 62,581,725
- -------------------------------------------------------------------------------
Total Investment Income 129,265,097
- -------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 12,305,595
Investment advisory fees (Note 2) 7,885,332
Administration fees (Note 2) 3,542,538
Shareholder and system servicing fees 1,957,000
Shareholder communications 330,000
Custody 165,000
Registration fees 80,000
Audit and legal 40,500
Trustees' fees 40,000
Other 97,643
- -------------------------------------------------------------------------------
Total Expenses 26,443,608
- -------------------------------------------------------------------------------
Net Investment Income 102,821,489
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales 901,901,130
Cost of securities sold 935,415,373
- -------------------------------------------------------------------------------
Net Realized Loss (33,514,243)
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year (81,900,040)
End of year 53,212,640
- -------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 135,112,680
- -------------------------------------------------------------------------------
Net Gain on Investments 101,598,437
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations $204,419,926
===============================================================================
</TABLE>
See Notes to Financial Statements.
16
<PAGE>206
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended July 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 102,821,489 $ 123,112,775
Net realized gain (loss) (33,514,243) 51,444,413
Increase (decrease) in net unrealized
appreciation of investments 135,112,680 (410,755,069)
- ---------------------------------------------------------------------------------------
Increase (Decrease) in Net
Assets From Operations 204,419,926 (236,197,881)
- ---------------------------------------------------------------------------------------
DISTRIBUTION TO
SHAREHOLDERS FROM:
Net investment income (100,155,893) (120,473,042)
Overdistribution of net income -- (4,592,716)
Net realized gains -- (82,734,637)
Overdistribution of realized gain (10,931,878) --
Capital (2,430,498) --
- ---------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (113,518,269) (207,800,395)
- ---------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sales 281,385,409 317,051,744
Net value of shares issued
to shareholders for
reinvestment of dividends 91,060,017 168,684,429
Cost of shares reacquired (580,475,140) (1,006,685,681)
- ---------------------------------------------------------------------------------------
Decrease in Net Assets
From Fund Share Transactions (208,029,714) (520,949,508)
- ---------------------------------------------------------------------------------------
Decrease in Net Assets (117,128,057) (964,947,784)
NET ASSETS:
Beginning of year 1,877,269,558 2,842,217,342
- ---------------------------------------------------------------------------------------
End of year* $1,760,141,501 $1,877,269,558
=======================================================================================
* Includes overdistributed net investment income of: -- $(2,665,596)
=======================================================================================
</TABLE>
See Notes to Financial Statements.
17
<PAGE>207
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Utilities Fund ("Fund"), a separate investment fund of the
Smith Barney Income Funds ("Trust"), a Massachusetts business trust, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Trust consists of the
Fund and six other separate investment funds: Smith Barney Exchange Reserve
Fund, Smith Barney Premium Total Return Fund, Smith Barney High Income Fund,
Smith Barney Tax-Exempt Income Fund, Smith Barney Diversified Strategic Income
Fund and Smith Barney Convertible Fund. The financial statements and financial
highlights for the other funds are presented in separate annual reports.
The significant accounting policies consistently followed by the Trust are:
(a) securities transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing price on such
markets; securities traded in the over-the-counter market and listed securities
for which no sales price were reported and U.S. Government and Government Agency
obligations are valued at bid price, or in the absence of a recent bid price, at
the bid equivalent obtained from one or more of the major market makers; (c)
short-term securities that have a maturity of more than 60 days are valued at
prices based on market quotations for securities of similar type, yield and
maturity; (d) short-term investments that have a maturity of 60 days or less are
valued at cost plus accreted discount, or minus amortized premium, as
applicable; (e) dividend income is recorded on ex-dividend date and interest
income is recorded on the accrual basis; (f) gains or losses on the sale of
securities are recorded on the identified cost basis; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) direct
expenses are charged to each fund and each class; management fees and general
fund expenses are allocated on the basis of relative net assets of each class;
(i) the Fund intends to comply with the applicable provisions of the Internal
Revenue Code of 1986, as amended, pertaining to regulated investment companies
and to make distributions of taxable income sufficient to relieve it from
substantially all Federal income and excise taxes and (i) in accordance with
Statement of Position 93-2 Determination, Disclosure, and Financial Statement
- -----------------------------------------------------------------------------
Presentation of Income, Capital Gain, and Return of Capital Distributions by
- ----------------------------------------------------------------------------
Investment Companies. Accordingly, the net investment loss of $2,427,225 and a
- ---------------------
18
<PAGE>208
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
portion of the net realized loss on investments amounting to $3,273 at July 31,
1995 has been reclassified to paid-in capital. Net investment income, net
realized gains, and net assets were not affected by this change.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment advisor to the Fund. The Funds
pays SBMFM an advisory fee calculated at an annual rate of 0.45% of the average
daily net assets; this fee is calculated daily and paid monthly.
SBMFM also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets; this fee
is calculated daily and paid monthly.
In addition, The Boston Company Advisors, Inc. ("Boston Advisors"), an
indirect wholly owned subsidiary of Mellon Bank Corporation, had entered into a
sub-administration agreement with the Fund and SBMFM. SBMFM paid Boston Advisors
a portion of its administration fee at a rate agreed upon from time to time
between SBMFM and Boston Advisors. As of March 27, 1995 this relationship was
terminated.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
year ended July 31, 1995, SB received brokerage commissions of $162,924 and
sales charges of approximately $150,600 of sales for the Fund's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on certain
Class B shares if redemption occurs less than one year from initial purchase and
thereafter declines by 1.00% per year until no CDSC is incurred. Class C shares
have a 1.00% CDSC if redemption occurs within the first year from the date such
investment was made. For the year ended July 31, 1995, CDSC's of approximately
$4,738,800 were paid to SB.
Pursuant to a Distribution Plan, the Fund pays a distribution fee with
<PAGE>209
19
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
respect to Class B and C shares calculated at the annual rate of 0.50% and
0.45%, respectively, of the average daily net assets for each class. The Fund
also pays a service fee with respect to Class A, B and C shares calculated at
the annual rate of 0.25% of the average daily net assets of each class,
respectively.
All officers and one trustee of the Fund are employees of SB.
3. Investments
During the year ended July 31, 1995, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) was $614,533,492 and $901,901,130, respectively.
At July 31, 1995, the net unrealized appreciation of investments for
Federal income tax purposes consisted of the following:
<TABLE>
===============================================================================
<S> <C>
Gross unrealized appreciation $98,737,521
Gross unrealized depreciation (45,524,881)
- -------------------------------------------------------------------------------
Net unrealized appreciation $53,212,640
===============================================================================
</TABLE>
4. Capital Loss Carryforward
At July 31, 1995, the Fund had approximately $18,779,651 of capital loss
carryforwards available to offset future capital gains expiring on July 31,
2003. To the extent that these carryforward losses are used to offset capital
gains, it is probable that the gains so offset will not be distributed.
5. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed-upon higher repurchase price. The Fund requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
6. Shares of Beneficial Interest
The Fund may issue an unlimited number of shares of beneficial interest of
each class in each separate series with a $0.001 par value. The Fund has the
ability to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses, including those specifically related
20
<PAGE>210
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
to the distribution of its shares. Effective November 7, 1994, the Fund adopted
a new class structure, renaming the former Class D and C shares as C shares and
Z shares, respectively. At July 31, 1995, total paid-in capital amounted to the
following for each class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Z
========================================================================================
<S> <C> <C> <C> <C>
Total Paid-in Capital $160,909,905 $1,559,678,508 $3,931,044 $15,923,647
========================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1995 July 31, 1994
------------------------------ ------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold 12,200,129 $ 155,398,366 1,190,478 $ 18,086,455
Shares issued on
reinvestment 635,849 8,481,967 263,745 3,899,160
Shares redeemed (3,912,440) (51,670,012) (1,703,880) (25,063,608)
- ------------------------------------------------------------------------------------------
Net Increase (Decrease) 8,923,538 $ 112,210,321 (249,657) $ (3,077,993)
==========================================================================================
CLASS B
Shares sold 8,946,045 $ 116,256,568 18,848,373 $ 289,406,819
Shares issued on
reinvestment 5,975,380 81,512,249 10,988,064 162,852,087
Shares redeemed (40,024,691) (522,321,582) (65,768,788) (965,045,931)
- ------------------------------------------------------------------------------------------
Net Decrease (25,103,266) $(324,552,765) (35,932,351) $(512,787,025)
==========================================================================================
CLASS C+
Shares sold 304,315 $ 4,058,795 142,046 $ 2,066,406
Shares issued on
reinvestment 12,479 167,141 6,211 88,581
Shares redeemed (179,428) (2,396,381) (21,427) (291,646)
- ------------------------------------------------------------------------------------------
Net Increase 137,366 $ 1,829,555 126,830 $ 1,863,341
==========================================================================================
CLASS Z++
Shares sold 428,912 $ 5,671,680 493,082 $ 7,492,064
Shares issued on
reinvestment 67,336 898,660 123,974 1,844,601
Shares redeemed (309,629) (4,087,165) (1,153,635) (16,284,496)
- ------------------------------------------------------------------------------------------
Net Increase (Decrease) 186,619 $ 2,483,175 (536,579) $ (6,947,831)
==========================================================================================
<FN>
+ On November 7, 1994, the former Class D shares were renamed Class C shares.
++ On November 7, 1994, the former Class C shares were renamed Class Z shares.
</TABLE>
<PAGE>211
21
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
7. Concentration of Credit
Because the Fund concentrates its investments in the utilities industry,
its portfolio may be subject to greater risk and market fluctuations than a
portfolio of securities representing a broader range of investment alternatives.
The risks could adversely affect the ability and inclination of companies within
the utilities industry to declare or pay dividends or interest and the ability
of holders of such securities to realize any value from the assets of the issuer
upon liquidation or bankruptcy.
22
<PAGE>212
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class A Shares 1995 1994 1993(1)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $13.28 $15.97 $14.36
- ------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.85 0.56 0.66
Net realized and unrealized gain (loss) on investments 0.82 (1.92) 1.72
- ------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.67 (1.36) 2.38
- ------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.82) (0.80) (0.63)
Overdistribution of net income -- (0.03) (0.01)
Net realized gains -- (0.50) (0.13)
Overdistribution of net realized gains (0.08) -- --
Capital (0.02) -- --
- ------------------------------------------------------------------------------------------
Total Distributions (0.92) (1.33) (0.77)
- ------------------------------------------------------------------------------------------
Net Asset Value, End of Year $14.03 $13.28 $15.97
- ------------------------------------------------------------------------------------------
Total Return 13.24% (8.99)% 17.01%++
- ------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $168,963 $41,458 $53,856
- ------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.07% 1.07% 1.07%+
Net investment income 6.36 5.54 5.67+
- ------------------------------------------------------------------------------------------
Portfolio Turnover Rate 36% 28% 37%
==========================================================================================
<FN>
(1) For the period from November 6, 1992 (inception date) to July 31, 1993.
++ Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
</TABLE>
<PAGE>213
23
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class B Shares 1995 1994 1993 1992(1) 1992(2)
=================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.28 $15.97 $14.83 $13.95 $13.21
- -------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.78 0.75 0.79 0.35 0.82
Net realized and unrealized
gain (loss) on investments 0.82 (2.19) 1.30 0.89 0.94
- -------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.60 (1.44) 2.09 1.24 1.76
- -------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.76) (0.72) (0.79) (0.35) (0.84)
Overdistribution of net income -- (0.03) (0.01) -- --
Net realized gains -- (0.50) (0.15) -- (0.15)
Overdistribution of net realized gains (0.08) -- -- -- --
Capital (0.02) -- -- (0.01) (0.03)
- -------------------------------------------------------------------------------------------------
Total Distributions (0.86) (1.25) (0.95) (0.36) (1.02)
- -------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $14.02 $13.28 $15.97 $14.83 $13.95
- -------------------------------------------------------------------------------------------------
Total Return 12.62% (9.52)% 14.69% 8.98%++ 13.63%
- -------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $1,573 $1,823 $2,766 $1,721 $1,275
- -------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.56% 1.54% 1.56% 1.57%+ 1.58%
Net investment income 5.82 5.07 5.17 5.78+ 6.04
- -------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 36% 28% 37% 10% 33%
=================================================================================================
<FN>
(1) For the period from March 1, 1992 to July 31, 1992.
(2) For the period from March 1, 1991 to February 28, 1992.
++ Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
</TABLE>
24
<PAGE>214
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class C Shares(1) 1995 1994 1993(2)
=======================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $13.28 $15.97 $15.17
- ---------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.78 0.73 0.35
Net realized and unrealized gain (loss) on investments 0.82 (2.17) 0.86
- ---------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.60 (1.44) 1.21
- ---------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.76) (0.72) (0.38)
Overdistribution of net income -- (0.03) (0.01)
Net realized gains -- (0.50) (0.02)
Overdistribution of net realized gains (0.08) -- --
Capital (0.02) -- --
- ---------------------------------------------------------------------------------------
Total Distributions (0.86) (1.25) (0.41)
- ---------------------------------------------------------------------------------------
Net Asset Value, End of Year $14.02 $13.28 $15.97
- ---------------------------------------------------------------------------------------
Total Return 12.62% (9.52)% 8.08%++
- ---------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $3,925 $1,894 $252
- ---------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.51% 1.48% 1.49%+
Net investment income 5.77 5.13 5.25+
- ---------------------------------------------------------------------------------------
Portfolio Turnover Rate 36% 28% 37%
=======================================================================================
<FN>
(1) On November 7, 1994, the former Class D shares were renamed Class C shares.
(2) For the period from February 4, 1993 (inception date) to July 31, 1993.
++ Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
</TABLE>
<PAGE>215
25
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class Z Shares(1) 1995 1994 1993(2)
==========================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $13.28 $15.97 $14.36
- --------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.89 0.89 0.69
Net realized and unrealized
gain (loss) on investments 0.82 (2.21) 1.72
- --------------------------------------------------------------------------
Total Income (Loss) From Operations 1.71 (1.32) 2.41
- --------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.87) (0.84) (0.65)
Overdistribution of net income -- (0.03) (0.01)
Net realized gains -- (0.50) (0.14)
Overdistribution of net realized gains (0.08) -- --
Capital (0.02) -- --
- --------------------------------------------------------------------------
Total Distributions (0.97) (1.37) (0.80)
- --------------------------------------------------------------------------
Net Asset Value, End of Year $14.02 $13.28 $15.97
- --------------------------------------------------------------------------
Total Return 13.55% (8.78)% 17.21%++
- --------------------------------------------------------------------------
Net Assets, End of Year (000s) $14,631 $11,372 $22,251
- --------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.81% 0.69% 0.68%+
Net investment income 6.58 5.92 6.06+
- --------------------------------------------------------------------------
Portfolio Turnover Rate 36% 28% 37%
==========================================================================
<FN>
(1) On November 7, 1994, the former Class C shares were renamed Class Z shares.
(2) For the period from November 6, 1992 (inception date) to July 31, 1993.
++ Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
</TABLE>
26
<PAGE>216
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
Change in Independent Auditor: On October 20, 1994, based upon the
recommendation of the Audit Committee of the Fund, the Board of Trustees
determined not to retain Coopers & Lybrand L.L.P ("Coopers & Lybrand") as the
Fund's independent auditor and voted to appoint KPMG Peat Marwick LLP. During
the Fund's two most recent fiscal years, Coopers & Lybrand's audit reports
contained no adverse opinion or disclaimer of opinion; nor were the reports
qualified or modified as to uncertainty, audit scope, or accounting
principles. Further, during this same period there were no disagreements with
Coopers & Lybrand on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Coopers & Lybrand,
would have caused it to make reference to the subject matter of such
disagreements in connection with its audit reports. The Fund has requested
Coopers & Lybrand to provide a letter to the Securities and Exchange
Commission stating whether Coopers & Lybrand agrees with the foregoing
statements, and to provide the Fund with a copy of such letter. A
copy of this letter is available upon request by calling the Fund at
(212) 723-9218.
<PAGE>217
27
Smith Barney Utilities Fund
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Smith Barney Utilities Fund of
Smith Barney Income Funds:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Smith Barney Utilities Fund of
Smith Barney Income Funds as of July 31, 1995, and the related statement of
operations, statement of changes in net assets, and financial highlights for
the year then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on
our audit. The statement of changes in net assets for the year ended July 31,
1994 and the financial highlights for each of the years or periods in the
four-year period then ended, were audited by other auditors whose report
thereon, dated September 9, 1994, expressed an unqualified opinion on that
statement of changes in net assets and those financial highlights.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of July 31, 1995, by correspondence with the custodian.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Smith Barney Utilities Fund
of Smith Barney Income Funds as of July 31, 1995, and the results of its
operations, changes in its net assets and financial highlights for the year then
ended, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
September 22, 1995
28
<PAGE>218
Smith Barney
Utilities Fund
Trustees
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon
Madelon DeVoe Talley
Officers
Heath B. McLendon
Chairman and Investment Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President and Treasurer
Jack S. Levande
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
- ------------
[LOGO OF TRAVELERS GROUP APPEARS HERE]
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
Shareholder
Servicing Agent
The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Utilities Fund. It is not authorized for distribution to
prospective investors unless accompanied or preceded by a current Prospectus for
the Fund, which contains information concerning the Fund's investment policies
and expenses as well as other pertinent information.
Smith Barney
Utilities Fund
388 Greenwich Street
New York, New York 10013
FD 0426 9/95
<PAGE>219
ANNUAL REPORT
OF
SMITH BARNEY FUNDS, INC. -- UTILITY PORTFOLIO
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
<PAGE>220
ANNUAL REPORT
- --------------------------------------------------------------------------------
1994
1994
1994
1994
1994
Smith Barney
Funds, Inc.
Utility Portfolio
--------------------------------------------------------
December 31, 1994
[LOGO OF SMITH BARNEY MUTUAL FUNDS APPEARS HERE]
Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>221
- -----------------
Utility Portfolio
- -----------------
Dear Shareholder:
The 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
utilities industry 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, 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 utilities industry 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%.
Portfolio Strategy
In the face of industry and market uncertainties, our strategy has been to keep
the Utility Portfolio well diversified. In the second half of the year, we
gradually
1
<PAGE>222
increased the Portfolio's equity position. At year end, the 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, we increased both our stock and bond electric
position. With prices depressed, electric utilities offer good value and
attractive yields. We decreased our natural gas holdings because prices had
collapsed, and we thought they might suffer further losses. Also, we sold
Sprint, taking a profit on the strength of their long distance business, which
decreased our telephone position.
To benefit from the effects of rising interest rates, we modestly increased the
average duration in the bond portion of the 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 we favor 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, we
have positive expectations for GTE. Although the benefits of restructuring have
appeared more slowly than expected, we believe they will be seen in the next few
years. There are also excellent opportunities in their cellular phone business.
Outlook
Looking ahead, we believe 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 we will continue to seek those
companies for the Portfolio. In this environment, we expect that the performance
of the Utility Portfolio should improve as we continue to emphasize a
diversified portfolio and individual stock selection in the coming year.
Sincerely,
/s/ Stephen Treadway
Stephen Treadway
Chairman and Chief Executive Officer
January 31, 1995
2
<PAGE>223
Smith Barney Funds, Inc.
Utility Portfolio
- -------------------------------------------------------------------------------
Historical Performance - Class A Shares
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End of Income Capital Gain Total
Year Ended of Year Year Dividend Distributions Returns/(1)/
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 -- 0.08
- --------------------------------------------------------------------------------------------
Total $3.21 $0.59
- --------------------------------------------------------------------------------------------
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
- --------------------------------------------------------------------------------
Average Annual Total Return - Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without With
Sales Charge/(1)/ Sales Charge/(2)/
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Year Ended 12/31/94 (8.56)% (13.14)%
- -------------------------------------------------------------------------------------------
12/28/90* through 12/31/94 6.26 4.90
- -------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End of Income Capital Gain Total
Year Ended of Year Year Dividend Distributions Returns/(1)/
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/7/94*-12/31/94 $11.29 $11.32 $0.12 $0.05 1.82%
- --------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Average Annual Total Return - Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without With
Sales Charge/(1)/ Sales Charge/(2)/
- -------------------------------------------------------------------------------------------
<S> <C> <C>
11/7/94* through 12/31/94 1.82% (3.18)%
- -------------------------------------------------------------------------------------------
<FN>
* Inception.
</TABLE>
3
<PAGE>224
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End of Income Capital Gain Total
Year Ended of Year Year Dividend Distributions Returns/(1)/
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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>
- --------------------------------------------------------------------------------
Average Annual Total Return - Class C Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without With
Sales Charge/(1)/ Sales Charge/(2)/
- -------------------------------------------------------------------------------------------
<S> <C> <C>
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>
Without
Sales Charge/(1)/
- --------------------------------------------------------------------------------------
<S> <C>
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 gain distributions at net
asset value and does not reflect deduction of the applicable sales charge
with respect to Class A shares or the applicable contingent deferred sales
charges ("CDSC") with respect to Class B and Class C shares.
(2) Assumes reinvestment of all dividends and capital gain 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>
4
<PAGE>225
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in
Class A Shares of The Utility Portfolio vs Standard & Poor's
Utility, Lehman Bros. Intermediate Corp.
Bond and Lehman Bros. Government Corp. Bond Indices
(unaudited)
- --------------------------------------------------------------------------------
December 1990 - December 1994
[GRAPH APPEARS HERE]
<TABLE>
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG PORTFOLIO CLASS A, S&P UTILITY, LEHMAN BROTHER AND LEHMAN BROTHERS
<CAPTION> PORTFOLIO
Measurement period CLASS S&P LEHMAN LEHMAN
(Fiscal Year Covered) A UTILITY BROTHER BROTHERS
- --------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Measurement PT -
12/28/90 $ 9,550 $ 10,000 $ 10,000 $ 10,000
FYE 12/90 $ 9,559 $ 10,012 $ 10,017 $ 10,010
FYE 12/91 $ 11,205 $ 11,479 $ 11,742 $ 11,544
FYE 12/92 $ 12,076 $ 12,636 $ 12,675 $ 12,378
FYE 12/93 $ 13,326 $ 14,453 $ 14,054 $ 13,698
FYE 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>
5
<PAGE>226
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 59.0%
ELECTRIC -- 40.6%
70,000 American Electrical Power Co. $ 2,301,250
20,000 BCE Inc. 642,500
100,000 DPL Inc Holding Co. 2,050,000
130,000 Eastern Utility Association 2,860,000
30,000 Florida Progress Corp. 900,000
50,000 Illinova Corp. 1,087,500
10,000 McDermott International Inc. 247,500
100,000 Montana Power Co. 2,300,000
93,700 New York State Electric & Gas Corp. 1,780,300
128,100 Northeast Utilities 2,770,163
170,000 Pacificorp 3,081,250
80,000 Peco Energy Co. 1,960,000
60,000 Portland General Corp. 1,155,000
110,000 Public Service Enterprise Group 2,915,000
59,000 Texas Utilities Co. 1,888,000
15,000 TNP Enterprises Inc. 223,125
60,000 United Illuminating Co. 177,721
- --------------------------------------------------------------------------------
29,931,588
- --------------------------------------------------------------------------------
NATURAL GAS -- 9.0%
40,000 Questar Corp. 1,100,000
10,000 Sonat Inc. 280,000
25,000 Tenneco Inc. 1,062,500
50,000 UGI Corp. 1,018,750
135,000 Washington Energy Co. 1,822,500
50,000 Williams Coal Steam Gas Trust 875,000
20,000 Williams Co. 502,500
- --------------------------------------------------------------------------------
6,661,250
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 1.0%
40,000 Comsat Corp. 745,000
- --------------------------------------------------------------------------------
TELEPHONE -- 6.0%
15,000 Bell Atlantic Corp. 746,250
120,000 GTE Corp. 3,645,000
- --------------------------------------------------------------------------------
4,391,250
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>227
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
Real Estate Investment -- 2.4%
25,000 McArthur Glen Realty $ 412,500
50,000 Storage USA Inc. 1,375,000
- --------------------------------------------------------------------------------
1,787,500
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost--$45,244,400) 43,516,588
- --------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS -- 36.8%
ELECTRIC -- 28.1%
$1,000,000 Cleveland Electric Illumination, 9.375%
due 3/01/17 867,500
2,000,000 Coastal Corp., 10.75% due 10/10/10 2,200,000
2,000,000 Coastal Corp., 9.625% due 5/15/12 2,015,000
3,000,000 First Private Funding, 10.30% due 1/15/14 2,827,500
3,824,800 National Coop Services, 9.48% due 1/01/12 3,949,106
2,000,000 Natural Rural Utilities, 9.00% due 9/1/21 2,005,000
1,980,000 Public Service Electric, 8.75% due 11/01/21 1,940,400
2,900,000 Texas New Mexico Power, 10.75% due 9/15/03 2,856,500
2,000,000 Texas Utilities Electric, 9.75% due 5/01/21 2,072,500
- --------------------------------------------------------------------------------
20,733,506
- --------------------------------------------------------------------------------
AIRLINE -- 2.9%
2,150,000 Delta Airlines, 9.90% due 6/15/02 2,155,374
- --------------------------------------------------------------------------------
NATURAL GAS -- 3.8%
2,000,000 Transcontinental Pipeline, 9.125% due 2/01/17 1,860,000
1,000,000 Westinghouse Electric Co., 8.625% due 08/10/12 922,500
- --------------------------------------------------------------------------------
2,782,500
- --------------------------------------------------------------------------------
TRANSPORTATION -- 2.0%
2,O00,000 Greyhound, 10.00% due 7/31/01 1,505,000
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (Cost--$29,500,361) 27,176,380
- --------------------------------------------------------------------------------
EURO BONDS -- 2.8%
2,000,000 Fisher Brothers Financial Realty,
10.75% due 12/17/00 (Cost--$2,250,000) 2,075,000
- --------------------------------------------------------------------------------
GOVERNMENT BONDS -- 1.4%
1,000,000 U.S. Treasury Bond, 7.875% due 11/15/04
(Cost--$1,004,375) 1,003,570
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost--$77,999,136*) $73,771,538
- --------------------------------------------------------------------------------
<FN>
*Aggregate cost for Federal income tax purposes is substantially the same.
</TABLE>
See Notes to Financial Statements.
7
<PAGE>228
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (Cost -- $77,999,136) $73,771,538
Cash 1,379,432
Receivable for securities sold 1,349,021
Receivable for Fund shares sold 123,105
Dividends and interest receivable 1,214,038
- -------------------------------------------------------------------------------------------
Total Assets 77,837,134
- -------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 155,450
Payable for Fund shares purchased 13,045
Management fees payable 77,745
Distribution costs payable 55,407
Accrued expenses and other liabilities 122,254
- -------------------------------------------------------------------------------------------
Total Liabilities 423,961
- -------------------------------------------------------------------------------------------
Total Net Assets $77,413,173
- -------------------------------------------------------------------------------------------
NET ASSETS:
Par value of capital shares $ 68,449
Capital paid in excess of par value 81,567,506
Accumulated net realized gain on security transactions 4,816
Net unrealized depreciation of investments (4,227,598)
- -------------------------------------------------------------------------------------------
Total Net Assets $77,413,173
- -------------------------------------------------------------------------------------------
Shares Outstanding:
Class A 6,082,790
---------------------------------------------------------------------------------------
Class B 65,086
---------------------------------------------------------------------------------------
Class C 697,074
---------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $11.31
---------------------------------------------------------------------------------------
Class B* $11.32
---------------------------------------------------------------------------------------
Class C** $11.32
---------------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $11.91
- -------------------------------------------------------------------------------------------
<FN>
* Redemption price is NAV of Class B shares reduced by 5.00% if shares are
redeemed less than one year from initial purchase and declines by 1.00% per
year until no CDSC is incurred.
** Redemption price is NAV of Class C shares reduced by 1.00% if shares are
redeemed within the first year of purchase.
</TABLE>
See Notes to Financial Statements.
8
<PAGE>229
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Statement of Operations For the year ended December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Dividends $ 3,534,460
Interest 3,549,264
- -------------------------------------------------------------------------------------------------
Total Income 7,083,724
- -------------------------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 557,472
Distribution costs (Note 2) 294,159
Shareholder servicing fees 69,847
Registration fees 34,000
Shareholder communication fees 18,998
Custodian fees 16,002
Audit and legal fees 11,501
Directors' fees 2,500
Other 7,904
- -------------------------------------------------------------------------------------------------
Total Expenses 1,012,383
- -------------------------------------------------------------------------------------------------
Net Investment Income 6,071,341
- -------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 4):
Realized Gain From Security Transactions (excluding short-term
securities):
Proceeds from sales 50,826,269
Cost of securities sold 50,489,933
- -------------------------------------------------------------------------------------------------
Net Realized Gain 336,336
Change in Net Unrealized Appreciation of Investments:
Beginning of year 11,324,024
End of year (4,227,598)
- -------------------------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (15,551,622)
- -------------------------------------------------------------------------------------------------
Net Loss on Investments (15,215,286)
- -------------------------------------------------------------------------------------------------
Decrease in Net Assets Resulting From Operations $ (9,143,945)
- -------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>230
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 6,071,341 $ 7,915,352
Net realized gain 336,336 2,781,304
Increase (decrease) in net unrealized
appreciation of investments (15,551,622) 2,206,756
- ---------------------------------------------------------------------------------------------------
Increase (Decrease) In Net Assets Resulting
From Operations (9,143,945) 12,903,412
- ---------------------------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (6,203,791) (7,840,186)
Net realized gain (339,516) (2,776,876)
- ---------------------------------------------------------------------------------------------------
Decrease In Net Assets From Distributions
To Shareholders (6,543,307) (10,617,062)
- ---------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS:
Net proceeds from sale of shares 9,101,919 26,947,083
Net asset value of shares issued for
reinvestment of dividends 4,384,725 7,661,653
Cost of shares reacquired (41,366,290) (43,211,654)
- ---------------------------------------------------------------------------------------------------
Decrease In Net Assets From
Fund Share Transactions (27,879,646) (8,602,918)
- ---------------------------------------------------------------------------------------------------
Decrease In Net Assets (43,566,898) (6,316,568)
NET ASSETS:
Beginning of year 120,980,071 127,296,639
- ---------------------------------------------------------------------------------------------------
End of year* $77,413,173 $120,980,071
- ---------------------------------------------------------------------------------------------------
*Includes undistributed net investment income of: -- $84,181
- ---------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>231
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Utility Portfolio ("Portfolio") is a separate investment portfolio of
the Smith Barney Funds, Inc. ("Fund"). The Fund, a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company and consists of this
Portfolio and six other separate investment portfolios: Income and Growth, U.S.
Government Securities, Income Return Account, Monthly Payment Government, Short-
Term U.S. Treasury Securities and Capital Appreciation Portfolios. The financial
statements and financial highlights for the other portfolios are presented in
separate annual reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) securities transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing prices on such
markets; securities for which no sales price was reported and U.S. Government
and Government Agency obligations are valued at the mean between the bid and
asked prices; short-term investments that have a maturity of more than 60 days
are valued at prices based on market quotations for securities of similar type,
yield and maturity; short-term investments that have a maturity of 60 days or
less are valued at cost plus accreted discount, or minus amortized premium, as
applicable; (c) dividend income is recorded on the ex-dividend date and interest
income is recorded on the accrual basis; (d) gains or losses on the sale of
securities are calculated by using the specific identification method; (e)
direct expenses are charged to each portfolio and each class; management fees
and general fund expenses are allocated on the basis of relative net assets; (f)
dividends and distributions to shareholders are recorded by the Portfolio on the
ex-dividend date; (g) the accounting records of the Portfolio are maintained in
U.S. dollars. All assets and liabilities denominated in foreign currencies are
translated into U.S. dollars based on the rate of exchange of such currencies
against U.S. dollars on the date of valuation. Purchases and sales of
securities, and income and expenses are translated at the rate of exchange
quoted on the respective date that such transactions are recorded. Differences
between income and expense amounts recorded and collected or paid are adjusted
when reported by the custodian bank; (h) the Portfolio intends to comply with
the requirements of the Internal Revenue Code pertaining to regulated investment
companies and to make the required distributions to shareholders; therefore, no
provision for Federal income
11
<PAGE>232
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
taxes has been made; and (i) during 1994, the Fund adopted Statement of Position
---------------------
93-2 Determination, Disclosure, and Financial Statement Presentation of Income,
- ------------------------------------------------------------------------------
Capital Gain, and Return of Capital Distributions by Investment Companies.
- -------------------------------------------------------------------------
Accordingly, the net investment loss of $48,269 at December 31, 1994 has been
reclassified to paid-in capital. Net investment income, net realized gains, and
net assets were not affected by this change.
2. Management Agreement and Transactions with Affiliated Persons
Smith Barney Mutual Funds Management Inc. ("SBMFM"), formerly known as
Smith Barney Advisers, Inc., a subsidiary of Smith Barney Holdings Inc. ("SBH"),
acts as investment manager of the Fund. The Utility Portfolio pays SBMFM a
management fee calculated at an annual rate of 0.60% on the first $500 million
of average daily net assets, 0.55% on the next $500 million and 0.50% on average
daily net assets in excess of $1.0 billion. All fees are calculated daily and
paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
year ended December 31, 1994, SB received brokerage commissions of $22,907 and
was paid sales charges on Class A share purchases of approximately $162,000.
Effective November 7, 1994, the Fund adopted a new class structure,
renaming the existing Class B shares as Class C shares and exchanging the old
Class C shares into Class A shares. A contingent deferred sales charge ("CDSC")
was imposed on new Class B shares which begins at 5.00% if redemption occurs
less than one year from initial purchase and declines by 1.00% per year until no
CDSC is incurred. A CDSC of 1.00% was imposed on Class C shares if redemption
occurs within the first year from the date such investment was made. Any CDSC
imposed on redemptions is paid to SB. For the year ended December 31, 1994,
there were approximately $8,000 in such charges.
Pursuant to a Distribution Plan the Portfolio pays a service fee with
respect to its Class A, B and C shares calculated at the annual rate of 0.25% of
the average daily net assets of each respective class' shares. The
12
<PAGE>233
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Portfolio also pays a distribution fee with respect to Class B and C shares
calculated at the annual rate of 0.75% of the average daily net assets for that
class. All officers and two directors of the Fund are employees of SB.
3. Investments
During the year ended December 31, 1994, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) was $21,757,160 and $50,826,269, respectively.
At December 31, 1994, the net unrealized depreciation of investments for
Federal income tax purposes consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
Gross unrealized appreciation $ 2,210,202
Gross unrealized depreciation (6,437,800)
- --------------------------------------------------------------------------------
Net unrealized depreciation $ (4,227,598)
- --------------------------------------------------------------------------------
</TABLE>
4. Repurchase Agreements
The Portfolio purchases (and its custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
5. Capital Shares
At December 31, 1994, there were two billion shares of $0.01 par value
capital stock authorized. The Portfolio has the ability to issue multiple
classes of shares. Each share of a class represents an identical interest and
has the same rights, except that each class bears certain expenses, including
those specifically related to the distribution of its shares. At December 31,
1994, paid-in capital amounted to the following for each class:
<TABLE>
<CAPTION>
Class A Class B Class C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Paid-in Capital $71,423,954 $739,046 $9,472,955
- --------------------------------------------------------------------------------
</TABLE>
13
<PAGE>234
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1994 December 31, 1993
---------------------------- ---------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A++
Shares sold 399,731 $4,862,656 1,403,632 $ 19,296,800
Shares issued on reinvestment 333,095 3,997,753 540,025 7,351,402
Shares redeemed (3,185,160) (39,122,649) (3,104,284) (42,558,472)
- ----------------------------------------------------------------------------------------------------------------
Net Decrease (2,452,334) $(30,262,240) (1,160,627) $(15,910,270)
- ----------------------------------------------------------------------------------------------------------------
Class B*
Shares sold 65,088 $738,648 529,526 $ 7,318,245
Shares issued on reinvestment 279 3,155 21,923 296,738
Shares redeemed (281) (3,206) (47,143) (653,182)
- ----------------------------------------------------------------------------------------------------------------
Net Increase 65,086 $738,597 504,306 $ 6,961,801
- ----------------------------------------------------------------------------------------------------------------
Class C+
Shares sold 282,137 $ 3,500,615 23,589 $ 332,038
Shares issued on reinvestment 32,304 383,817 999 13,513
Shares redeemed (187,475) (2,240,435) -- --
- ----------------------------------------------------------------------------------------------------------------
Net Increase 126,966 $ 1,643,997 24,588 $ 345,551
- ----------------------------------------------------------------------------------------------------------------
<FN>
++ On October 10, 1994 the old Class C shares were exchanged into Class A
shares and therefore Class C share activity is included with the Class A
share activity prior to this date.
* Sales of Class B shares commenced on November 7, 1994.
+ On November 7, 1994 the old Class B shares were renamed Class C shares.
</TABLE>
14
<PAGE>235
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares 1994 1993 1992 1991 1990(1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.29 $13.07 $13.07 $11.94 $11.94
- -----------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
Net investment income 0.79 0.82 0.79 0.78 0.01
Net realized and unrealized gain (loss)
on investments (1.91) 0.52 0.17 1.20 --
- -----------------------------------------------------------------------------------------------------------
Total Income (Loss) from Investment Operations (1.12) 1.34 0.96 1.98 0.01
- -----------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.81) (0.81) (0.79) (0.79) (0.01)
Distributions from net realized gains on
security transactions (2) (0.05) (0.31) (0.17) (0.06) --
- -----------------------------------------------------------------------------------------------------------
Total Distributions (0.86) (1.12) (0.96) (0.85) (0.01)
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $11.31 $13.29 $13.07 $13.07 $11.94
- -----------------------------------------------------------------------------------------------------------
Total Return (8.56)% 10.37% 7.77% 17.21% 0.08%++
- -----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $68,788 $113,080 $126,437 $104,905 $71,237
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.01% 0.98% 1.07% 1.00% 1.00%+
Net investment income 6.54 5.97 6.13 6.61 7.58+
- -----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 23.54% 36.68% 27.54% 39.45% --
- -----------------------------------------------------------------------------------------------------------
Class B Shares (3) Class C Shares (5)
----------------- --------------------------
1994(4) 1994 1993 1992(6)
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $11.29 $13.28 $13.07 $12.98
- -----------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
Net investment income 0.14 0.71 0.73 0.02
Net realized and unrealized gain
on investments 0.06 (1.91) 0.50 0.26
- -----------------------------------------------------------------------------------------------------------
Total Income (Loss) from Investment Operations 0.20 (1.20) 1.23 0.28
- -----------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.12) (0.71) (0.71) (0.03)
Distributions from net realized gains on
security transactions (2) (0.05) (0.05) (0.31) (0.16)
- -----------------------------------------------------------------------------------------------------------
Total Distributions (0.17) (0.76) (1.02) (0.19)
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $11.32 $11.32 $13.28 $13.07
- -----------------------------------------------------------------------------------------------------------
Total Return 1.82%++ (9.19)% 9.48% 2.23%++
- -----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $737 $7,889 $7,573 $860
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.67%+ 1.77% 1.72% 1.55%+
Net investment income 4.71+ 5.87 5.12 2.45+
- -----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 23.54% 23.54% 36.68% 27.45%
- -----------------------------------------------------------------------------------------------------------
<FN>
(1) For the period from December 28, 1990 (inception date) to December 31, 1990.
(2) Net short term gains, if any, are included and reported as ordinary income
for tax purposes.
(3) On November 7, 1994 the old Class B shares were renamed Class C shares.
(4) For the period from November 7, 1994 (inception date) to December 31, 1994.
(5) On October 10, 1994 old Class C shares were exchanged into Class A shares
and therefore Class C share activity is included with the Class A share
activity prior to this date.
(6) For the period from December 2, 1992 (inception date) to December 31, 1992.
++ Not annualized as it may not be representative of the total return for
the year.
+ Annualized.
</TABLE>
15
<PAGE>236
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Smith Barney Funds, Inc.:
We have audited the accompanying statement of assets and liabilities
including the schedule of investments of the Utility Portfolio of Smith Barney
Funds, Inc. as of December 31, 1994, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended and the financial highlights for each of
the years in the four-year period then ended and the period from December 28,
1990 (commencement of operations) to December 31, 1990. These financial
statements and financial highlights are the responsibility of the Portfolio's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Utility Portfolio of Smith Barney Funds, Inc. as of December 31, 1994 and the
results of its operations for the year then ended, changes in its net assets for
each of the years in the two-year period then ended and the financial highlights
for each of the years in the four-year period then ended and the period from
December 28, 1990 (commencement of operations) to December 31, 1990, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 17, 1995
16
<PAGE>237
Smith Barney
Funds, Inc.
Directors
Ralph D. Creasman
Joseph H. Fleiss
Donald R. Foley
Paul Hardin
Francis P. Martin, M.D.
Roderick C. Rasmussen
Bruce D. Sargent
John P. Toolan
Stephen Treadway, Chairman
C. Richard Youngdahl
Officers
Stephen Treadway
Chief Executive Officer
Heath B. McLendon
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Bruce D. Sargent
Vice President
Ayako Weissman
Vice President
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Smith Barney
- ------------
[LOGO OF TRAVELERS GROUP APPEARS HERE]
Investment Manager
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
Shareholder
Servicing Agent
The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Funds, Inc. -- Utility Portfolio. It is not authorized for
distribution to prospective investors unless accompanied or preceded by a
current Prospectus for the Portfolio, which contains information concerning the
Portfolio's investment policies and expenses as well as other pertinent
information.
Smith Barney Funds, Inc.
388 Greenwich Street
New York, New York 10013
FD 0852 B5
<PAGE>238
SEMI-ANNUAL REPORT
OF
SMITH BARNEY FUNDS, INC. -- UTILITY PORTFOLIO
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1995
<PAGE>239
- --------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
Smith Barney
Funds, Inc.
Utility Portfolio
-------------------------------------------------------
June 30,1995
[LOGO APPEARS HERE] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>240
- --------------------------------------------------------------------------------
Utility Portfolio
- --------------------------------------------------------------------------------
Dear Shareholder:
The Utility Portfolio's total return for the six months ended June 30, 1995 was
12.62% for Class A shares. This compares with 15.14% for the Standard & Poor's
Utility Index, an unmanaged index of 45 gas, electric, and telephone stocks, and
11.80% for the Lehman Government/Corporate Bond Index, an unmanaged index which
measures the performance of U.S. government and corporate bonds, for the same
period. The average total return for all utility stock funds for the same period
was 11.11%, according to Lipper Analytical Services.
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 Fed'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
We have been fully invested throughout the year. At the present time, asset
allocation for the Utility Portfolio is 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.
1
<PAGE>241
In selecting stocks for the Utility Portfolio, we try 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. We think that there are a number of positive changes taking place within
the company which are not yet reflected in the price of the stock. We have also
added Houston Industries to the Portfolio. We believe that the sale of its
cable operations will provide funds for a share buy-back plan and boost
earnings. In the telephone utilities area, we have added Sprint and Comsat and
increased our position in Telmex.
Outlook
As we discussed, the yield on utility stocks is historically high relative to
Treasuries. In our 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 our largest position in
GTE, as well as Bell Atlantic.
We thank you for your confidence in our investment management and look forward
to serving your investment needs in the future.
Sincerely,
/s/ Heath B. McLendon /s/ Philip Miller
Heath B. McLendon Philip Miller
Chairman and Portfolio Manager
Chief Executive Officer
July 20, 1995
2
<PAGE>242
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End of Income Capital Gain Total
Period Ended of Period Period Dividend Distributions Returns/(1)/
================================================================================================
<S> <C> <C> <C> <C> <C>
6/30/95 $11.31 $12.31 $0.41 $0.00 12.62%
- ------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------
Inception*- 12/31/90 11.94 11.94 0.01 0.00 0.08
================================================================================================
Total $3.62 $0.59
================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
- --------------------------------------------------------------------------------
Average Annual Total Return -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without With
Sales Charge/(1)/ Sales Charge/(2)/
================================================================================================
<S> <C> <C>
Six Months Ended 6/30/95+ 12.62% 6.95%
- ------------------------------------------------------------------------------------------------
Year Ended 6/30/95 12.87 7.21
- ------------------------------------------------------------------------------------------------
Inception* through 6/30/95 8.37 7.14
- ------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End of Income Capital Gain Total
Period Ended of Period Period Dividend Distributions Returns/(1)/
================================================================================================
<S> <C> <C> <C> <C> <C>
6/30/95 $11.32 $12.34 $0.35 $0.00 12.31%
- ------------------------------------------------------------------------------------------------
Inception*-12/31/94 11.29 11.32 0.12 0.05 1.82
================================================================================================
Total $0.47 $0.05
================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Average Annual Total Return -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without With
Sales Charge/(1)/ Sales Charge/(2)/
================================================================================================
<S> <C> <C>
Six Months Ended 6/30/95+ 12.31% 7.31%
- ------------------------------------------------------------------------------------------------
Inception* through 6/30/95 14.36 9.36
- ------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>243
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End of Income Capital Gain Total
Period Ended of Period Period Dividend Distributions Returns/(1)/
================================================================================================
<S> <C> <C> <C> <C> <C>
6/30/95 $11.32 $12.33 $0.35 $0.00 12.22%
- ------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------
Inception*-12/31/92 12.98 13.07 0.03 0.16 2.23
================================================================================================
Total $1.80 $0.52
================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Average Annual Total Return -- Class C Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without With
Sales Charge/(1)/ Sales Charge/(2)/
================================================================================================
<S> <C> <C>
Six Months Ended 6/30/95+ 12.22% 11.22%
- ------------------------------------------------------------------------------------------------
Year Ended 6/30/95 12.07 11.07
- ------------------------------------------------------------------------------------------------
Inception* through 6/30/95 5.23 5.23
- ------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without
Sales Charge/(1)/
================================================================================================
<S> <C>
Class A (Inception* through 6/30/95) 43.66%
- ------------------------------------------------------------------------------------------------
Class B (Inception* through 6/30/95) 14.36
- ------------------------------------------------------------------------------------------------
Class C (Inception* through 6/30/95) 14.03
- ------------------------------------------------------------------------------------------------
<FN>
(1) Assumes reinvestment of all dividends and capital gain distributions at net
asset value and does not reflect deduction of the applicable sales charge
with respect to Class A shares or the applicable contingent deferred sales
charges ("CDSC") with respect to Class B and Class C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions at net
asset value. In addition, Class A shares reflect the deduction of the
maximum initial sales charge of 5.00% and 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, B and C shares are December 28, 1990,
November 7, 1994 and December 2, 1992, respectively.
+ Represents total return for the period from January 1, 1995 through June 30,
1995, not annualized.
</TABLE>
4
<PAGE>244
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of
The Utility Portfolio vs Standard & Poor's Utility, Lehman Bros.
Intermediate Corp. Bond and Lehman Bros.
Government Corp. Bond Indexes
(unaudited)
- --------------------------------------------------------------------------------
December 1990 - June 1995
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Lehman Brothers Lehman Brothers
Utility S&P Intermediate Corp. Gov't. Corp.
Date Portfolio Utility Bond Index 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 10,544
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 13,788
6/95 13,723 14,906 15,379 15,415
<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 in
effect at the time of investment and reinvestment of dividends (after
deduction of applicable sales charge through November 7, 1994, afterwards at
net asset value) and capital gains at net asset value through June 30, 1995.
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 Indexes, including U.S. government
treasury and agency securities, corporate and yankee bonds. The corporate
index sectors are industrial finance, utility and Yankee. The indexes 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>
5
<PAGE>245
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) June 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
===============================================================================
<C> <S> <C>
COMMON STOCKS -- 59.6%
ELECTRIC -- 37.5%
35,000 American Electrical Power Co. $ 1,229,375
100,000 DPL Inc. Holding Co. 2,212,500
125,000 Eastern Utilities Association 2,828,125
70,000 Energy Corp. 1,688,750
25,000 Florida Progress Corp. 781,250
50,000 Illinova Corp. 1,268,750
10,000 Houston Industries 421,250
100,000 Montana Power Co. 2,300,000
93,700 New York State Electric & Gas Corp. 2,190,238
110,000 Northeast Utilities 2,475,000
100,000 Pacificorp 1,875,000
80,000 Peco Energy Co. 2,210,000
60,000 Portland General Corp. 1,327,500
110,000 Public Service Enterprise Group 3,052,500
59,000 Texas Utilities Co. 2,028,125
60,000 United Illumination Co. 1,980,000
- -------------------------------------------------------------------------------
29,868,363
- -------------------------------------------------------------------------------
NATURAL GAS -- 10.7%
30,000 Central & Southwest Corp. 787,500
25,000 CMS Energy Corp. 615,625
40,000 Questar Corp. 1,150,000
10,000 Sonat Inc. 305,000
25,000 Tenneco Inc. 1,150,000
50,000 UGI Corp. 1,056,250
155,000 Washington Energy Co. 2,538,125
50,000 Williams Coal Steam Gas Trust 887,500
- -------------------------------------------------------------------------------
8,490,000
- -------------------------------------------------------------------------------
TELECOMMUNICATION -- 3.0%
50,000 Comsat Corp. 981,250
20,000 Sprint Corp. 672,500
25,000 Telefonos de Mexico 740,625
- -------------------------------------------------------------------------------
2,394,375
- -------------------------------------------------------------------------------
TELEPHONE -- 6.2%
15,000 Bell Atlantic Corp. 840,000
120,000 GTE Corp. 4,095,000
- -------------------------------------------------------------------------------
4,935,000
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>246
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
===============================================================================
<C> <S> <C>
Real Estate Investment Trusts -- 2.2%
25,000 McArthur Glen Realty $ 365,625
50,000 Storage USA Inc. 1,418,750
- -------------------------------------------------------------------------------
1,784,375
- -------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost -- $45,434,908) 47,472,113
===============================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
===============================================================================
<C> <S> <C>
CORPORATE BONDS -- 37.7%
AIRLINE -- 3.0%
$2,150,000 Delta Airlines, 9.900% due 6/16/02 2,413,375
- -------------------------------------------------------------------------------
ELECTRIC -- 28.6%
1,000,000 Cleveland Electric Illumination,
9.375% due 3/01/17 970,000
2,000,000 Coastal Corp., 10.750% due 10/01/10 2,512,500
2,000,000 Coastal Corp., 9.625% due 5/15/12 2,300,000
3,000,000 First Private Funding, 10.300% due 1/15/14 3,082,500
3,825,000 National Coop Services, 9.480% due 1/01/12 4,135,781
2,000,000 National Rural Utilities, 9.000% due 9/1/21 2,235,000
1,980,000 Public Service Electric, 8.750% due 11/01/21 2,128,500
2,900,000 Texas New Mexico Power, 10.750% due 9/15/03 3,055,875
2,000,000 Texas Utilities Electric, 9.750% due 5/01/21 2,322,500
- -------------------------------------------------------------------------------
22,742,656
- -------------------------------------------------------------------------------
NATURAL GAS -- 3.9%
2,000,000 Transcontinental Pipeline, 9.125% due 2/01/17 2,102,500
1,000,000 Westinghouse Electric Co., 8.625% due 8/01/12 1,032,500
- -------------------------------------------------------------------------------
3,135,000
- -------------------------------------------------------------------------------
TRANSPORTATION -- 2.2%
2,000,000 Greyhound, 10.000% due 7/31/01 1,737,500
- -------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (Cost -- $29,500,561) 30,028,531
===============================================================================
EURO BONDS -- 2.7%
2,000,000 Fisher Brothers Financial Realty,
10.75% due 12/17/00 (Cost -- $2,250,000) 2,110,000
===============================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $77,185,469*) $79,610,644
===============================================================================
<FN>
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
7
<PAGE>247
Smith Barney Funds, Inc.
Utility Portfolio
- -------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) June 30, 1995
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (Cost -- $77,185,469) $79,610,644
Receivable for securities sold 419,544
Dividends and interest receivable 1,178,266
- -------------------------------------------------------------------------------
Total Assets 81,208,454
- -------------------------------------------------------------------------------
LIABILITIES:
Management fees payable 40,386
Distribution costs payable 16,187
Dividends payable 434,198
Accrued expenses 59,949
Other liabilities 727,750
- -------------------------------------------------------------------------------
Total Liabilities 1,278,470
- -------------------------------------------------------------------------------
Total Net Assets $79,929,984
===============================================================================
NET ASSETS:
Par value of capital shares $ 64,898
Capital paid in excess of par value 77,266,117
Overdistributed net investment income (54,359)
Accumulated net realized gain on security transactions 228,153
Net unrealized appreciation of investments 2,425,175
- -------------------------------------------------------------------------------
Total Net Assets $79,929,984
===============================================================================
Shares Outstanding:
Class A 5,661,001
- -------------------------------------------------------------------------------
Class B 198,878
- -------------------------------------------------------------------------------
Class C 629,937
- -------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $12.31
- -------------------------------------------------------------------------------
Class B* $12.34
- -------------------------------------------------------------------------------
Class C** $12.33
- -------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $12.96
===============================================================================
<FN>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed less than one year from initial purchase.
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
</TABLE>
8
<PAGE>248
Smith Barney Funds, Inc.
Utility Portfolio
- -------------------------------------------------------------------------------
Statement of Operations (unaudited)
- -------------------------------------------------------------------------------
For the Six Months Ended June 30, 1995
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Dividends $1,573,331
Interest 1,523,606
- -------------------------------------------------------------------------------
Total Investment Income 3,096,937
- -------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 239,216
Distribution fees (Note 2) 136,541
Shareholder and system servicing fees 34,449
Registration fees 16,860
Shareholder communications 9,421
Custody 7,935
Audit and legal 5,703
Directors' fees 1,240
Other 3,919
- -------------------------------------------------------------------------------
Total Expenses 455,284
- -------------------------------------------------------------------------------
Net Investment Income 2,641,653
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 7,506,324
Cost of securities sold 7,282,987
- -------------------------------------------------------------------------------
Net Realized Gain 223,337
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period (4,227,598)
End of period 2,425,175
- -------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 6,652,773
- -------------------------------------------------------------------------------
Net Gain on Investments 6,876,110
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations $9,517,763
===============================================================================
</TABLE>
See Notes to Financial Statements.
9
<PAGE>249
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1995 (unaudited)
and the Year Ended December 31, 1994
<TABLE>
<CAPTION>
1995 1994
===================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 2,641,653 $ 6,071,341
Net realized gain 223,337 336,336
Increase (decrease) in net unrealized appreciation
of investments 6,652,773 (15,551,622)
- ---------------------------------------------------------------------------------------------------
Increase (Decrease) in
Net Assets From Operations 9,517,763 (9,143,945)
- ---------------------------------------------------------------------------------------------------
DISTRIBUTION TO
SHAREHOLDERS FROM:
Net investment income (2,696,012) (6,203,791)
Net realized gain -- (339,516)
- ---------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions To Shareholders (2,696,012) (6,543,307)
- ---------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 3,863,832 9,101,919
Net asset value of shares issued for
reinvestment of dividends 1,512,348 4,384,725
Cost of shares reacquired (9,681,120) (41,366,290)
- ---------------------------------------------------------------------------------------------------
Decrease in Net Assets From Fund
Share Transactions (4,304,940) (27,879,646)
- ---------------------------------------------------------------------------------------------------
Increase (Decrease) In Net Assets 2,516,811 (43,566,898)
NET ASSETS:
Beginning of period 77,413,173 120,980,071
- ---------------------------------------------------------------------------------------------------
End of period* $79,929,984 $ 77,413,173
===================================================================================================
* Includes overdistributed net investment income of: $(54,359) --
===================================================================================================
</TABLE>
See Notes to Financial Statements.
10
<PAGE>250
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Utility Portfolio ("Portfolio") is a separate investment portfolio of
the Smith Barney Funds, Inc. ("Fund"). The Fund, a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company and consists of this
Portfolio and five other separate investment portfolios: Income and Growth, U.S.
Government Securities, Income Return Account, Monthly Payment Government and
Short-Term U.S. Treasury Securities Portfolios. The financial statements and
financial highlights for the other portfolios are presented in separate semi-
annual reports.
The significant accounting policies consistently followed by the Fund are:
(a) securities transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing prices on such
markets; securities for which no sales price was reported and U.S. Government
and Government Agency obligations are valued at the mean between the bid and
asked prices; short-term investments that have a maturity of more than 60 days
are valued at prices based on market quotations for securities of similar type,
yield and maturity; short-term investments that have a maturity of 60 days or
less are valued at cost plus accreted discount, or minus amortized premium, as
applicable; (c) dividend income is recorded on the ex-dividend date and interest
income is recorded on the accrual basis; (d) gains or losses on the sale of
securities are calculated by using the specific identification method; (e)
direct expenses are charged to each portfolio and each class; management fees
and general fund expenses are allocated on the basis of relative net assets; (f)
dividends and distributions to shareholders are recorded on the ex-dividend
date; (g) the accounting records are maintained in U.S. dollars. All assets and
liabilities denominated in foreign currencies are translated into U.S. dollars
based on the rate of exchange of such currencies against U.S. dollars on the
date of valuation. Purchases and sales of securities, and income and expenses
are translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are adjusted when reported by the custodian bank;
(h) each portfolio intends to comply with the requirements of the Internal
Revenue Code pertaining to regulated investment companies and to make the
required distributions to shareholders; therefore, no provision for Federal
income taxes has been made; and (i) during 1994, the Fund adopted STATEMENT OF
POSITION 93-2
11
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES.
Accordingly, the net investment loss of $48,269 at December 31, 1994 has been
reclassified to paid-in capital. Net investment income, net realized gains, and
net assets were not affected by this change.
2. Management Agreement and Transactions with Affiliated Persons
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment manager of the Fund. The
Utility Portfolio pays SBMFM a management fee calculated at an annual rate of
0.60% on the Portfolio's average daily net assets up to $500 million, 0.55% on
the next $500 million and 0.50% on average daily net assets in excess of $1.0
billion. All fees are calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
six months ended June 30, 1995, SB received brokerage commissions of $2,100 and
sales charges of approximately $39,000 on sales of Utility Class A shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares if redemption occurs less than one year from initial purchase and
declines by 1.00% per year thereafter until no CDSC is incurred. Class C shares
have a 1.00% CDSC if redemption occurs within the first year from the date such
investment was made. Any CDSC imposed on redemptions is paid to SB. For the six
months ended June 30, 1995, there were approximately $3,000 in such charges.
Pursuant to a Distribution Plan the Portfolio pays a service fee with
respect to its Class A, B and C shares calculated at the annual rate of 0.25% of
the average daily net assets for each class, respectively. The Portfolio also
pays a distribution fee with respect to Class B and C shares calculated at the
annual rate of 0.75% of the average daily net assets for each class,
respectively. All officers and three directors of the Fund are employees of SB.
12
<PAGE>251
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
3. Investments
During the six months ended June 30, 1995, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) was $6,469,320 and $7,506,324, respectively.
At June 30, 1995, the net unrealized appreciation of investments for
Federal income tax purposes consisted of the following:
<TABLE>
===============================================================================
<S> <C>
Gross unrealized appreciation $ 4,727,200
Gross unrealized depreciation (2,302,025)
- -------------------------------------------------------------------------------
Net unrealized appreciation $ 2,425,175
===============================================================================
</TABLE>
4. Repurchase Agreements
The Portfolio purchases (and its custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
5. Capital Shares
At June 30, 1995, there were two billion shares of $0.01 par value capital
stock authorized. The Portfolio has the ability to issue multiple classes of
shares. Each share of a class represents an identical interest and has the same
rights, except that each class bears certain expenses, including those
specifically related to the distribution of its shares. Effective November 7,
1994, the Fund adopted a new class structure, renaming existing Class B shares
as Class C shares and exchanging former Class C shares into Class A shares. At
June 30, 1995, total paid-in capital amounted to the following for each class:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Total Paid-in Capital $66,369,022 $2,307,654 $8,654,339
================================================================================
</TABLE>
13
<PAGE>252
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1995 December 31, 1994*
---------------------------- ------------------------------
Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Class A++
Shares sold 129,176 $ 1,516,185 399,731 $ 4,862,656
Shares issued on
reinvestment 112,716 1,329,040 333,095 3,997,753
Shares redeemed (663,681) (7,916,671) (3,185,160) (39,122,649)
- -------------------------------------------------------------------------------------------------
Net Decrease (421,789) $(5,071,446) (2,452,334) $(30,262,240)
=================================================================================================
Class B
Shares sold 138,967 $ 1,630,737 65,088 $ 738,648
Shares issued on
reinvestment 2,662 31,575 279 3,155
Shares redeemed (7,837) (92,795) (281) (3,206)
- -------------------------------------------------------------------------------------------------
Net Increase 133,792 $ 1,569,517 65,086 $ 738,597
=================================================================================================
Class C+
Shares sold 61,089 $ 716,910 282,137 $ 3,500,615
Shares issued on
reinvestment 12,856 151,733 32,304 383,817
Shares redeemed (141,082) (1,671,654) (187,475) (2,240,435)
- -------------------------------------------------------------------------------------------------
Net Increase (Decrease) (67,137) $ (803,011) 126,966 $ 1,643,997
=================================================================================================
<FN>
* For Class B shares, transactions are for the period from November 7, 1994
(inception date) to December 31, 1994.
++ On October 10, 1994 the former Class C shares were exchanged into Class A
shares; therefore for the period from January 1, 1994 to October 9, 1994 the
Class C share activity is included with the Class A share activity.
+ On November 7, 1994 the former Class B shares were renamed Class C shares.
</TABLE>
14
<PAGE>253
Smith Barney Funds, Inc.
Utility Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each
period:
<TABLE>
<CAPTION>
Class A Shares 1995(1) 1994 1993 1992 1991
========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $11.31 $13.29 $13.07 $13.07 $11.94
- --------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.40 0.79 0.82 0.79 0.78
Net realized and unrealized
gain (loss) on investments 1.01 (1.91) 0.52 0.17 1.20
- --------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.41 (1.12) 1.34 0.96 1.98
- --------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.41) (0.81) (0.81) (0.79) (0.79)
Distributions from net realized gains on
security transactions (2) -- (0.05) (0.31) (0.17) (0.06)
- --------------------------------------------------------------------------------------------------------
Total Distributions (0.41) (0.86) (1.12) (0.96) (0.85)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $12.31 $11.31 $13.29 $13.07 $13.07
- --------------------------------------------------------------------------------------------------------
Total Return 12.62%++ (8.56)% 10.37% 7.77% 17.21%
- --------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $69,709 $68,788 $113,080 $126,437 $104,905
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.04%+ 1.01% 0.98% 1.07% 1.00%
Net investment income 6.71+ 6.54 5.97 6.13 6.61
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 8.21% 23.54% 36.68% 27.54% 39.45%
========================================================================================================
<CAPTION>
Class B Shares(3) 1995(1) 1994(4)
========================================================================================================
<S> <C> <C>
Net Asset Value, Beginning of Period $11.32 $11.29
- --------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.36 0.14
Net realized and unrealized
gain on investments 1.01 0.06
- --------------------------------------------------------------------------------------------------------
Total Income From Operations 1.37 0.20
- --------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.35) (0.12)
Distributions from net realized gains on
security transactions (2) -- (0.05)
- --------------------------------------------------------------------------------------------------------
Total Distributions (0.35) (0.17)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $12.34 $11.32
- --------------------------------------------------------------------------------------------------------
Total Return 12.31%++ 1.82%++
- --------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $2,453 $737
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.73%+ 1.67%+
Net investment income 6.03+ 4.71+
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 8.21% 23.54%
========================================================================================================
<FN>
(1) For the six months ended June 30, 1995 (unaudited).
(2) Net short-term gains, if any, are included and reported as ordinary income
for tax purposes.
(3) On November 7, 1994 the former Class B shares were renamed Class C shares.
(4) For the period from November 7, 1994 (inception date) to December 31, 1994.
++ Not annualized as it may not be representative of the total return for the
year.
+ Annualized.
</TABLE>
15
<PAGE>254
Smith Barney Funds, Inc.
Utility Portfolio
- -----------------------------------------------------------------------------
Financial Highlights (continued)
- -----------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class C Shares(1) 1995(3) 1994 1993 1992(4)
=============================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $11.32 $13.28 $13.07 $12.98
- -----------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.35 0.71 0.73 0.02
Net realized and unrealized
gain (loss) on investments 1.01 (1.91) 0.50 0.26
- -----------------------------------------------------------------------------
Total Income (Loss) From Operations 1.36 (1.20) 1.23 0.28
- -----------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.35) (0.71) (0.71) (0.03)
Distributions from net realized gains on
security transactions (2) -- (0.05) (0.31) (0.16)
- -----------------------------------------------------------------------------
Total Distributions (0.35) (0.76) (1.02) (0.19)
- -----------------------------------------------------------------------------
Net Asset Value, End of Period $12.33 $11.32 $13.28 $13.07
- -----------------------------------------------------------------------------
Total Return 12.22%++ (9.19)% 9.48% 2.23%++
- -----------------------------------------------------------------------------
Net Assets, End of Period (000s) $7,768 $7,889 $7,573 $860
- -----------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.79%+ 1.77% 1.72% 1.55%+
Net investment income 5.98+ 5.87 5.12 2.45+
- -----------------------------------------------------------------------------
Portfolio Turnover Rate 8.21% 23.54% 36.68% 27.45%
=============================================================================
<FN>
(1) On October 10, 1994 the former Class C shares were exchanged into Class A
shares; therefore for the period from January 1, 1994 to October 9, 1994 the
Class C share activity is included with the Class A share activity.
(2) Net short term gains, if any, are included and reported as ordinary income
for tax purposes.
(3) For the six months ended June 30, 1995 (unaudited).
(4) For the period from December 2, 1992 (inception date) to December 31, 1992.
++ Not annualized as it may not be representative of the total return for the
year.
+ Annualized.
</TABLE>
16
<PAGE>255
Smith Barney
Funds, Inc.
Directors
Jessica M. Bibliowicz
Ralph D. Creasman
Joseph H. Fleiss
Donald R. Foley
Paul Hardin
Francis P. Martin, M.D.
Roderick C. Rasmussen
Bruce D. Sargent
John P. Toolan
Heath B. McLendon, Chairman
C. Richard Youngdahl
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Bruce D. Sargent
Vice President
Ayako Weissman
Vice President
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
- ------------
[LOGO OF TRAVELERS
GROUP APPEARS HERE]
Investment Manager
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
Shareholder
Servicing Agent
The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Funds, Inc.: Utility Portfolio. It is not authorized for
distribution to prospective investors unless accompanied or preceded by a
current Prospectus for the Portfolio, which contains information concerning the
Portfolio's investment policies and expenses as well as other pertinent
information.
Smith Barney Funds, Inc.
388 Greenwich Street
New York, New York 10013
FD 0629 8/95
<PAGE>256
SMITH BARNEY INCOME FUNDS
PART C
OTHER INFORMATION
Item 15. Indemnification
The response to this item is incorporated by reference to
"Liability of Directors/Trustees" under the caption
"Information on Shareholders' Rights" in Part A of this
Registration Statement.
Item 16. Exhibits -- References are to Registrant's Registration
Statement on Form N-1A as filed with the
Securities and Exchange Commission on March 13,
1985 (File Nos. 2-96408 and 811-4254) (the
"Registration Statement")
(1) (a) Registrant's First Amended and Restated Master Trust
Agreement dated November 5, 1993 and Amendment No. 1 to
the First Amended and Restated Master Trust Agreement,
dated July 30, 1994, are incorporated by reference to
Post-Effective Amendment No. 36 to the Registration
Statement.
(1) (b) Amendment No. 2 to the First Amended and Restated Master Trust
Agreement, dated October 14, 1994, is incorporated by reference
to Exhibit 1(b) of Post-Effective Amendment No. 40 to the
Registration Statement.
(1) (c) Amendment No. 3 to the First Amended and Restated Master
Trust Agreement, dated October 14, 1994, is incorporated
by reference to Exhibit 1(c) of Post-Effective Amendment
No. 40 to the Registration Statement.
(2) By-Laws of the Registrant are incorporated by reference to
Exhibit 2 to the Registration Statement.
(3) Not Applicable.
(4) Agreement and Plan of Reorganization (included as Exhibit A to
Registrant's Prospectus/Proxy Statement contained in Part A of
this Registration Statement).*
(5) Not Applicable.
<PAGE>257
(6) Investment Advisory Agreement for Smith Barney Utilities Fund,
a portfolio of the Registrant, is incorporated by reference to
Post-Effective Amendment No. 36 to the Registration Statement.
(7) Distribution Agreement is incorporated by reference to Post-
Effective Amendment No. 38 to the Registration Statement.
(8) Not Applicable.
(9) (a) Form of Custodian Agreement effective March 27, 1995.*
(9) (b) Transfer Agency and Registrar Agreement dated August 4, 1983 is
incorporated by reference to Post-Effective Amendment No. 16 to
the Registration Statement.
(10) Amended Services and Distribution Plan of the Registrant
pursuant to Rule 12b-1 is incorporated by reference to Post-
Effective Amendment No. 40 to the Registration Statement.
(11) (a) Opinion and Consent of Willkie Farr & Gallagher with respect to
validity of shares.*
(11) (b) Opinion and Consent of Goodwin, Procter & Hoar with respect to
certain matters under Massachusetts law.*
(12) Opinion and Consent of Willkie Farr & Gallagher with respect to
tax matters.*
(13) Not Applicable.
(14) (a) Consent of Coopers & Lybrand L.L.P.*
(14) (b) Consents of KPMG Peat Marwick LLP.*
(15) Not Applicable.
(16) Powers of Attorney (included on signature page).**
(17) (a) Form of Proxy Card.*
<PAGE>258
(17) (b) Registrant's Declaration pursuant to Rule 24f-2 is incorporated
by reference to its initial Registration Statement.
* Filed herewith.
** Previously filed.
Item 17. Undertakings
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of
a prospectus which is a part of this Registration
Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the
Securities Act of 1933, the reoffering prospectus will
contain the information called for by the applicable
registration form for reofferings by persons who may be
deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus
that is filed under paragraph (1) above will be filed as a
part of an amendment to the Registration Statement and
will not be used until the amendment is effective, and
that, in determining any liability under the Securities
Act of 1933, each post-effective amendment shall be deemed
to be a new registration statement for the securities
offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide
offering of them.
<PAGE>259
SIGNATURES
As required by the Securities Act of 1933, this Registration
Statement has been signed on behalf of the registrant, in the City of New York
and State of New York on the 3rd day of October, 1995.
Smith Barney Income Funds
on behalf of Smith Barney Utilities Fund
By: /s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board and
Chief Executive Officer
As required by the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated.
Signature Title Date
/s/ Heath B. McLendon Chairman of the Board and October 3, 1995
Heath B. McLendon Chief Executive Officer
/s/ Lewis E. Daidone Senior Vice President and October 3, 1995
Lewis E. Daidone Treasurer (Chief Financial
and Accounting Officer)
* Trustee October 3, 1995
Lee Abraham
<PAGE>260
* Trustee October 3, 1995
Antoinette C. Bentley
Trustee October , 1995
Allan J. Bloostein
* Trustee October 3, 1995
Richard E. Hanson, Jr.
Trustee October , 1995
Madelon DeVoe Talley
*By: /s/ Robert A. Vegliante
Robert A. Vegliante
Attorney-in-fact
<PAGE>261
EXHIBIT INDEX
Exhibit Number Description Page
(4) Agreement and Plan of Reorganization *
(included as Exhibit A to Registrant's
Prospectus/Proxy Statement contained in Part A
of this Registration Statement).
(9) Form of Custodian Agreement effective March 27, 1995. *
(11) (a) Opinion and Consent of Willkie Farr & Gallagher *
with respect to validity of shares.
(11) (b) Opinion and Consent of Goodwin, Procter & Hoar *
with respect to certain matters under Massachusetts law.
(12) Opinion and Consent of Willkie Farr & *
Gallagher with respect to tax matters.
(14) (a) Consent of Coopers & Lybrand L.L.P. *
(14) (b) Consents of KPMG Peat Marwick LLP. *
(16) Powers of Attorney (included on signature page). **
(17) (a) Form of Proxy Card. *
* Filed herewith.
** Previously filed.
<PAGE>1
CUSTODIAN SERVICES AGREEMENT
This Agreement is made as of , 1995 by and between
SMITH BARNEY INVESTMENT FUNDS INC., a Maryland corporation (the "Fund") and
PNC BANK, NATIONAL ASSOCIATION, a national banking association ("PNC Bank").
The Fund is registered as an open-end investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund wishes
to retain PNC Bank to provide custodian services and PNC Bank wishes to
furnish such services, either directly or through an affiliate or affiliates,
as more fully described herein. In consideration of the premises and mutual
covenants herein contained, the parties agree as follows:
1. Definitions.
(a) "Authorized Person". The term "Authorized Person" shall mean
any officer of the Fund and any other person, who is duly authorized by the
Fund's Governing Board, to give Oral and Written Instructions on behalf of the
Fund. Such persons are listed in the Certificate attached hereto as the
Authorized Persons Appendix, as such Appendix may be amended in writing by the
Fund's Governing Board from time to time.
(b) "Book-Entry System". The term "Book-Entry System" means
Federal Reserve Treasury book-entry system for United States and federal
agency securities, its successor or successors, and its nominee or nominees
and any book-entry system maintained by an exchange registered with the SEC
under the 1934 Act.
<PAGE>2
(c) "CFTC". The term "CFTC" shall mean the Commodities Futures
Trading Commission.
(d) "Governing Board". The term "Governing Board" shall mean the
Fund's Board of Directors if the Fund is a corporation or the Fund's Board of
Trustees if the Fund is a trust, or, where duly authorized, a competent
committee thereof.
(e) "Oral Instructions". The term "Oral Instructions" shall mean
oral instructions received by PNC Bank from an Authorized Person or from a
person reasonably believed by PNC Bank to be an Authorized Person.
(f) "SEC". The term "SEC" shall mean the Securities and Exchange
Commission.
(g) "Securities and Commodities Laws". The term "Securities and
Commodities Laws" shall mean the "1933 Act" which shall mean the Securities
Act of 1933, the "1934 Act" which shall mean the Securities Exchange Act of
1934, the 1940 Act, and the "CEA" which shall mean the Commodities Exchange
Act, each as amended.
(h) "Shares". The term "Shares" shall mean the shares of stock of
any series or class of the Fund, or, where appropriate, units of beneficial
interest in a trust where the Fund is organized as a Trust.
(i) "Property". The term "Property" shall mean:
(i) any and all securities and other investment items which
the Fund may from time to time deposit, or cause to be
deposited, with PNC
<PAGE>3
Bank or which PNC Bank may from time to time hold for the
Fund;
(ii) all income in respect of any of such securities or other
investment items;
(iii) all proceeds of the sale of any of such securities or
investment items; and
(iv) all proceeds of the sale of securities issued by the
Fund, which are received by PNC Bank from time to time,
from or on behalf of the Fund.
(j) "Written Instructions". The term "Written Instructions" shall
mean written instructions signed by one Authorized Person and received by PNC
Bank. The instructions may be delivered by hand, mail, tested telegram,
cable, telex or facsimile sending device.
2. Appointment. The Fund hereby appoints PNC Bank to provide custodian
services to the Fund, and PNC Bank accepts such appointment and agrees to
furnish such services.
3. Delivery of Documents. The Fund has provided or, where applicable,
will provide PNC Bank with the following:
(a) certified or authenticated copies of the resolutions of the
Fund's Governing Board, approving the appointment of PNC Bank or its
affiliates to provide services;
(b) a copy of the Fund's most recent effective registration
statement;
(c) a copy of the Fund's advisory agreement or
<PAGE>4
agreements;
(d) a copy of the Fund's distribution agreement or agreements;
(e) a copy of the Fund's administration agreements if PNC Bank is
not providing the Fund with such services; (f) copies
of any shareholder servicing agreements made in respect of the Fund; and
(g) certified or authenticated copies of any and all amendments or
supplements to the foregoing.
4. Compliance with Government Rules and Regulations. PNC Bank
undertakes to comply with all applicable requirements of the Securities and
Commodities Laws and any laws, rules and regulations of governmental
authorities having jurisdiction with respect to all duties to be performed by
PNC Bank hereunder. Except as specifically set forth herein, PNC Bank assumes
no responsibility for such compliance by the Fund.
5. Instructions. Unless otherwise provided in this Agreement, PNC Bank
shall act only upon Oral and Written Instructions. PNC Bank shall be entitled
to rely upon any Oral and Written Instructions it receives from an Authorized
Person (or from a person reasonably believed by PNC Bank to be an Authorized
Person) pursuant to this Agreement. PNC Bank may assume that any Oral or
Written Instructions received hereunder are not in any way inconsistent with
the provisions of organizational documents or this Agreement or of any vote,
resolution or proceeding of the Fund's Governing Board or of the Fund's
shareholders.
<PAGE>5
The Fund agrees to forward to PNC Bank Written Instructions confirming
Oral Instructions so that PNC Bank receives the Written Instructions by the
close of business on the same day that such Oral Instructions are received.
The fact that such confirming Written Instructions are not received by PNC
Bank shall in no way invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions.
The Fund further agrees that PNC Bank shall incur no liability to the
Fund in acting upon Oral or Written Instructions provided such instructions
reasonably appear to have been received from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If PNC Bank is in doubt as to any action
it should or should not take, PNC Bank may request directions or advice,
including Oral or Written Instructions, from the Fund.
(b) Advice of Counsel. If PNC Bank shall be in doubt as to any
questions of law pertaining to any action it should or should not take, PNC
Bank may request advice at its own cost from such counsel of its own choosing
(who may be counsel for the Fund, the Fund's advisor or PNC Bank, at the
option of PNC Bank).
(c) Conflicting Advice. In the event of a conflict between
directions, advice or Oral or Written Instructions PNC Bank receives from the
Fund, and the advice it receives from counsel, PNC Bank shall be entitled to
rely upon and follow the advice of counsel.
<PAGE>6
(d) Protection of PNC Bank. PNC Bank shall be protected in any
action it takes or does not take in reliance upon directions, advice or Oral
or Written Instructions it receives from the Fund or from counsel and which
PNC Bank believes, in good faith, to be consistent with those directions,
advice or Oral or Written Instructions.
Nothing in this paragraph shall be construed so as to impose an
obligation upon PNC Bank (i) to seek such directions, advice or Oral or
Written Instructions, or (ii) to act in accordance with such directions,
advice or Oral or Written Instructions unless, under the terms of other
provisions of this Agreement, the same is a condition of PNC Bank's properly
taking or not taking such action.
7. Records. The books and records pertaining to the Fund which are in
the possession of PNC Bank, shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the 1940 Act and other
applicable securities laws, rules and regulations. The Fund, or the Fund's
Authorized Persons, shall have access to such books and records at all time
during PNC Bank's normal business hours. Upon the reasonable request of the
Fund, copies of any such books and records shall be provided by PNC Bank to
the Fund or to an Authorized Person of the Fund, at the Fund's expense.
8. Confidentiality. PNC Bank agrees to keep confidential all records of
the Fund and information relative to the Fund and its shareholders (past,
present and potential), unless the release of
<PAGE>7
such records or information is otherwise consented to, in writing, by the
Fund. The Fund agrees that such consent shall not be unreasonably withheld
and may not be withheld where PNC Bank may be exposed to civil or criminal
contempt proceedings or when required to divulge. The Fund further agrees
that, should PNC Bank be required to provide such information or records to
duly constituted authorities (who may institute civil or criminal contempt
proceedings for failure to comply), PNC Bank shall not be required to seek the
Fund's consent prior to disclosing such information.
9. Cooperation with Accountants. PNC Bank shall cooperate with the
Fund's independent public accountants and shall take all reasonable action in
the performance of its obligations under this Agreement to ensure that the
necessary information is made available to such accountants for the expression
of their opinion, as required by the Fund.
10. Disaster Recovery. PNC Bank shall enter into and shall maintain in
effect with appropriate parties one or more agreements making reasonable
provision for emergency use of electronic data processing equipment to the
extent appropriate equipment is available. In the event of equipment
failures, PNC Bank shall, at no additional expense to the Fund, take
reasonable steps to minimize service interruptions but shall have no liability
with respect thereto.
11. Compensation. As compensation for custody services rendered by PNC
Bank during the term of this Agreement, the Fund will pay to PNC Bank a fee or
fees as may be agreed to from time to
<PAGE>8
time in writing by the Fund and PNC Bank.
12. Indemnification. The Fund agrees to indemnify and hold harmless PNC
Bank and its nominees from all taxes, charges, expenses, assessment, claims
and liabilities (including, without limitation, liabilities arising under the
Securities and Commodities Laws and any state and foreign securities and blue
sky laws, and amendments thereto, and expenses, including (without limitation)
attorneys' fees and disbursements, arising directly or indirectly from any
action which PNC Bank takes or does not take (i) at the request or on the
direction of or in reliance on the advice of the Fund or (ii) upon Oral or
Written Instructions. Neither PNC Bank, nor any of its nominees, shall be
indemnified against any liability to the Fund or to its shareholders (or any
expenses incident to such liability) arising out of PNC Bank's own willful
misfeasance, bad faith, negligence or reckless disregard of its duties and
obligations under this Agreement.
13. Responsibility of PNC Bank. PNC Bank shall be under no duty to take
any action on behalf of the Fund except as specifically set forth herein or as
may be specifically agreed to by PNC Bank, in writing. PNC Bank shall be
obligated to exercise care and diligence in the performance of its duties
hereunder, to act in good faith and to use its best effort, within reasonable
limits, in performing services provided for under this Agreement. PNC Bank
shall be responsible for its own negligent failure to perform its duties under
this Agreement. Notwithstanding the foregoing, PNC Bank shall not be
responsible for losses beyond its
<PAGE>9
control, provided that PNC Bank has acted in accordance with the standard of
care set forth above; and provided further that PNC Bank shall only be
responsible for that portion of losses or damages suffered by the Fund that
are attributable to the negligence of PNC Bank.
Without limiting the generality of the foregoing or of any other
provision of this Agreement, PNC Bank, in connection with its duties under
this Agreement, shall not be under any duty or obligation to inquire into and
shall not be liable for (a) the validity or invalidity or authority or lack
thereof of any Oral or Written Instruction, notice or other instrument which
conforms to the applicable requirements of this Agreement, and which PNC Bank
reasonably believes to be genuine; or (b) delays or errors or loss of data
occurring by reason of circumstances beyond PNC Bank's control, including acts
of civil or military authority, national emergencies, labor difficulties,
fire, flood or catastrophe, acts of God, insurrection, war, riots or failure
of the mails, transportation, communication or power supply.
Notwithstanding anything in this Agreement to the contrary, PNC Bank
shall have no liability to the Fund for any consequential, special or indirect
losses or damages which the Fund may incur or suffer by or as a consequence of
PNC Bank's performance of the services provided hereunder, whether or not the
likelihood of such losses or damages was known by PNC Bank.
<PAGE>10
14. Description of Services.
(a) Delivery of the Property. The Fund will deliver or arrange for
delivery to PNC Bank, all the property owned by the Fund, including cash
received as a result of the distribution of its Shares, during the period that
is set forth in this Agreement. PNC Bank will not be responsible for such
property until actual receipt.
(b) Receipt and Disbursement of Money. PNC Bank, acting upon
Written Instructions, shall open and maintain separate account(s) in the
Fund's name using all cash received from or for the account of the Fund,
subject to the terms of this Agreement. In addition, upon Written
Instructions, PNC Bank shall open separate custodial accounts for each
separate series, class or portfolio of the Fund and shall hold in such
account(s) all cash received from or for the accounts of the Fund specifically
designated to each separate series, class or portfolio. PNC Bank shall make
cash payments from or for the account of the Fund only for:
(i) purchases of securities in the name of the Fund or PNC
Bank or PNC Bank's nominee as provided in sub-paragraph j
and for which PNC Bank has received a copy of the broker's
or dealer's confirmation or payee's invoice, as
appropriate;
(ii) purchase or redemption of Shares of the Fund delivered
to PNC Bank;
<PAGE>11
(iii) payment of, subject to Written Instructions, interest,
taxes, administration, accounting, distribution, advisory,
management fees or similar expenses which are to be borne
by the Fund;
(iv) payment to, subject to receipt of Written Instructions,
the Fund's transfer agent, as agent for the shareholders,
an amount equal to the amount of dividends and
distributions stated in the Written Instructions to be
distributed in cash by the transfer agent to shareholders,
or, in lieu of paying the Fund's transfer agent, PNC Bank
may arrange for the direct payment of cash dividends and
distributions to shareholders in accordance with
procedures mutually agreed upon from time to time by and
among the Fund, PNC Bank and the Fund's transfer agent;
(v) payments, upon receipt of Written Instructions, in
connection with the conversion, exchange or surrender of
securities owned or subscribed to by the Fund and held by
or delivered to PNC Bank;
(vi) payments of the amounts of dividends received with
respect to securities sold short; payments made to a
sub-custodian pursuant to
<PAGE>12
provisions in sub-paragraph c of this Paragraph; and
(viii) payments, upon Written Instructions made for other proper
Fund purposes. PNC Bank is hereby authorized to endorse
and collect all checks, drafts or other orders for the
payment of money received as custodian for the account of
the Fund.
(c) Receipt of Securities.
(i) PNC Bank shall hold all securities received by it for the
account of the Fund in a separate account that physically
segregates such securities from those of any other
persons, firms or corporations, except for securities held
in a Book-Entry System. All such securities shall be
held or disposed of only upon Written Instructions of the
Fund pursuant to the terms of this Agreement. PNC Bank
shall have no power or authority to assign, hypothecate,
pledge or otherwise dispose of any such securities or
investment, except upon the express terms of this
Agreement and upon Written Instructions, accompanied by a
certified resolution of the Fund's Governing Board,
authorizing the transaction. In no case may any member of
the
<PAGE>13
Fund's Governing Board, or any officer, employee or agent
of the Fund withdraw any securities. At PNC Bank's own
expense and for its own convenience, PNC Bank may enter
into sub-custodian agreements with other banks or trust
companies to perform duties described in this
sub-paragraph c. Such bank or trust company shall have an
aggregate capital, surplus and undivided profits,
according to its last published report, of at least one
million dollars ($1,000,000), if it is a subsidiary or
affiliate of PNC Bank, or at least twenty million dollars
($20,000,000) if such bank or trust company is not a
subsidiary or affiliate of PNC Bank. In addition, such
bank or trust company must agree to comply with the
relevant provisions of the 1940 Act and other applicable
rules and regulations. PNC Bank shall remain responsible
for the performance of all of its duties as described in
this Agreement and shall hold the Fund harmless from PNC
Bank's own (or any sub-custodian chosen by PNC Bank under
the terms of this sub-paragraph c) acts or omissions,
under the standards of care provided for herein.
<PAGE>14
(d) Transactions Requiring Instructions. Upon receipt of Oral or
Written Instructions and not otherwise, PNC Bank, directly or through the use
of the Book-Entry System, shall:
(i) deliver any securities held for the Fund against the
receipt of payment for the sale of such securities;
(ii) execute and deliver to such persons as may be designated
in such Oral or Written Instructions, proxies, consents,
authorizations, and any other instruments whereby the
authority of the Fund as owner of any securities may be
exercised;
(iii) deliver any securities to the issuer thereof, or its
agent, when such securities are called, redeemed, retired
or otherwise become payable; provided that, in any such
case, the cash or other consideration is to be delivered
to PNC Bank;
(iv) deliver any securities held for the Fund against receipt
of other securities or cash issued or paid in connection
with the liquidation, reorganization, refinancing, tender
offer, merger, consolidation or recapitalization of any
corporation, or the exercise of any conversion privilege;
(v) deliver any securities held for the Fund to
<PAGE>15
any protective committee, reorganization committee
or other person in connection with the
reorganization, refinancing, merger, consolidation,
recapitalization or sale of assets of any corporation, and
receive and hold under the terms of this Agreement such
certificates of deposit, interim receipts or other
instruments or documents as may be issued to it to
evidence such delivery; (vi) make such transfer or
exchanges of the assets of the Fund and take such other
steps as shall be stated in said Oral or Written
Instructions to be for the purpose of effectuating a
duly authorized plan of liquidation, reorganization,
merger, consolidation or recapitalization of the Fund;
(vii) release securities belonging to the Fund to any bank or
trust company for the purpose of a pledge or hypothecation
to secure any loan incurred by the Fund; provided,
however, that securities shall be released only upon
payment to PNC Bank of the monies borrowed, except that
in cases where additional collateral is required to
secure a borrowing already made subject to proper prior
authorization, further securities may be released for
that purpose;
<PAGE>16
and repay such loan upon redelivery to it of the
securities pledged or hypothecated therefor and upon
surrender of the note or notes evidencing the loan;
(viii) release and deliver securities owned by the Fund in
connection with any repurchase agreement entered into on
behalf of the Fund, but only on receipt of payment
therefor; and pay out moneys of the Fund in connection
with such repurchase agreements, but only upon the
delivery of the securities;
(ix) release and deliver or exchange securities owned by the
Fund in connection with any conversion of such securities,
pursuant to their terms, into other securities;
(x) release and deliver securities owned by the Fund for the
purpose of redeeming in kind shares of the Fund upon
delivery thereof to PNC Bank; and
(xi) release and deliver or exchange securities owned by the
Fund for other corporate purposes. PNC Bank must also
receive a certified resolution describing the nature of
the corporate purpose and the name and address of the
person(s) to whom delivery shall be made when such action
is pursuant to
<PAGE>17
sub-paragraph d above.
(e) Use of Book-Entry System. The Fund shall deliver to PNC Bank
certified resolutions of the Fund's Governing Board approving, authorizing and
instructing PNC Bank on a continuous and on-going basis, to deposit in the
Book-Entry System all securities belonging to the Fund eligible for deposit
therein and to utilize the Book-Entry System to the extent possible in
connection with settlements of purchases and sales of securities by the Fund,
and deliveries and returns of securities loaned, subject to repurchase
agreements or used as collateral in connection with borrowings. PNC Bank
shall continue to perform such duties until it receives Written or Oral
Instructions authorizing contrary actions(s).
To administer the Book-Entry System properly, the following provisions
shall apply:
(i) With respect to securities of the Fund which are
maintained in the Book-Entry system, established pursuant
to this sub-paragraph e hereof, the records of PNC Bank
shall identify by Book-Entry or otherwise those securities
belonging to the Fund. PNC Bank shall furnish the Fund a
detailed statement of the Property held for the Fund under
this Agreement at least monthly and from time to time and
upon written request.
(ii) Securities and any cash of the Fund deposited in the
Book-Entry System will at all times be
<PAGE>18
segregated from any assets and cash controlled by PNC
Bank in other than a fiduciary or custodian capacity but
may be commingled with other assets held in such
capacities. PNC Bank and its sub-custodian, if any, will
pay out money only upon receipt of securities and will
deliver securities only upon the receipt of money.
(iii) All books and records maintained by PNC Bank which relate
to the Fund's participation in the Book-Entry System will
at all times during PNC Bank's regular business hours be
open to the inspection of the Fund's duly authorized
employees or agents, and the Fund will be furnished with
all information in respect of the services rendered to it
as it may require.
(iv) PNC Bank will provide the Fund with copies of any report
obtained by PNC Bank on the system of internal accounting
control of the Book-Entry System promptly after receipt of
such a report by PNC Bank. PNC Bank will also provide the
Fund with such reports on its own system of internal
control as the Fund may reasonably request from time to
time.
(f) Registration of Securities. All Securities held for the Fund
which are issued or issuable only in bearer form, except
<PAGE>19
such securities held in the Book-Entry System, shall be held by PNC Bank in
bearer form; all other securities held for the Fund may be registered in the
name of the Fund; PNC Bank; the Book-Entry System; a sub-custodian; or any
duly appointed nominee(s) of the Fund, PNC Bank, Book-Entry system or
sub-custodian. The Fund reserves the right to instruct PNC Bank as to the
method of registration and safekeeping of the securities of the Fund. The
Fund agrees to furnish to PNC Bank appropriate instruments to enable PNC Bank
to hold or deliver in proper form for transfer, or to register its registered
nominee or in the name of the Book-Entry System, any securities which it may
hold for the account of the Fund and which may from time to time be registered
in the name of the Fund. PNC Bank shall hold all such securities which are
not held in the Book-Entry System in a separate account for the Fund in the
name of the Fund physically segregated at all times from those of any other
person or persons.
(g) Voting and Other Action. Neither PNC Bank nor its nominee
shall vote any of the securities held pursuant to this Agreement by or for the
account of the Fund, except in accordance with Written Instructions. PNC
Bank, directly or through the use of the Book-Entry System, shall execute in
blank and promptly deliver all notice, proxies, and proxy soliciting materials
to the registered holder of such securities. If the registered holder is not
the Fund then Written or Oral Instructions must designate the person(s) who
owns such securities.
(h) Transactions Not Requiring Instructions. In the
<PAGE>20
absence of contrary Written Instructions, PNC Bank is authorized to take the
following actions:
(i) Collection of Income and Other Payments.
(A) collect and receive for the account of the Fund, all
income, dividends, distributions, coupons, option
premiums, other payments and similar items, included
or to be included in the Property, and, in addition,
promptly advise the Fund of such receipt and credit
such income, as collected, to the Fund's custodian
account;
(B) endorse and deposit for collection, in the name of
the Fund, checks, drafts, or other orders for the
payment of money;
(C) receive and hold for the account of the Fund all
securities received as a distribution on the Fund's
portfolio securities as a result of a stock dividend,
share split-up or reorganization, recapitalization,
readjustment or other rearrangement or distribution
of rights or similar securities issued with respect
to any portfolio securities belonging to the Fund
held by PNC Bank hereunder;
<PAGE>21
(D) present for payment and collect the amount payable
upon all securities which may mature or be called,
redeemed, or retired, or otherwise become payable on
the date such securities become payable; and
(E) take any action which may be necessary and proper in
connection with the collection and receipt of such
income and other payments and the endorsement for
collection of checks, drafts, and other negotiable
instruments.
(ii) Miscellaneous Transactions.
(A) PNC Bank is authorized to deliver or cause to be
delivered Property against payment or other
consideration or written receipt therefor in the
following cases:
(1) for examination by a broker or dealer selling
for the account of the Fund in accordance with
street delivery custom;
(2) for the exchange of interim receipts or
temporary securities for definitive securities;
and
(3) for transfer of securities into the name of the
Fund or PNC Bank or
<PAGE>22
nominee of either, or for exchange of
securities for a different number of
bonds,certificates, or other evidence,
representing the same aggregate face amount or
number of units bearing the same interest rate,
maturity date and call provisions, if any;
provided that, in any such case, the new
securities are to be delivered to PNC Bank.
(B) Unless and until PNC Bank receives Oral or
Written Instructions to the contrary, PNC Bank
shall:
(1) pay all income items held by it which
call for payment upon presentation and hold
the cash received by it upon such payment for
the account of the Fund;
(2) collect interest and cash
dividends received, with notice to the Fund, to
the Fund's account;
(3) hold for the account of
the Fund all stock dividends, rights and
similar securities issued with respect to any
securities held by PNC Bank; and
(4) execute as agent on behalf of
<PAGE>23
the Fund all necessary ownership certificates
required by the Internal Revenue Code or the
Income Tax Regulations of the United States
Treasury Department or under the laws of any
State now or hereafter in effect, inserting the
Fund's name, on such certificate as the owner
of the securities covered thereby, to the extent
it may lawfully do so.
(i) Segregated Accounts.
(i) PNC Bank shall upon receipt of Written or Oral
Instructions establish and maintain segregated account(s)
on its records for and on behalf of the Fund. Such
account(s) may be used to transfer cash and securities,
including securities in the Book-Entry System:
(A) for the purposes of compliance by the Fund with the
procedures required by a securities or option
exchange, providing such procedures comply with the
1940 Act and any releases of the SEC relating to the
maintenance of segregated accounts by registered
investment companies; and
(B) Upon receipt of Written Instructions, for
<PAGE>24
other proper corporate purposes.
(ii) PNC Bank may enter into separate custodial agreements with
various futures commission merchants ("FCMs") that the
Fund uses ("FCM Agreement"). Pursuant to an FCM
Agreement, the Fund's margin deposits in any transactions
involving futures contracts and options on futures
contracts will be held by PNC Bank in accounts ("FCM
Account") subject to the disposition by the FCM involved
in such contracts and in accordance with the customer
contract between FCM and the Fund ("FCM Contract"), SEC
rules and the rules of the applicable commodities
exchange. Such FCM Agreements shall only be entered into
upon receipt of Written Instructions from the Fund which
state that:
(A) a customer agreement between the FCM and the Fund
has been entered into; and
(B) the Fund is in compliance with all the rules and
regulations of the CFTC. Transfers of initial margin
shall be made into a FCM Account only upon Written
Instructions; transfers of premium and variation
margin may be made into a FCM Account pursuant to
Oral Instructions.
<PAGE>25
Transfers of funds from a FCM Account to the FCM for
which PNC Bank holds such an account may only occur
upon certification by the FCM to PNC Bank that
pursuant to the FCM Agreement and the FCM Contract,
all conditions precedent to its right to give PNC
Bank such instructions have been satisfied.
(iii) PNC Bank shall arrange for the establishment of IRA
custodian accounts for such share- holders holding Shares
through IRA accounts, in accordance with the Fund's
prospectuses, the Internal Revenue Code (including
regulations), and with such other procedures as are
mutually agreed upon from time to time by and among the
Fund, PNC Bank and the Fund's transfer agent.
(j) Purchases of Securities. PNC Bank shall settle purchased
securities upon receipt of Oral or Written Instructions from the Fund or its
investment advisor(s) that specify:
(i) the name of the issuer and the title of the securities,
including CUSIP number if applicable;
(ii) the number of shares or the principal amount purchased and
accrued interest, if any;
(iii) the date of purchase and settlement;
<PAGE>26
(iv) the purchase price per unit;
(v) the total amount payable upon such purchase; and
(vi) the name of the person from whom or the broker through
whom the purchase was made. PNC Bank shall upon receipt of
securities purchased by or for the Fund pay out of the
moneys held for the account of the Fund the total amount
payable to the person from whom or the broker through whom
the purchase was made, provided that the same conforms to
the total amount payable as set forth in such Oral or
Written Instructions.
(k) Sales of Securities. PNC Bank shall settle sold securities
upon receipt of Oral or Written Instructions from the Fund that specify:
(i) the name of the issuer and the title of the security,
including CUSIP number if applicable;
(ii) the number of shares or principal amount sold, and accrued
interest, if any;
(iii) the date of trade, settlement and sale;
(iv) the sale price per unit;
(v) the total amount payable to the Fund upon such sale;
(vi) the name of the broker through whom or the
<PAGE>27
person to whom the sale was made; and
(vii) the location to which the security must be delivered and
delivery deadline, if any. PNC Bank shall deliver the
securities upon receipt of the total amount payable to the
Fund upon such sale, provided that the total amount
payable is the same as was set forth in the Oral or
Written Instructions. Subject to the foregoing, PNC Bank
may accept payment in such form as shall be satisfactory
to it, and may deliver securities and arrange for payment
in accordance with the customs prevailing among dealers in
securities.
(l) Reports.
(i) PNC Bank shall furnish the Fund the following reports:
(A) such periodic and special reports as the Fund may
reasonably request;
(B) a monthly statement summarizing all transactions and
entries for the account of the Fund, listing the
portfolio securities belonging to the Fund with the
adjusted average cost of each issue and the market
value at the end of such month, and stating the cash
account of the Fund including disbursement;
<PAGE>28
(C) the reports to be furnished to the Fund pursuant to
Rule 17f-4; and
(D) such other information as may be agreed upon from
time to time between the Fund and PNC Bank.
(ii) PNC Bank shall transmit promptly to the Fund any proxy
statement, proxy material, notice of a call or conversion
or similar communication received by it as custodian of
the Property. PNC Bank shall be under no other obligation
to inform the Fund as to such actions or events.
(m) Collections. All collections of monies or other property, in
respect, or which are to become part of the Property (but not the safekeeping
thereof upon receipt by PNC Bank) shall be at the sole risk of the Fund. If
payment is not received by PNC Bank within a reasonable time after proper
demands have been made, PNC Bank shall notify the Fund in writing, including
copies of all demand letters, any written responses, memoranda of all oral
responses and telephonic demands thereto, and await instructions from the
Fund. PNC Bank shall not be obliged to take legal action for collection
unless and until reasonably indemnified to its satisfaction. PNC Bank shall
also notify the Fund as soon as reasonably practicable whenever income due on
securities is not collected in due course.
15. Duration and Termination. This Agreement shall continue until
terminated by the Fund or by PNC Bank on sixty (60) days'
<PAGE>29
prior written notice to the other party. In the event this Agreement is
terminated (pending appointment of a successor to PNC Bank or vote of the
shareholders of the Fund to dissolve or to function without a custodian of its
cash, securities or other property), PNC Bank shall not deliver cash,
securities or other property of the Fund to the Fund. It may deliver them to
a bank or trust company of PNC Bank's choice, having an aggregate capital,
surplus and undivided profits, as shown by its last published report, of not
less than twenty million dollars ($20,000,000), as a custodian for the Fund to
be held under terms similar to those of this Agreement. PNC Bank shall not be
required to make any such delivery or payment until full payment shall have
been made to PNC Bank of all of its fees, compensation, costs and expenses.
PNC Bank shall have a security interest in and shall have a right of setoff
against Property in the Fund's possession as security for the payment of such
fees, compensation, costs and expenses.
16. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notice shall be addressed (a) if to PNC Bank at PNC
Bank's address: Airport Business Center, International Court 2, 200 Stevens
Drive, Lester, Pennsylvania 19113, marked for the attention of the Custodian
Services Department (or its successor) (b) if to the Fund, at the address of
the Fund; or (c) if to neither of the foregoing, at such other address as
shall have been notified to the sender of any such notice or other
communication. If notice is sent by confirming
<PAGE>30
telegram, cable, telex or facsimile sending device, it shall be deemed to have
been given immediately. If notice is sent by first-class mail, it shall be
deemed to have been given five days after it has been mailed. If notice is
sent by messenger, it shall be deemed to have been given on the day it is
delivered.
17. Amendments. This Agreement, or any term hereof, may be changed or
waived only by a written amendment, signed by the party against whom
enforcement of such change or waiver is sought. 18. Delegation. PNC
Bank may assign its rights and delegate its duties hereunder to any
wholly-owned direct or indirect subsidiary of PNC Bank, National Association
or PNC Bank Corp., provided that (i) PNC Bank gives the Fund thirty (30) days
prior written notice; (ii) the delegate agrees with PNC Bank to comply with
all relevant provisions of the 1940 Act; and (iii) PNC Bank and such delegate
promptly provide such information as the Fund may request, and respond to such
questions as the Fund may ask, relative to the assignment, including (without
limitation) the capabilities of the delegate.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. 20. Further
Actions. Each party agrees to perform such further acts and execute such
further documents as are necessary to effectuate the purposes hereof.
21. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all
<PAGE>31
prior agreements and understandings relating to the subject matter hereof,
provided that the parties may embody in one or more separate documents their
agreement, if any, with respect to delegated duties and/or Oral Instructions.
The captions in this Agreement are included for convenience of reference only
and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect.
This Agreement shall be deemed to be a contract made in Pennsylvania and
governed by Pennsylvania law, without regard to principles of conflicts of
law. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
<PAGE>32
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
PNC BANK, NATIONAL ASSOCIATION
By:
Title:
SMITH BARNEY INVESTMENT FUNDS INC.
By:
Title:
<PAGE>33
AUTHORIZED PERSONS APPENDIX
NAME (Type) SIGNATURE
<PAGE>1
[LETTERHEAD OF WILLKIE FARR & GALLAGHER]
October 2, 1995
Smith Barney Income Funds
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
We have acted as counsel for Smith Barney Income Funds, a business
trust organized under the laws of The Commonwealth of Massachusetts (the
"Trust"), in connection with the transfer of all or substantially all of the
assets of the Utility Portfolio (the "Acquired Fund"), a series of Smith
Barney Funds, Inc. ("SBFI"), a corporation organized under the laws of the
State of Maryland, to Smith Barney Utilities Fund (the "Acquiring Fund"), a
sub-trust of the Trust, and the related issuance of shares of the Acquiring
Fund's Class A, Class B and Class C shares of beneficial interest, par value
$.001 per share (the "Acquiring Fund Shares"), and the assumption by the
Acquiring Fund of scheduled liabilities of the Acquired Fund in exchange
therefor, all pursuant to an Agreement and Plan of Reorganization dated as of
October 2, 1995 (the "Agreement") between the Trust on behalf of the Acquiring
Fund and SBFI on behalf of the Acquired Fund. Capitalized terms used herein
have the same meanings ascribed to them in the Agreement unless defined
otherwise herein.
As counsel for the Trust, we have examined the Trust's Registration
Statement on Form N-14 substantially in the form in which it is to become
effective (the "Registration Statement"), the Trust's Master Trust Agreement
and By-laws, and all amendments thereto, and the Agreement.
We have also examined and relied upon such organizational records of
the Trust and other documents and certificates with respect to factual matters
as we have deemed necessary to render the opinions expressed herein. We have
assumed without independent verification the genuineness of all signatures,
the legal capacity of natural persons, the authenticity of all documents
submitted to us as originals and the conformity with originals of all
documents submitted to us as copies. As to matters of Massachusetts law, we
have relied solely on the opinion of Goodwin, Procter & Hoar with respect to
the matters addressed therein, which is satisfactory to us in form and scope
and a copy of which is annexed hereto.
<PAGE>2
Anything in this opinion to the contrary notwithstanding, we render
or imply no opinion with respect to compliance with any applicable securities
or anti-fraud statutes, rules, regulations or other similar laws of any state
(including Massachusetts) or the United States of America. In rendering the
opinions herein, we assume that there will be no material changes in the facts
and conditions on which we base such opinions between the date hereof and the
time of issuance of the Acquiring Fund Shares pursuant to the Agreement.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable for the obligations of the
Trust. The Trust's Master Trust Agreement provides, however, that if a
shareholder of any sub-trust of the Trust is charged or held personally liable
solely by reason of being or having been a shareholder, the shareholder shall
be entitled out of the assets of the sub-trust to be held harmless from and
indemnified against all loss and expense arising from such liability. Thus,
the risk of a shareholder incurring financial loss on account of shareholder's
liability is limited to circumstances in which the sub-trust itself would be
unable to meet its obligations.
Based upon the foregoing, we are of the opinion that all necessary
Trust action precedent to the issuance of the Acquiring Fund Shares pursuant
to the Agreement has been duly taken. We are further of the opinion that the
Acquiring Fund Shares when issued in accordance with the terms of the
Agreement will be validly issued, fully paid and nonassessable by the Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, to the references to us in the Prospectus/Proxy
Statement included as part of the Registration Statement and to the filing of
this opinion as an exhibit to any application made by or on behalf of the
Trust or any distributor or dealer in connection with the registration or
qualification of the Trust or the Acquiring Fund Shares under the securities
laws of any state or other jurisdiction.
<PAGE>3
This opinion is furnished by us as counsel to the Trust, is solely
for the benefit of the Trust and its governing board in connection with the
above described acquisition of assets and liabilities and may not be relied
upon for any other purpose or by any other person.
Very truly yours,
/s/WILLKIE FARR & GALLAGHER
<PAGE>1
GOODWIN, PROCTER & HOAR
A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
COUNSELLORS AT LAW
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109-2881
TELEPHONE (617) 570-1000
TELECOPIER (617) 227-8591
CABLE - GOODPROCT, BOSTON
October 2, 1995
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Re: Acquisition by Smith Barney Income Funds, on behalf of
Smith Barney Utilities Fund, of Assets of Utility Portfolio,
an investment portfolio of Smith Barney Funds, Inc.
Ladies and Gentlemen:
You have requested our opinion as special Massachusetts counsel to Smith
Barney Income Funds (the "Trust"), a business trust organized under the laws
of the Commonwealth of Massachusetts, on behalf of the Smith Barney Utilities
Fund (the "Acquiring Fund"), an investment portfolio of the Trust, in
connection with the transfer of all or substantially all of the assets of
Utility Portfolio (the "Acquired Fund"), an investment portfolio of Smith
Barney Funds, Inc., a corporation organized under the laws of the State of
Maryland, in exchange for shares of beneficial interest of the Acquiring Fund
and the assumption by the Acquiring Fund of certain liabilities of the
Acquired Fund, pursuant to an Agreement and Plan of Reorganization (the
"Agreement") dated as of October 2, 1995 by and between the Trust, on behalf
of the Acquiring Fund, and Smith Barney Funds, Inc., on behalf of the Acquired
Fund.
In connection with this opinion, we have examined:
1. the Agreement;
2. the First Amended and Restated Master Trust Agreement of the Trust,
dated as of November 5, 1993, as amended to date, certified by the
Assistant Secretary of the Trust (the "Declaration of Trust");
3. the By-laws of the Trust, as amended to date, certified by the
Assistant Secretary of the Trust;
<PAGE>2
4. a certificate as of a recent date of the Secretary of State of the
Commonwealth of Massachusetts as to the good standing of the Trust
and the authority of the Trust to exercise in the Commonwealth all
of the powers recited in the Declaration of Trust and to transact
business in the Commonwealth; and
5. a certificate of the Assistant Secretary of the Trust as to, among
other things, the issuance of shares of beneficial interest of the
Trust and actions of the trustees of the Trust relating to the
adoption and approval of the Agreement.
As to matters of fact underlying the opinions expressed herein, we have
relied exclusively upon certificates of certain public officials and officers
of the Trust and upon the representations and warranties of the Trust
contained in the Agreement. We have assumed the authenticity of all documents
submitted to us as originals, the genuineness of all signatures, the legal
capacity of natural persons and the conformity to the originals of all
documents submitted to us as copies.
We have made such examination of Massachusetts law as in our judgment is
necessary and appropriate for the purposes of this opinion. We do not purport
to be experts in the laws of any jurisdiction other than the laws of the
Commonwealth of Massachusetts and our opinions expressed herein are limited
solely to the laws of the Commonwealth of Massachusetts. We have not, at your
instruction, examined independently the question of what law would govern the
interpretation or enforcement of any provision of the Declaration of Trust and
have, at your direction, assumed for purposes of this opinion that the
interpretation and enforcement of each provision of the Declaration of Trust
will be governed by the laws of the Commonwealth of Massachusetts.
As indicated below, the Trust is an entity of the type commonly known as a
"Massachusetts business trust. " Under Massachusetts law, shareholders of a
business trust may, under certain circumstances, be held personally liable for
the obligations of the Trust. The Declaration of Trust provides, however,
that if a shareholder of any sub-trust of the Trust is charged or held
personally liable solely by reason of being or having been a shareholder, the
shareholder shall be entitled out
<PAGE>3
of the assets of the sub-trust to be held harmless from and indemnified
against all loss and expense arising from such liability. Thus, the risk of a
shareholder incurring financial loss on account of shareholder's liability is
limited to circumstances in which the sub-trust itself would be unable to meet
its obligations.
Anything in this opinion to the contrary notwithstanding, we render or
imply no opinion with respect to compliance with any applicable securities or
anti-fraud statutes, rules, regulations or other similar laws of any state
(including Massachusetts) or the United States of America. In rendering the
opinions herein, we assume that there will be no material changes in the facts
and conditions on which we base such opinions between the date hereof and the
time of issuance of the shares of beneficial interest of the Trust
representing interests in the Acquiring Fund (the "Shares") pursuant to the
Agreement.
Based upon and subject to the foregoing, we are of the opinion that all
necessary Trust action precedent to the issuance of the Shares pursuant to the
Agreement has been duly taken. We are further of the opinion that the Shares
when issued in accordance with the terms of the Agreement will be validly
issued, fully paid and nonassessable by the Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement of the Trust on Form N-14 pursuant to which the Shares
are to be registered under the Securities Act of 1933, as amended. This
opinion is issued to, and may be relied upon only by, you in rendering your
opinion in connection with the registration of the Shares and this opinion may
not be used by any other person or for any other purpose without our prior
written consent.
Very truly yours,
/s/ Goodwin Procter & Hoar
GOODWIN, PROCTER & HOAR
<PAGE>1
[LETTERHEAD OF WILLKIE FARR & GALLAGHER]
October 2, 1995
Smith Barney Income Funds,
on behalf of
Smith Barney Utilities Fund
388 Greenwich Street
New York, New York 10013
Smith Barney Funds, Inc.
on behalf of
Utility Portfolio
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
You have asked us for our opinion concerning certain federal income tax
consequences to (a) Utility Portfolio (the "Acquired Fund"), a separate
investment portfolio of Smith Barney Funds, Inc., (b) Smith Barney Utilities
Fund (the "Acquiring Fund"), a separate investment portfolio of Smith Barney
Income Funds, and (c) holders of shares of beneficial interest in the Acquired
Fund (the "Acquired Fund Shareholders") when the holders of Class A, Class B
and Class C shares of the Acquired Fund receive Class A, Class B and Class C
shares, respectively, of the Acquiring Fund (all such shares of the Acquiring
Fund referred to hereinafter as the "Acquiring Fund Shares") in liquidation of
their interests in the Acquired Fund pursuant to an acquisition by the
Acquiring Fund of all or substantially all 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 and the subsequent
liquidation of the Acquired Fund and distribution in liquidation of the
Acquiring Fund Shares to the Acquired Fund Shareholders.
We have reviewed such documents and materials as we have considered necessary
for the purpose of rendering this opinion. In rendering this opinion, we
assume that such documents as yet
<PAGE>2
unexecuted will, when executed, conform in all material respects to the
proposed forms of such documents that we have examined. In addition, we
assume the genuineness of all signatures, the capacity of each party executing
a document so to execute that document, the authenticity of all documents
submitted to us as originals and the conformity to original documents of all
documents submitted to us as certified or photostatic copies.
We have made inquiry as to the underlying facts which we considered to be
relevant to the conclusions set forth in this letter. The opinions expressed
in this letter are based upon certain factual statements relating to the
Acquired Fund and the Acquiring Fund set forth in the Registration Statement
on Form N-14 (the "Registration Statement") filed by Smith Barney Income
Funds, on behalf of the Acquiring Fund, with the Securities and Exchange
Commission and representations to be made in letters from Smith Barney Funds,
Inc., on behalf of the Acquired Fund, and Smith Barney Income Funds, on behalf
of the Acquiring Fund, addressed to us for our use in rendering this opinion.
Based on information received from the Acquired Fund and the Acquiring Fund,
we have no reason to believe that we will not be able to render this opinion
as a final opinion at the Closing. We have no reason to believe that these
representations and facts will not be valid, but we have not attempted and
will not attempt to verify independently any of these representations and
facts, and this opinion is based upon the assumption that each of them is
accurate. Capitalized terms used herein and not otherwise defined shall have
the meaning given them in the Registration Statement.
The conclusions expressed herein are based upon the Internal Revenue Code of
1986 (the "Code"), Treasury regulations issued thereunder, published rulings
and procedures of the Internal Revenue Service and judicial decisions, all as
in effect on the date of this letter.
Based upon the foregoing, it is our opinion that:
(1) 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 Acquired Fund and the Acquiring 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
<PAGE>3
Fund upon the receipt of the assets of the Acquired Fund in exchange for
Acquiring Fund Shares and the assumption by the Acquiring Fund 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
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 Shareholders;
(4) no gain or loss will be recognized by Acquired Fund Shareholders
upon the exchange of their shares of the Acquired Fund for Acquiring Fund
Shares;
(5) the aggregate tax basis of Acquiring Fund Shares received by each
Acquired Fund Shareholder pursuant to the Reorganization will be the same as
the aggregate tax basis of the shares of the Acquired Fund held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Acquired Fund Shareholder
will include the period during which the shares of the Acquired Fund exchanged
therefor were held by such Acquired Fund Shareholder (provided the 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.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name and any reference to our
firm in the Registration Statement or in the Prospectus/Proxy Statement
constituting a part thereof.
Very truly yours,
/s/ Willkie Farr & Gallagher
<PAGE>1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
Smith Barney Utilities Fund
of the Smith Barney Income Funds:
We hereby consent to the following with respect to the Registration Statement
on Form N-14 under the Securities Act of 1933, as amended, of Smith Barney
Income Funds:
1. The incorporation of our report dated September 9, 1994,
accompanying the financial statements of the Smith Barney
Utilities Fund (formerly the Smith Barney Shearson Utilities
Fund) as of July 31, 1994, which report is included in the
Annual Report of the Smith Barney Utilities Fund for the
fiscal year ended July 31, 1994.
2. The reference to our firm under the heading "Financial
Statements and Experts" in the Prospectus/Proxy Statement.
3. The reference to our firm under the heading "Financial
Highlights" in the Prospectus dated November 7, 1994 of the
Smith Barney Utilities Fund.
4. The reference to our firm under the heading "Counsel and
Auditors" in the Statement of Additional Information dated
November 7, 1994 of the Smith Barney Utilities Fund.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
September 29, 1995
<PAGE>1
Independent Auditors' Consent
T0 the Shareholders and Board of Trustees
of the Smith Barney Income Funds:
We consent to the use of our report dated September 20, 1995 with respect to
the Utility Fund incorporated herein by reference in the Prospectus and
included in this Registration Statement on Form N-14 for Smith Barney Income
Funds and to the references to our firm under the headings "Financial
Statements and Experts" and "Representations and Warranties" in the
Prospectus/Proxy Statement and Financial Highlights in the Prospectus
incorporated herein by reference.
KPMG PEAT MARWICK LLP
October 2, 1995
New York, New York
<PAGE>2
Independent Auditors' Consent
T0 the Shareholders and Board of Directors
of the Smith Barney Funds, Inc.:
We consent to the use of our report dated February 17, 1995 with respect to
the Utility Portfolio incorporated herein by reference in the Prospectus and
included in this Registration Statement on Form N-14 for Smith Barney Funds,
Inc. and to the references to our firm under the headings "Financial
Statements and Experts" and "Representations and Warranties" in the
Prospectus/Proxy Statement and Financial Highlights in the Prospectus
incorporated herein by reference.
KPMG PEAT MARWICK LLP
October 2, 1995
New York, New York
<PAGE>1
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
..............................................................................
..............................................................................
SMITH BARNEY FUNDS, INC. -- UTILITY PORTFOLIO
PROXY SOLICITED BY THE BOARD OF DIRECTORS
The undersigned holder of shares of Smith Barney Funds, Inc. -- Utility
Portfolio ("Utility Portfolio"), hereby appoints Heath B. McLendon, Jessica M.
Bibliowicz, Christina T. Sydor and Robert A. Vegliante attorneys and proxies
for the undersigned with full powers of substitution and revocation, to
represent the undersigned and to vote on behalf of the undersigned all shares
of the Utility Portfolio that the undersigned is entitled to vote at the
Special Meeting of Shareholders of Utility Portfolio to be held at the offices
of Utility Portfolio, 388 Greenwich Street, 26th Floor, New York, New York on
November 15, 1995 at 10:00 a.m., and any adjournment or adjournments thereof.
The undersigned hereby acknowledges receipt of the Notice of Special Meeting
and Prospectus/Proxy Statement dated October 2, 1995 and hereby instructs
said attorneys and proxies to vote said shares as indicated herein. In their
discretion, the proxies are authorized to vote upon such other business as may
properly come before the Special Meeting. A majority of the proxies present
and acting at the Special Meeting in person or by substitute (or, if only one
shall be so present, then that one) shall have and may exercise all of the
power and authority of said proxies hereunder. The undersigned hereby revokes
any proxy previously given.
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE
Date: ________________________________________________
Note: Please sign exactly as your name appears on this
Proxy. If joint owners, EITHER may sign this Proxy. When
signing as attorney, executor, administrator, trustee,
guardian or corporate officer, please give your full
title.
________________________________________________
________________________________________________
Signature(s) (Title(s), if applicable)
<PAGE>2
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
..............................................................................
..............................................................................
Please indicate your vote by FILLING the appropriate box below, as shown,
using blue or black ink or dark pencil Do not use red ink. [*]. This proxy,
if properly executed, will be voted in the manner directed by the undersigned
shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR APPROVAL
OF THE PROPOSAL.
[ ] [ ] [ ]
1. To approve or disapprove the FOR AGAINST ABSTAIN
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 the Utility Portfolio ("Utility Portfolio")
of Smith Barney Funds, Inc. 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 to
shareholders of Utility Portfolio of such shares of Utilities Fund in
liquidation of Utility Portfolio and (iii) the subsequent termination of
Utility Portfolio.
PLEASE DO NOT FORGET TO SIGN THE REVERSE SIDE OF THIS CARD
