SMITH BARNEY FUNDS, INC.- MONTHLY PAYMENT
GOVERNMENT
PORTFOLIO
Supplement to Prospectus dated April 28, 1995
On June 7, 1995, the Board of Directors
of Smith Barney Funds, Inc. (the "Fund")
approved a proposed reorganization pursuant to
which the assets of the Monthly Payment
Government Portfolio (the "Acquired
Portfolio"), a series of the Fund would be
acquired by the U.S. Government Securities
Portfolio (the "Acquiring Portfolio"), a
series of the Fund through an exchange of
shares of the Acquiring Portfolio for
substantially all of the Acquired Portfolio's
assets. These shares would then be
distributed to shareholders of the Acquired
Portfolio in liquidation of the Acquired
Portfolio. The Acquired Portfolio and the
Acquiring Portfolio have substantially similar
investment objectives.
Under the terms of the proposed
reorganization, each shareholder of the
Acquired Portfolio would become a shareholder
of the Acquiring Portfolio, receiving shares
of the Acquiring Portfolio with a value equal
to the value of the shareholder's investment
in the portfolio in accordance with the terms
of the plan of reorganization. No sales
charge would be imposed in the transaction,
and it is anticipated that no gain or loss for
Federal income tax purposes would be
recognized by shareholders as a result of the
reorganization.
The proposed reorganization is subject to
the fulfillment of certain conditions,
including the approval of shareholders of the
Acquired Portfolio. Proxy materials
describing the proposed reorganization will be
mailed to Portfolio shareholders in
anticipation of a meeting of shareholders
expected to be held in September, 1995. If
approved by shareholders at that time, the
transaction will occur as soon after the
meeting as practicable. In anticipation of
this transaction, shares of the Acquired
Portfolio will not be offered as of June 20,
1995.
________________________________
Dated: June 20, 1995
FD 0963 F5
<PAGE>
SMITH BARNEY FUNDS, INC.
U.S. Government
Securities Portfolio
Monthly Payment
Government Portfolio
Income Return
Account Portfolio
APRIL 28, 1995
PROSPECTUS
BEGINS ON PAGE ONE
[LOGO OF SMITH BARNEY MUTUAL FUNDS
APPEARS HERE]
P R O S P E C T U S
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS
APRIL 28, 1995
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Funds, Inc. (the "Fund") is an investment company
currently
offering a choice of six different Portfolios. Each Portfolio is
separately
managed to achieve its own investment objective and a shareholder's
interest is
in the assets and earnings of the Portfolio in which he or she
holds shares.
This Prospectus contains disclosure regarding the following
Portfolios:
The U.S. Government Securities Portfolio and the Monthly Payment
Government
Portfolio each seek high current income, liquidity and security of
principal
from a portfolio of U.S. Government Obligations.
The Income Return Account Portfolio seeks high current income from
a portfolio
of high quality debt obligations and employs an immunization
strategy to mini-
mize the risk of loss of account value.
This Prospectus sets forth concisely certain information about the
Fund and
the Portfolios, 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.
Additional information about the Portfolio is contained in a
Statement of
Additional Information dated April 28, 1995, as amended or
supplemented from
time to time, that is available upon request and without charge by
calling or
writing the Fund at the telephone number or address set forth above
or by con-
tacting a Smith Barney Financial Consultant. The Statement of
Additional Infor-
mation 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 Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
Smith Barney Funds, Inc.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- --------------------------------------------------
FINANCIAL HIGHLIGHTS 12
- --------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES 19
- --------------------------------------------------
VALUATION OF SHARES 21
- --------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 21
- --------------------------------------------------
PURCHASE OF SHARES 23
- --------------------------------------------------
EXCHANGE PRIVILEGE 34
- --------------------------------------------------
REDEMPTION OF SHARES 38
- --------------------------------------------------
MINIMUM ACCOUNT SIZE 40
- --------------------------------------------------
PERFORMANCE 40
- --------------------------------------------------
MANAGEMENT OF THE FUND 42
- --------------------------------------------------
DISTRIBUTOR 43
- --------------------------------------------------
ADDITIONAL INFORMATION 44
- --------------------------------------------------
APPENDIX A-1
- --------------------------------------------------
</TABLE>
- -----------------------------------------------------------------
- ---------------
No person has been authorized to give any information or to make
any
representations in connection with this offering other than those
contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized
by the Fund
or the Distributor. This Prospectus does not constitute an offer by
the Fund or
the Distributor to sell or a solicitation of an offer to buy any of
the
securities offered hereby in any jurisdiction to any person to whom
it is
unlawful to make such offer or solicitation in such jurisdiction.
- -----------------------------------------------------------------
- ---------------
2
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed
information
appearing elsewhere in this Prospectus and in the Statement of
Additional
Information. Cross references in this summary are to headings in
the Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVES The Fund is an open-end, management
investment company.
The U.S. Government Securities Portfolio and the Monthly Payment
Government
Portfolio each seek high current income, liquidity and security of
principal
from a portfolio of U.S. Government Obligations. The Income Return
Account
Portfolio seeks high current income from a portfolio of high
quality debt
obligations and employs an immunization strategy to minimize the
risk of loss
of account value. See "Investment Objectives and Management
Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS Each Portfolio 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 pur-
suant to a separate prospectus, is offered exclusively to
tax-exempt employee
benefit and retirement plans of Smith Barney Inc. ("Smith Barney")
and its
affiliates and is available for the U.S. Government Securities
Portfolio and
the Income Return Account Portfolio. See "Purchase of Shares" and
"Redemption
of Shares."
Class A Shares. Class A shares of the U.S. Government Securities
Portfolio
and the Monthly Payment Government Portfolio are sold at net asset
value plus
an initial sales charge of up to 4.50% and are subject to an annual
service
fee of 0.25% of the average daily net assets of the Class. Class A
shares of
the Income Return Account Portfolio are sold at net asset value
plus an ini-
tial sales charge of up to 2.00% and are not subject to an annual
service fee.
The initial sales charges may be reduced or waived for certain
purchases. Pur-
chases 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 initial sales charge, but
will be sub-
ject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions
made within 12 months of purchase. See "Prospectus Summary--Reduced
or No Ini-
tial Sales Charge."
3
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
Class B Shares. Class B shares, which are only available in the
U.S. Govern-
ment Securities Portfolio and the Monthly Payment Government
Portfolio, are
offered at net asset value subject to a maximum CDSC of 4.50% of
redemption
proceeds, declining by 0.50% the first year after purchase and by
1.00% each
year thereafter 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 distribu-
tion 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 are not
available for pur-
chase in the Income Return Account Portfolio.
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 dis-
tributions ("Class B Dividend Shares") will be converted at that
time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with
no initial
sales charge at the time of purchase. Class C shares of the U.S.
Government
Securities Portfolio and the Monthly Payment Government Portfolio
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. Class C shares
of the
Income Return Account Portfolio are subject to an annual service
fee of 0.15%
and an annual distribution fee of 0.20% of the average daily net
assets of the
Class C shares. All Class C investors pay a CDSC of 1.00% if they
redeem Class
C shares within 12 months of purchase. The 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 a
Portfolio 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>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
In deciding which Class of Portfolio 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
alternative,
Class B and Class C shares are sold without any initial sales
charge so the
entire purchase price is immediately invested in a Portfolio. Any
investment
return on these additional invested amounts may partially or wholly
offset the
higher annual expenses of these Classes. Because a Portfolio'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 con-
version 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 distribu-
tion fees. 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 pur-
chase 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 Portfolio. 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 offered with a sales charge held in funds sponsored
by Smith
Barney listed under "Exchange Privilege." Class A share pur-
5
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
chases also may be eligible for a reduced initial sales charge. See
"Purchase
of Shares." Because the ongoing expenses of Class A shares may 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 Fund" for a
complete descrip-
tion of the sales charges and service and distribution fees for
each Class of
shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Ex-
change 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 spon-
sors 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 a brokerage
account main-
tained with Smith Barney. Shares may also be purchased through a
broker that
clears securities transactions through Smith Barney on a fully
disclosed basis
(an "Introducing Broker") or an investment dealer in the selling
group. In
addition, certain investors, including qualified retirement plans
and certain
other institutional investors, may purchase shares directly from
the Fund
through the Fund's transfer agent, 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 Retire-
ment 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 invest-
ment requirement for all Classes is $25. The minimum initial
invest-
6
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
ment requirement for Class A, Class B and Class C shares and the
subsequent
investment requirement for all Classes through the Systematic
Investment Plan
described below is $50. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a
Systematic
Investment Plan under which they may authorize the automatic
placement of a
purchase order each month or quarter for Portfolio shares in an
amount of at
least $50. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New
York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of
Shares" and "Re-
demption of Shares."
MANAGEMENT OF THE PORTFOLIOS Smith Barney Mutual Funds Management
Inc. (former-
ly, Smith, Barney Advisers, Inc.) ("the "Manager") serves as the
Portfolios'
investment manager. The Manager is a wholly owned subsidiary of
Smith Barney
Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary
of The Trav-
elers 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. See "Management of the
Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of
the same
Class of certain other funds of the Smith Barney Mutual Funds at
the respective
net asset values next determined, plus any applicable sales charge
differen-
tial. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Portfolio for the prior
day gener-
ally is quoted daily in the financial section of most newspapers
and is also
available from a Smith Barney Financial Consultant. See "Valuation
of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income
are paid quar-
terly on shares of the U.S. Government Securities Portfolio and
monthly on
shares of each of the Monthly Payment Government Portfolio and the
Income
Return Account Portfolio. Distributions of net realized capital
gains, if any,
are paid 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, 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
7
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
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 each
Portfolio's investment objective will be achieved. The value of
each Portfo-
lio's investments, and thus the net asset value of each Portfolio's
shares,
will fluctuate in response to changes in market and economic
conditions, as
well as the financial condition and prospects of issuers in which
the Portfolio
invests. See "Investment Objectives and Management Policies."
THE PORTFOLIOS' EXPENSES The following expense table lists the
costs and
expenses an investor will incur either directly or indirectly as a
shareholder
of the Portfolios, based on the maximum sales charge or maximum
CDSC that may
be incurred at the time of purchase or redemption and each
Portfolio's operat-
ing expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
APPLICABLE TO THE U.S. GOVERNMENT
SECURITIES PORTFOLIO AND THE
MONTHLY PAYMENT GOVERNMENT PORTFOLIO:
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) 4.50% None None None
Maximum CDSC
(as a percentage of None* 4.50% 1.00% None
original cost or
redemption
proceeds, whichever
is lower)
</TABLE>
<TABLE>
<CAPTION>
APPLICABLE TO INCOME
RETURN ACCOUNT
PORTFOLIO
CLASS A CLASS C CLASS Y
- ----------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on
purchases
(as a percentage of offering price) 2.00% None None
Maximum CDSC (as a percentage of
original cost or redemption None* 1.00% None
proceeds, whichever is lower)
</TABLE>
8
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
<TABLE>
<CAPTION>
APPLICABLE TO U.S. GOVERNMENT
SECURITIES PORTFOLIO
CLASS A CLASS B CLASS C CLASS Y
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Management fees 0.44% 0.44% 0.44% 0.44%
12b-1 fees** 0.25 0.75 0.70 --
Other expenses 0.07 0.02 0.07 0.17
- --------------------------------------------------------------
TOTAL PORTFOLIO OPERATING
EXPENSES 0.76% 1.21% 1.21% 0.61%
- --------------------------------------------------------------
<CAPTION>
APPLICABLE TO MONTHLY PAYMENT
GOVERNMENT PORTFOLIO
<S> <C> <C> <C> <C>
Management fees 0.44% 0.44% 0.44% 0.44%
12b-1 fees** 0.25 0.75 0.70 --
Other expenses*** 0.18 0.01 0.18 0.11
- --------------------------------------------------------------
TOTAL PORTFOLIO OPERATING
EXPENSES 0.87% 1.20% 1.32% 0.55%
- --------------------------------------------------------------
<CAPTION>
APPLICABLE TO INCOME RETURN
ACCOUNT PORTFOLIO
<S> <C> <C> <C> <C>
Management fees 0.44% 0.44% 0.44%
12b-1 fees** -- 0.35 --
Other expenses 0.12 0.15 0.25
- --------------------------------------------------------------
TOTAL PORTFOLIO OPERATING
EXPENSES 0.56% 0.94% 0.69%
- --------------------------------------------------------------
</TABLE>
* 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.
** 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.
*** "Other expenses" for Class Y shares have been estimated because
no Class Y
shares were outstanding during the fiscal year ended December
31, 1994.
The sales charge and CDSC set forth in the above table are the
maximum
charges imposed on purchases or redemptions of Portfolio 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."
9
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
With respect to the U. S. Government Securities Portfolio and the
Monthly
Payment Government Portfolio, 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 Bar-
ney also receives with respect to Class B shares an annual 12b-1
fee of 0.75%
of the value of average daily net assets of that Class, consisting
of a 0.50%
distribution fee and a 0.25% service fee. For Class C shares, Smith
Barney also
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.
With respect to the Income Return Account Portfolio, Smith Barney
receives an
annual 12b-1 fee of 0.35% of the value of average daily net assets
of Class C
shares, consisting of a 0.20% distribution fee and a 0.15% service
fee. "Other
expenses" in the above table include fees for shareholder services,
custodial
fees, legal and accounting fees, printing costs and registration
fees.
EXAMPLE
The following example is intended to assist an investor in
understanding the
various costs that an investor in each Portfolio will bear directly
or indi-
rectly. The example assumes payment by each Portfolio of operating
expenses at
the levels set forth in the table above. See "Purchase of Shares,"
"Redemption
of Shares" and "Management of the Fund."
<TABLE>
<CAPTION>
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:
U.S. Government
Securities Portfolio
Class A $52 $68 $85 $135
Class B 57 68 76 134
Class C 22 38 66 147
Class Y 6 20 34 76
Monthly Payment
Government Portfolio
Class A $53 $72 $91 $147
Class B 57 68 76 136
Class C 23 42 72 159
Class Y 6 18 31 69
</TABLE>
10
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Income Return Account
Portfolio
Class A $26 $38 $51 $ 89
Class C 20 30 52 115
Class Y 7 22 38 86
An investor would pay the following expenses on the same
investment, assuming the same annual return and no
redemption:
U.S. Government Securities
Portfolio
Class A $52 $68 $85 $135
Class B 12 38 66 134
Class C 12 38 66 147
Class Y 6 20 34 76
Monthly Payment Government
Portfolio
Class A $53 $72 $91 $147
Class B 12 38 66 136
Class C 13 42 72 159
Class Y 6 18 31 69
Income Return Account
Portfolio
Class A $26 $38 $51 $ 89
Class C 10 30 52 115
Class Y 7 22 38 86
- ---------------------------------------------------------------
</TABLE>
* 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.
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, each Portfolio's actual return will
vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED
A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN
THOSE SHOWN.
11
<PAGE>
Smith Barney Funds, Inc.
FINANCIAL HIGHLIGHTS
The following schedule for the periods ended December 31st has been
audited in
conjunction with the annual audits of the financial statements of
Smith Barney
Funds, Inc. by KPMG Peat Marwick LLP, independent auditors. The
1994 financial
statements and the independent auditors' report thereon appear in
the December
31, 1994 Annual Report of Shareholders. No information is presented
for Class Y
shares for the Monthly Payment Government Portfolio because no
Class Y shares
were outstanding for the periods shown.
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT
EACH PERIOD:
U.S. GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
CLASS A SHARES 1994 1993 1992 1991
1990
- -----------------------------------------------------------------
- ---------------
<S> <C> <C> <C> <C>
<C>
NET ASSET VALUE, BEGINNING
OF YEAR $13.66 $13.87 $14.10
$13.22 $13.17
- -----------------------------------------------------------------
- ---------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.91 0.98 1.06
1.26 1.15
Net realized and unrealized
gain
(loss) on investments (1.11) (0.10) (0.13)
0.80 0.08
- -----------------------------------------------------------------
- ---------------
Total Income (Loss) from
Investment Operations (0.20) 0.88 0.93
2.06 1.23
- -----------------------------------------------------------------
- ---------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.91) (0.98) (1.08)
(1.13) (1.18)
Distributions from net
realized gains on security
transactions (1) (0.05) (0.11) (0.08)
(0.05) --
- -----------------------------------------------------------------
- ---------------
Total Distributions (0.96) (1.09) (1.16)
(1.18) (1.18)
- -----------------------------------------------------------------
- ---------------
NET ASSET VALUE, END OF YEAR $12.50 $13.66 $13.87
$14.10 $13.22
- -----------------------------------------------------------------
- ---------------
TOTAL RETURN (P) (1.48)% 6.40% 6.85%
16.29% 9.95%
- -----------------------------------------------------------------
- ---------------
NET ASSETS, END OF YEAR
(000S) $358,045 $468,278 $459,380
$394,412 $335,447
- -----------------------------------------------------------------
- ---------------
RATIOS TO AVERAGE NET
ASSETS:
EXPENSES 0.76%* 0.49% 0.50%
0.44% 0.41%
Net investment income 6.83 7.00 7.65
8.31 8.87
- -----------------------------------------------------------------
- ---------------
PORTFOLIO TURNOVER RATE 40.22% 57.34% 26.18%
9.29% 5.62%
- -----------------------------------------------------------------
- ---------------
</TABLE>
(1) Represents distributions from paydown gains which are reported
as ordinary
income for tax purposes.
(P) Total Returns do not reflect sales charges.
* Amount has been restated from the December 31, 1994 Annual
Report.
12
<PAGE>
Smith Barney Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
U.S. GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
CLASS A SHARES (CONTINUED) 1989 1988 1987 1986
1985
- -----------------------------------------------------------------
- ----------------
<S> <C> <C> <C> <C>
<C>
NET ASSET VALUE, BEGINNING
OF YEAR $12.56 $12.68 $13.89
$13.95 $12.76
- -----------------------------------------------------------------
- ----------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 1.19 1.20 1.23
1.37 1.52
Net realized and
unrealized gain
(loss) on investments 0.63 (0.12) (0.89)
0.05 0.89
- -----------------------------------------------------------------
- ----------------
Total Income (Loss) from
Investment Operations 1.82 1.08 0.34
1.42 2.41
- -----------------------------------------------------------------
- ----------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (1.21) (1.20) (1.31)
(1.44) (1.22)
Distributions from net
realized gains on
security transactions (1) -- -- (0.24)
(0.04)
- -----------------------------------------------------------------
- ----------------
Total Distributions (1.21) (1.20) (1.55)
(1.48) (1.22)
- -----------------------------------------------------------------
- ----------------
NET ASSET VALUE, END OF
YEAR $13.17 $12.56 $12.68
$13.89 $13.95
- -----------------------------------------------------------------
- ----------------
TOTAL RETURN (P) 15.11% 8.72% 2.67%
10.76% 19.59%
- -----------------------------------------------------------------
- ----------------
NET ASSETS, END OF YEAR
(000S) $329,186 $328,446 $370,783
$507,243 $281,019
- -----------------------------------------------------------------
- ----------------
RATIOS TO AVERAGE NET
ASSETS:
EXPENSES 0.41% 0.42% 0.36%
0.35% 0.27%
Net investment income 9.19 9.25 9.43
9.95 11.45
- -----------------------------------------------------------------
- ----------------
PORTFOLIO TURNOVER RATE 22.88% 1.53% 108.19%
130.92% 67.13%
- -----------------------------------------------------------------
- ----------------
<CAPTION>
CLASS B SHARES 1994(2)
- -----------------------------------------------------------------
- ----------------
<S> <C> <C> <C> <C>
<C>
NET ASSET VALUE, BEGINNING
OF PERIOD $12.47
- -----------------------------------------------------------------
- ----------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.08
Net realized and
unrealized gain
on investments 0.17
- -----------------------------------------------------------------
- ----------------
Total Income from
Investment Operations 0.25
- -----------------------------------------------------------------
- ----------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.21)
Distributions from net
realized gains on
security transactions
(1) --
- -----------------------------------------------------------------
- ----------------
Total Distributions (0.21)
- -----------------------------------------------------------------
- ----------------
NET ASSET VALUE, END OF
PERIOD $12.51
- -----------------------------------------------------------------
- ----------------
TOTAL RETURN (P) 2.04%++
- -----------------------------------------------------------------
- ----------------
NET ASSETS, END OF YEAR
(000S) $1,529
- -----------------------------------------------------------------
- ----------------
RATIOS TO AVERAGE NET
ASSETS:
EXPENSES 1.21%+*
Net investment income 6.94+
- -----------------------------------------------------------------
- ----------------
PORTFOLIO TURNOVER RATE 40.22%
- -----------------------------------------------------------------
- ----------------
</TABLE>
(1) Represents distributions from paydown gains which are reported
as ordinary
income for tax purposes.
(2) 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.
(P) Total Returns do not reflect sales charges.
* Amount has been restated from the December 31, 1994 Annual
Report.
13
<PAGE>
Smith Barney Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
U.S. GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
CLASS C SHARES 1994(1) 1993
1992(2)
- -----------------------------------------------------------------
- -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.66 $13.86
$14.01
- -----------------------------------------------------------------
- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.82 0.89
0.15
Net realized and unrealized loss
on investments (1.11) (0.10)
- --
- -----------------------------------------------------------------
- -------
Total Income (Loss) from Investment
Operations (0.29) 0.79
0.15
- -----------------------------------------------------------------
- -------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.83) (0.88)
(0.30)
Distributions from net realized gains
on security transactions (3) (0.04) (0.11)
- --
- -----------------------------------------------------------------
- -------
Total Distributions (0.87) (0.99)
(0.30)
- -----------------------------------------------------------------
- -------
NET ASSET VALUE, END OF PERIOD $12.50 $13.66
$13.86
- -----------------------------------------------------------------
- -------
TOTAL RETURN (P) (2.11)% 5.74%
1.07%++
- -----------------------------------------------------------------
- -------
NET ASSETS, END OF PERIOD (000S) $21,253 $19,938
$1,954
- -----------------------------------------------------------------
- -------
RATIOS TO AVERAGE NET ASSETS:
EXPENSES 1.21% 1.21%
1.14%+
Net investment income 6.27 6.23
6.56+
- -----------------------------------------------------------------
- -------
PORTFOLIO TURNOVER RATE 40.22% 57.34%
26.18%
- -----------------------------------------------------------------
- -------
<CAPTION>
CLASS Y SHARES 1994(4) 1993(5)
- -----------------------------------------------------------------
- -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.67 $13.97
- -----------------------------------------------------------------
- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.89 0.86
Net realized and unrealized loss on
investments (1.10) (0.10)
- -----------------------------------------------------------------
- -------
Total Income (Loss) from Investment
Operations (0.21) 0.76
- -----------------------------------------------------------------
- -------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.91) (0.95)
Distributions from net realized gains
on security transactions (3) (0.04) (0.11)
- -----------------------------------------------------------------
- -------
Total Distributions (0.91) (1.06)
- -----------------------------------------------------------------
- -------
NET ASSET VALUE, END OF PERIOD $12.51 $13.67
- -----------------------------------------------------------------
- -------
TOTAL RETURN (P) (1.53)% 5.55%++
- -----------------------------------------------------------------
- -------
NET ASSETS, END OF PERIOD (000S) $13,903 $14,118
- -----------------------------------------------------------------
- -------
RATIOS TO AVERAGE NET ASSETS:
EXPENSES 0.61% 0.69%+
Net investment income 6.82 7.29+
- -----------------------------------------------------------------
- -------
PORTFOLIO TURNOVER RATE 40.22% 57.34%
- -----------------------------------------------------------------
- -------
</TABLE>
(1) On November 7, 1994 the former Class B shares were renamed
Class C shares.
(2) For the period from December 2, 1992 (inception date) to
December 31, 1992.
(3) Represents distributions from paydown gains which are reported
as ordinary
income for tax purposes.
(4) On November 7, 1994, the former Class C shares were renamed
Class Y shares.
(5) For the period from January 12, 1993 (inception date) to
December 31, 1993.
++ Not annualized as it may not be representative of the total
return for the
year.
+ Annualized.
(P) Total Returns do not reflect sales charges.
14
<PAGE>
Smith Barney Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
MONTHLY PAYMENT GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
CLASS A SHARES 1994 1993 1992 1991
1990
- -----------------------------------------------------------------
- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $12.85 $12.96 $13.12 $12.41
$12.37
- -----------------------------------------------------------------
- -------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income 0.79 0.87 0.92 1.02
1.14
Net realized and
unrealized gain
(loss) on investments (0.97) (0.04) (0.07) 0.83
0.01
- -----------------------------------------------------------------
- -------
Total Income (Loss)
from Investment
Operations (0.18) 0.83 0.85 1.85
1.15
- -----------------------------------------------------------------
- -------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.78) (0.88) (0.96) (1.11)
(1.11)
Distribution from net
realized gains
on security
transactions (1) (0.03) (0.06) (0.05) (0.03)
--
- -----------------------------------------------------------------
- -------
Total Distributions (0.81) (0.94) (1.01) (1.14)
(1.11)
- -----------------------------------------------------------------
- -------
NET ASSET VALUE, END OF
YEAR $11.86 $12.85 $12.96 $13.12
$12.41
- -----------------------------------------------------------------
- -------
TOTAL RETURN (P) (1.36)% 6.51% 6.83% 15.66%
9.89%
- -----------------------------------------------------------------
- -------
NET ASSETS, END OF YEAR
(000S) $40,258 $54,953 $49,755 $33,327
$22,527
- -----------------------------------------------------------------
- -------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.87%* 0.56% 0.51% 0.51%
0.44%
Net investment income 6.54 6.66 7.39 8.18
8.91
- -----------------------------------------------------------------
- -------
PORTFOLIO TURNOVER RATE 58.00% 97.66% 36.11% 10.62%
4.64%
- -----------------------------------------------------------------
- -------
<CAPTION>
CLASS A SHARES
(CONTINUED) 1989 1988 1987 1986(2)
- -----------------------------------------------------------------
- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $11.74 $11.83 $12.59 $12.50
- -----------------------------------------------------------------
- -------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income 1.10 1.09 1.10 0.88
Net realized and
unrealized gain
(loss) on investments 0.64 (0.09) (0.86) (0.02)
- -----------------------------------------------------------------
- -------
Total Income (Loss)
from Investment
Operations 1.74 1.00 0.24 0.86
- -----------------------------------------------------------------
- -------
LESS DISTRIBUTIONS:
Dividends from net
investment income (1.11) (1.09) (0.99) (0.81)
Distribution from net
realized gains
on security
transactions (1) -- -- (0.01) --
- -----------------------------------------------------------------
- -------
Total Distributions (1.11) (1.09) (1.00) (0.81)
- -----------------------------------------------------------------
- -------
NET ASSET VALUE, END OF
PERIOD $12.37 $11.74 $11.83 $12.59
- -----------------------------------------------------------------
- -------
TOTAL RETURN (P) 15.45% 8.75% 2.09% 7.44%++
- -----------------------------------------------------------------
- -------
NET ASSETS, END OF
PERIOD (000S) $17,832 $17,877 $21,011 $15,498
- -----------------------------------------------------------------
- -------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.46% 0.50% 0.41% 0.26%+
Net investment income 9.10 9.03 9.22 8.85+
- -----------------------------------------------------------------
- -------
PORTFOLIO TURNOVER RATE 11.35% 5.31% 113.46% 107.44%
- -----------------------------------------------------------------
- -------
</TABLE>
(1) Represents distributions from paydown gains which are reported
as ordinary
income for tax purposes.
(2) For the period from April 16, 1986 (commencement of operations)
to December
31, 1986.
++ Not annualized as it may not be representative of the total
return for the
year.
+ Annualized.
(P) Total returns do not reflect sales charges.
* Amount has been restated from the December 31, 1994 Annual
Report.
15
<PAGE>
Smith Barney Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
MONTHLY PAYMENT GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
-------------- -------------------------
1994(1) 1994(2) 1993 1992(3)
- -----------------------------------------------------------------
- ----
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $11.78 $12.85 $12.96 $12.89
- -----------------------------------------------------------------
- ----
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income 0.18 0.72 0.78 0.05
Net realized and
unrealized gain
(loss) on investments 0.01 (0.98) (0.04) 0.10
- -----------------------------------------------------------------
- ----
Total Income (Loss) from
Investment Operations 0.19 (0.26) 0.74 0.15
- -----------------------------------------------------------------
- ----
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.12) (0.70) (0.79) (0.08)
Distributions from net
realized gains
on security
transactions (4) -- (0.03) (0.06) --
- -----------------------------------------------------------------
- ----
Total Distributions (0.12) (0.73) (0.85) (0.08)
- -----------------------------------------------------------------
- ----
NET ASSET VALUE, END OF
PERIOD $11.85 $11.86 $12.85 $12.96
- -----------------------------------------------------------------
- ----
TOTAL RETURN (P) 1.64%++ (2.07)% 5.77%
1.15%++
- -----------------------------------------------------------------
- ----
NET ASSETS, END OF PERIOD
(000S) $61 $3,351 $3,155 $72
- -----------------------------------------------------------------
- ----
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.20%+* 1.32% 1.27%
1.21%+
Net investment income 7.18+ 5.92 5.88 6.21+
- -----------------------------------------------------------------
- ----
PORTFOLIO TURNOVER RATE 58.00% 58.00% 97.66% 36.11%
- -----------------------------------------------------------------
- ----
</TABLE>
(1) For the period from November 10, 1994 (inception date) to
December 31,
1994.
(2) On November 7, 1994 the former Class B shares were renamed
Class C shares.
(3) For the period from December 2, 1992 (inception date) to
December 31, 1992.
(4) Represents distributions from paydown gains which are reported
as ordinary
income for tax purposes.
++ Not annualized as it may not be representative of the total
return for the
year.
+ Annualized.
(P) Total returns do not reflect sales charges.
* Amount has been restated from the December 31, 1994 Annual
Report.
16
<PAGE>
Smith Barney Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
INCOME RETURN ACCOUNT PORTFOLIO
<TABLE>
<CAPTION>
CLASS A SHARES 1994 1993 1992 1991 1990
- -----------------------------------------------------------------
- -----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $ 9.59 $ 9.68 $ 9.65 $ 9.38 $ 9.31
- -----------------------------------------------------------------
- -----
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.46 0.45 0.52 0.67 0.73
Net realized and
unrealized gain
(loss) on
investments (0.26) (0.07) 0.03 0.33 0.08
- -----------------------------------------------------------------
- -----
Total Income from
Investment Operations 0.20 0.38 0.55 1.00 0.81
- -----------------------------------------------------------------
- -----
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.45) (0.47) (0.52) (0.73)
(0.74)
- -----------------------------------------------------------------
- -----
Total Distributions (0.45) (0.47) (0.52) (0.73)
(0.74)
- -----------------------------------------------------------------
- -----
NET ASSET VALUE, END
OF YEAR $ 9.34 $ 9.59 $ 9.68 $ 9.65 $ 9.38
- -----------------------------------------------------------------
- -----
TOTAL RETURN (P) 2.14% 4.00% 5.85% 11.06%
9.10%
- -----------------------------------------------------------------
- -----
NET ASSETS, END OF
YEAR (000S) $18,918 $50,874 $48,538 $33,682 $24,058
- -----------------------------------------------------------------
- -----
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.56% 0.53% 0.50% 0.49%
0.43%
Net investment income 4.60 4.67 5.33 6.98 7.92
- -----------------------------------------------------------------
- -----
PORTFOLIO TURNOVER
RATE 126.64% 152.04% 84.15% 30.44%
27.90%
- -----------------------------------------------------------------
- -----
<CAPTION>
CLASS A SHARES
(CONTINUED) 1989 1988 1987 1986
1985*(1)
- -----------------------------------------------------------------
- -----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.12 $ 9.26 $ 9.43 $ 9.51 $ 9.17
- -----------------------------------------------------------------
- -----
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.75 0.71 0.68 0.72 0.68
Net realized and
unrealized gain
(loss) on
investments 0.19 (0.13) (0.19) 0.08 0.16
- -----------------------------------------------------------------
- -----
Total Income from
Investment Operations 0.94 0.58 0.49 0.80 0.84
- -----------------------------------------------------------------
- -----
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.75) (0.72) (0.60) (0.87)
(0.50)
Distributions from
net realized gains -- -- (0.06) (0.01) --
- -----------------------------------------------------------------
- -----
Total Distributions (0.75) (0.72) (0.66) (0.88)
(0.50)
- -----------------------------------------------------------------
- -----
NET ASSET VALUE, END
OF PERIOD $ 9.31 $ 9.12 $ 9.26 $ 9.43 $ 9.51
- -----------------------------------------------------------------
- -----
TOTAL RETURN (P) 10.67% 6.48% 5.36% 8.78%
9.34%++
- -----------------------------------------------------------------
- -----
NET ASSETS, END OF
PERIOD (000S) $27,604 $53,950 $55,494 $54,074 $24,855
- -----------------------------------------------------------------
- -----
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.43% 0.44% 0.35% 0.28%
0.21%+
Net investment income 8.13 7.78 7.37 7.58
8.63+
- -----------------------------------------------------------------
- -----
PORTFOLIO TURNOVER
RATE 33.17% 124.33% 68.21% 304.38%
182.61%
- -----------------------------------------------------------------
- -----
</TABLE>
(1) For the period from March 4, 1985 (commencement of operations)
to December
31, 1985.
++ Not annualized as it may not be representative of the total
return for the
year.
+ Annualized.
(P) Total returns do not reflect sales charges.
* Adjusted for 200% stock dividend to shareholders of record on
July 17, 1985.
17
<PAGE>
Smith Barney Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
INCOME RETURN ACCOUNT PORTFOLIO
<TABLE>
<CAPTION>
CLASS C SHARES(1) CLASS Y SHARES(3)
-----------------------
- ----------------------
1994 1993 1992(2) 1994
1993(4)
- -----------------------------------------------------------------
- ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $ 9.58 $ 9.68 $ 9.69 $ 9.59 $
9.72
- -----------------------------------------------------------------
- ------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income 0.42 0.45 0.03 0.44
0.42
Net realized and
unrealized loss
on investments (0.24) (0.12) -- (0.25)
(0.13)
- -----------------------------------------------------------------
- ------
Total Income from
Investment
Operations 0.18 0.33 0.03 0.19
0.29
- -----------------------------------------------------------------
- ------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.42) (0.43) (0.04) (0.44)
(0.42)
- -----------------------------------------------------------------
- ------
Total Distributions (0.42) (0.43) (0.04) (0.44)
(0.42)
- -----------------------------------------------------------------
- ------
NET ASSET VALUE,
END OF YEAR $ 9.34 $ 9.58 $ 9.68 $ 9.34 $
9.59
- -----------------------------------------------------------------
- ------
TOTAL RETURN (P) 1.86% 3.53% 0.31%++ 2.01%++
3.01%++
- -----------------------------------------------------------------
- ------
NET ASSETS, END OF
YEAR (000S) $3,055 $3,993 $10 $3,235 $
5,412
- -----------------------------------------------------------------
- ------
RATIOS TO AVERAGE
NET ASSETS:
Expenses 0.94% 0.90% 0.86%+ 0.69%
0.75%+
Net investment
income 4.40 4.25 5.71+ 4.65
4.78+
- -----------------------------------------------------------------
- ------
PORTFOLIO TURNOVER
RATE 126.64% 152.04% 84.15% 126.64%
152.04%
- -----------------------------------------------------------------
- ------
</TABLE>
(1) On November 7, 1994 former Class B shares were renamed Class C
shares.
(2) For the period from December 16, 1992 (inception date) to
December 31,
1992.
(3) On November 7, 1994, former Class C shares were renamed Class
Y shares.
(4) For the period from February 1, 1993 (inception date) to
December 31, 1993.
++ Not annualized as it may not be representative of the total
return for the
year.
+ Annualized.
(P) Total returns do not reflect sales charges.
18
<PAGE>
Smith Barney Funds, Inc.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The U.S. Government Securities Portfolio and the Monthly Payment
Government
Portfolio each seek high current income, liquidity and security of
principal
by investing in obligations of the U.S. Government, its agencies or
its
instrumentalities and related repurchase and reverse repurchase
agreements.
The Income Return Account Portfolio seeks high current income from
a portfolio
of high quality debt obligations and employs an "immunization
strategy" (see
below) to minimize the risk of loss of account value. Of course, no
assurance
can be given that a Portfolio's objective will be achieved.
The U.S. Government Securities Portfolio and the Monthly Payment
Government
Portfolio invest primarily in Government National Mortgage
Association
("GNMA") Certificates of the modified pass-through type and will
also normally
include other "U.S. Government Obligations," i.e., obligations
issued or guar-
anteed by the United States, its agencies or its instrumentalities
and related
repurchase and reverse repurchase agreements (reverse repurchase
agreement
transactions are limited to no more than 5% of each Portfolio's net
assets).
Under normal market conditions, each Portfolio will seek to invest
substan-
tially all of its assets -- and a Portfolio will invest not less
than 65% of
its assets -- in such securities. GNMA Certificates are debt
securities issued
by a mortgage banker or other mortgagee representing an interest in
a pool of
mortgages insured by the Federal Housing Administration or the
Farmers Home
Administration or guaranteed by the Veterans Administration. The
National
Housing Act provides that the full faith and credit of the United
States is
pledged to the timely payment of principal and interest by GNMA of
amounts due
on these GNMA Certificates. Securities of the type to be purchased
for these
Portfolios have historically involved no credit risk; however, due
to fluctua-
tions in interest rates, the market value of such securities will
vary during
the period of a shareholder's investment in the Portfolio. The
average life of
GNMA Certificates varies with the maturities of the underlying
mortgages (with
maximum maturities of 30 years) but is likely to be substantially
less than
the original maturity of the mortgage pools underlying the
securities as the
result of prepayments, refinancing of such mortgages or
foreclosure.
Unscheduled prepayments of mortgages are passed through to the
holders of GNMA
Certificates at par and will increase or decrease the yield
realized by the
Portfolio, depending on the cost of the underlying Certificate and
its market
value at the time of prepayment. As a hedge against changes in
interest rates,
the U.S. Government Securities Portfolio and the Monthly Payment
Government
Portfolio may enter into agreements with dealers in GNMA
Certificates to pur-
chase or sell an agreed-upon principal amount of GNMA Certificates
at a speci-
fied price on a certain date; provided,
19
<PAGE>
Smith Barney Funds, Inc.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
however, that settlement occurs within 120 days of the trade date.
For a
detailed explanation, see "Appendix."
The Income Return Account Portfolio invests in U.S. Government
Obligations
(see "Appendix"), bankers' acceptances, certificates of deposit,
securities
backed by letters of credit, commercial paper rated A-1 by Standard
& Poor's
Corporation ("S&P") or Prime-1 by Moody's Investors Service, Inc.
("Moody's")
and notes and bonds, including floating rate issues, rated A or
better by S&P
or Moody's or, if not rated, of comparable quality as determined by
the Manag-
er. The Portfolio's investments in U.S. Government Obligations will
be in obli-
gations with remaining maturities of five years or less, and its
investments in
corporate debt obligations will be in obligations with remaining
maturities of
three years or less. Normally, approximately one-third of the
Portfolio will
consist of obligations that have remaining maturities of less than
one year;
however, it is expected there may be occasions when up to 100% of
the Portfolio
will be invested in securities maturing within one year. This
portfolio compo-
sition is intended to achieve a higher level of income than would
otherwise be
available from an exclusively short-term portfolio with
substantially less risk
than that of a conventional bond or note portfolio. While minor
day-to-day
price fluctuations are unavoidable, it is believed that the
Portfolio's immuni-
zation strategy will produce sufficient income accrual during
adverse market
conditions to offset any potential loss in the Portfolio security
value mea-
sured over a three month period.
The U.S. Government Securities Portfolio and the Monthly Payment
Government
Portfolio each may seek to increase its net investment income by
lending its
securities to unaffiliated brokers, dealers and other financial
institutions,
provided such loans are callable at any time and are continuously
secured by
cash or U.S. Government Obligations equal to no less than the
market value,
determined daily, of the securities loaned. Management will limit
such lending
to not more than one-third of the value of each Portfolio's total
assets. The
risks in lending portfolio securities consist of possible delay in
recovery of
the securities or possible loss of rights in the collateral should
the borrower
fail financially. The Statement of Additional Information contains
more
detailed information.
The Board of Directors of the Fund may modify the investment
objective and
policies of each Portfolio (other than the Income Return Account
Portfolio
whose objective and policies may be changed only by the "vote of a
majority of
the outstanding voting securities", as defined in the Investment
Company Act of
1940 (the "1940 Act") provided such modification is not prohibited
by the
20
<PAGE>
Smith Barney Funds, Inc.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
investment restrictions (which are set forth in the Statement of
Additional
Information) or applicable laws, and any such change will first be
disclosed in
the then current prospectus.
PORTFOLIO TURNOVER
None of the Portfolios will engage in the trading of securities
for the pur-
pose of realizing short-term profits; however, each Portfolio will
adjust its
portfolio as considered advisable in view of prevailing or
anticipated market
conditions and the Portfolio's investment objective. As the
portfolio turnover
rate increases, so will the Portfolio's dealer mark-ups and other
transaction
related expenses. Investors should realize that risk of loss is
inherent in the
ownership of any securities and that shares of a Portfolio will
fluctuate with
the market value of its securities.
VALUATION OF SHARES
Each Portfolio's net asset value per share is determined as of
the close of
regular trading on the NYSE, on each day that the NYSE is open, by
dividing the
value of the Portfolio's net assets attributable to each Class by
the total
number of shares of the Class outstanding.
Obligations are valued at the mean between the bid and asked
quotations for
such securities or if no quotations are available, then for
securities of simi-
lar type, yield and maturity. Short-term investments that have a
maturity of
more than 60 days are valued at prices based on market quotations
for securi-
ties of similar type, yield and maturity. Short-term investments
that have a
maturity of 60 days or less are valued at amortized cost when the
Board of
Directors has determined that amortized cost equals fair value,
unless market
conditions dictate otherwise. Other investments of a Portfolio,
including
restricted securities, if any, are valued at a fair value
determined by the
Board of Directors in good faith.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund declares quarterly income dividends on shares of the
U.S. Government
Securities Portfolio and monthly income dividends on shares of the
21
<PAGE>
Smith Barney Funds, Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Monthly Payment Government Portfolio and the Income Return Account
Portfolio
and makes annual distributions of capital gains, if any, on such
shares.
If a shareholder does not otherwise instruct, dividends and
capital gain dis-
tributions will be reinvested automatically in additional shares of
the same
Class at net asset value, subject to no sales charge or CDSC.
Income dividends and capital gain distributions that are invested
are cred-
ited to shareholders' accounts in additional shares at the net
asset value as
of the close of business on the payment date. A shareholder may
change the
option at any time by notifying his or her Smith Barney Financial
Consultant.
Accounts held directly by TSSG should notify TSSG in writing at
least five
business days prior to the payment date to permit the change to be
entered in
the shareholder's account.
The per share dividends on Class B and Class C shares of each
Portfolio may
be lower than the per share dividends on Class A and Class Y shares
principally
as a result of the distribution fee applicable with respect to
Class B and
Class C shares. The per share dividends on Class A shares of each
Portfolio 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
Each Portfolio intends to qualify as a regulated investment
company under
Subchapter M of the Code to be relieved of federal income tax on
that part of
its net investment income and realized capital gains which it pays
out to its
shareholders. To qualify, each Portfolio must meet certain tests,
including
distributing at least 90% of its investment company taxable income,
and deriv-
ing less than 30% of its gross income from the sale or other
disposition of
certain investments held for less than three months.
Dividends from net investment income and distributions of
realized short-term
capital gains on the sale of securities, whether paid in cash or
automatically
invested in additional shares of a Portfolio, are taxable to
shareholders as
ordinary income. Each Portfolio's dividends will not qualify for
the dividends
received deduction for corporations. Dividends and distributions
declared by
each Portfolio may also be subject to state and local taxes.
Distributions out
of net long-term capital gains (i.e., net long-term capital gains
in excess of
net
22
<PAGE>
Smith Barney Funds, Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
short-term capital losses) are taxable to shareholders as long-term
capital
gains. Information as to the tax status of dividends paid or deemed
paid in
each calendar year will be mailed to shareholders as early in the
succeeding
year as practical but not later than January 31.
It is the policy of the Fund to comply with requirements of the
Internal Rev-
enue Code applicable to regulated investment companies and to
distribute all of
the taxable income and net taxable gains of each Portfolio to its
shareholders.
Dividends derived from net investment income and capital gains on
the sale of
securities, whether paid in cash or automatically invested in
additional shares
of the same Portfolio, are taxable to shareholders of each
Portfolio. Informa-
tion as to the tax status of dividends deemed paid in each calendar
year will
be mailed to shareholders as early in the succeeding year as
practical but no
later than January 31. The foregoing relates to Federal income
taxation. Divi-
dends may also be subject to state and local taxes; investors
should consult
with their tax advisors regarding state and local taxes.
PURCHASE OF SHARES
GENERAL
Each Portfolio offers several 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 CDSC
and are available only to investors investing a minimum of
$5,000,000. A fifth
class, Class Z shares, are also offered with respect to each of the
U.S. Gov-
ernment Securities Portfolio and the Income Return Account
Portfolio. Class Z
shares are offered without a sales charge, CDSC, service fee or
distribution
fee exclusively to tax-exempt employee benefit and retirement plans
of Smith
Barney and its affiliates. Investors meeting 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.
Shares may be purchased through a brokerage account maintained
with Smith
Barney. Shares may also be purchased through an Introducing Broker
or an
investment dealer in the selling group. In addition, certain
investors, includ-
ing qualified retirement plans and certain other institutional
investors, may
pur-
23
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
chase shares directly from the Fund through TSSG. When purchasing
shares of a
Portfolio, 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.
Investors in Class A, Class B and Class C shares may open an
account by mak-
ing an initial investment of at least $1,000 for each account, or
$250 for an
IRA or a Self-Employed Retirement Plan in each Portfolio. Investors
in Class Y
shares may open an account by making an initial investment of
$5,000,000. Sub-
sequent investments of at least $50 may be made for all Classes.
For partici-
pants 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
each Portfolio is $25. For each Portfolio'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 $50.
There are no
minimum investment requirements in Class A shares for employees of
Travelers
and its subsidiaries, including Smith Barney, Directors of the
Fund, and their
spouses and children. 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 for a Portfolio that are received by the Fund or
Smith Barney
prior to the close of regular trading on the NYSE, on any day the
Portfolio
calculates its net asset value, are priced according to the net
asset value
determined on that day (the "trade date"). Orders received by
dealers or Intro-
ducing Brokers prior to the close of regular trading on the NYSE on
any day a
Portfolio calculates its net asset value, are priced according to
the net asset
value determined on that day, provided the order is received by the
Fund or
Smith Barney prior to Smith Barney's close of business. Currently,
payment for
Portfolio shares is due on the fifth business day (the "settlement
date") after
the trade date. Each Portfolio 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
24
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
preauthorized transfers of $50 or more to charge the regular bank
account or
other financial institution indicated by the shareholder on a
monthly or quar-
terly basis to provide systematic additions to the shareholder's
Portfolio
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 share-
holder'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.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charges applicable to purchases of Class A shares of
each of the
U.S. Government Securities Portfolio and the Monthly Payment
Government Port-
folio are as follows:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------
DEALERS'
% OF % OF REALLOWANCE
AS % OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING
PRICE
- -----------------------------------------------------------------
- ----------
<S> <C> <C> <C>
Less than $ 25,000 4.50% 4.71% 4.00%
$ 25,000 - 49,999 4.00 4.17 3.60
50,000 - 99,999 3.50 3.63 3.15
100,000 -249,999 2.50 2.56 2.25
250,000 -499,999 1.50 1.52 1.35
500,000 and over * * *
- -----------------------------------------------------------------
- ----------
</TABLE>
The sales charge applicable to purchases of Class A shares of the
Income
Return Portfolio are as follows:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------
DEALERS'
% OF % OF
REALLOWANCE AS % OF
AMOUNT OF TRANSACTION OFFERING PRICE AMOUNT INVESTED OFFERING
PRICE
- -----------------------------------------------------------------
- -----------
<S> <C> <C> <C>
Less than $500,000 2.00% 2.04%
1.80%
$500,000 and
over * * *
- -----------------------------------------------------------------
- -----------
</TABLE>
* 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."
25
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
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 each Portfolio 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 offered with a sales charge held
in funds
sponsored by Smith Barney 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 Direc-
tors of the Fund and employees of Travelers and its subsidiaries,
or to the
spouse and children of such persons (including the surviving spouse
of a
deceased Director or employee, and retired Directors 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 pur-
chase is made for investment purposes and that the securities will
not be
resold except through redemption or repurchase; (b) offers of Class
A shares
to any other investment company in connection with the combination
of such
company with a Portfolio 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 a Portfolio (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 a Portfolio) and who wish to reinvest their
redemption
proceeds in a Portfolio, provided the reinvestment is made within
60 calendar
days of the redemption; and (e) accounts managed by registered
investment
advisory subsidiaries of Travelers. In order to obtain such
discounts, the
purchaser must provide sufficient information at the time of
purchase to per-
mit verification that the purchase would qualify for the
elimination of the
sales charge.
26
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
RIGHT OF ACCUMULATION
Class A shares of a Portfolio may be purchased by "any person"
(as defined
above) at a reduced sales charge or at net asset value determined
by aggregat-
ing the dollar amount of the new purchase and the total net asset
value of all
Class A shares of a Portfolio and of funds sponsored by Smith
Barney that 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 informa-
tion at the time of purchase to permit verification that the
purchase quali-
fies for the reduced sales charge. The right of accumulation is
subject to
modification or discontinuance at any time with respect to all
shares pur-
chased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales
charge or pur-
chase 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 pay-
roll deductions, IRAs or investments pursuant to retirement plans
under Sec-
tions 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 quali-
fied group may also purchase Class A shares at the reduced sales
charge appli-
cable 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 pre-
viously 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
Portfolio
shares at a discount and (c) satisfies uniform criteria which
enables Smith
Barney to realize economies of scale in its costs of distributing
shares. A
qualified group must have more than 10 members, must be
27
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
available to arrange for group meetings between representatives of
the Portfo-
lio and the members, and must agree to include sales and other
materials
related to the Portfolio in its publications and mailings to
members at no
cost to Smith Barney. In order to obtain such reduced sales charge
or to pur-
chase 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.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more
provides
an opportunity for an investor to obtain a reduced sales charge by
aggregating
investments over a 13 month period, provided that the investor
refers to such
Letter when placing orders. For purposes of a Letter of Intent, the
"Amount of
Investment" as referred to in the preceding sales charge table
includes pur-
chases of all Class A shares of each Portfolio and other funds of
the Smith
Barney Mutual Funds offered with a sales charge over a 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.
Please
contact a Smith Barney Financial Consultant or TSSG to obtain a
Letter of
Intent application.
Class Y Shares. A Letter of Intent may also be used as a way for
investors
to meet the minimum investment requirement for Class Y shares. Such
investors
must make an initial minimum purchase of $1,000,000 in Class Y
shares of a
Portfolio and agree to purchase a total of $5,000,000 of Class Y
shares of the
same Portfolio within six months from the date of the Letter. If a
total
investment of $5,000,000 is not made within the six-month period,
all Class Y
shares purchased to date will be transferred to Class A shares,
where they
will be subject to all fees (including a service fee of 0.25%)
(except the
Income Return Account Portfolio's Class A shares will not be
subject to a
service fee) and expenses applicable to the Portfolio's Class A
shares, which
may include a CDSC of 1.00%. Please contact a Smith Barney
Financial Consul-
tant or TSSG for further information.
28
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
DEFERRED SALES CHARGE ALTERNATIVES
Class B shares are only available in the U.S. Government
Securities Portfo-
lio and the Monthly Payment Government Portfolio. Class C shares
are available
in each Portfolio.
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 a Portfolio. A CDSC, however, may be
imposed on cer-
tain 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
original 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 Portfolio 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 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
preceding
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."
29
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- --------------------------------
<S> <C>
First 4.50%
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 will also be converted at that time
such pro-
portion 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")
on July 15,
1994 and who subsequently exchange those shares for Class B shares
of a Portfo-
lio will be offered the opportunity to exchange all such Class B
shares for
Class A shares of the Portfolio 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."
In determining the applicability of any CDSC, it will be assumed
that a
redemption is made first of shares representing capital
appreciation, next of
shares representing the reinvestment of dividends and capital gain
distribu-
tions and finally of other shares held by the shareholder for the
longest
period of time. The length of time that CDSC Shares acquired
through an
exchange have been held will be calculated from the date that the
shares
exchanged were initially acquired in one of the other Smith Barney
Mutual
Funds, and Portfolio 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.
30
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
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 addi-
tional 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 shareholder's shares at the time the withdrawal
plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that
automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the
value of
the shareholder's shares will be permitted for withdrawal plans
that were
established prior to November 7, 1994); (c) redemptions of shares
within twelve
months following the death or disability of the shareholder; (d)
redemption of
shares made in connection with qualified distributions from
retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary
redemptions; and (f)
redemptions of shares in connection with a combination of a
Portfolio with any
investment company by merger, acquisition of assets or otherwise.
In addition,
a shareholder who has redeemed shares from other funds of the Smith
Barney
Mutual Funds may, under certain circumstances, reinvest all or part
of the
redemption proceeds within 60 days and receive pro rata credit for
any CDSC
imposed on the prior 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 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 opera-
tion
31
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
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.
Each of the U.S. Government Securities Portfolio and the Monthly
Payment Gov-
ernment Portfolio offers to Participating Plans Class A, Class B,
Class C and
Class Y shares as investment alternatives under the Smith Barney
401(k) Pro-
gram; the Income Return Account Portfolio offers Class A, Class C
and Class Y
shares. 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 shares
available to
other investors, Class Y shares acquired through the Smith Barney
401(k) Pro-
gram are not subject to any service or distribution fees or any
initial sales
charge or CDSC. Once a Participating Plan has made an initial
investment in a
Portfolio, all of its subsequent investments in the Portfolio must
be in the
same Class of shares, except as otherwise described below.
Class A Shares. Class A shares of each Portfolio are offered
without any ini-
tial 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 each applicable Portfolio 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 Partici-
pating Plan first enrolled in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled in the
Smith Bar-
ney 401(k) Program, it will be offered the opportunity to exchange
all of its
Class B shares for Class A shares of a Portfolio. Such Plans will
be notified
of the pending exchange in writing approximately 60 days before the
eighth
anniversary of the enrollment date and, unless the exchange has
been rejected
in writing, the exchange will occur on or about the eighth
anniversary date.
Once the exchange has occurred, a Participating Plan will not be
eligible to
acquire addi-
32
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
tional Class B shares of the Portfolio but instead may acquire
Class A shares
of the Portfolio. 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 invest-
ors. See "Purchase of Shares -- Deferred Sales Charge
Alternatives."
Class C Shares. Class C shares of each Portfolio are offered to
any Partici-
pating 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. Each 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 a
Portfolio. Such
Plans will be notified in writing within 30 days after the last
business day of
the calendar year, and unless the exchange offer has been rejected
in writing,
the exchange will occur on or about the last business day of the
following
March. Once the exchange has occurred, a Participating Plan will
not be eligible
to acquire Class C shares of a Portfolio but instead may acquire
Class A shares
of the Portfolio. Any Class C shares not converted will continue to
be subject
to the distribution fee.
Class Y Shares. Class Y shares of each Portfolio 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 dis-
tributions, 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 redemp-
tion 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 preceding year and, with respect to Class B shares,
increases
in the net
33
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
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 applica-
bility 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 Class A, Class B and
Class C 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 a Portfolio
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 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 min-
imum investment requirements and all shares are subject to the
other require-
ments 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 Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
34
<PAGE>
Smith Barney Funds, Inc.
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney Funds, Inc. -- Utility Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed-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 Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt 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.
Smith Barney Massachusetts Municipals Fund
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
35
<PAGE>
Smith Barney Funds, Inc.
EXCHANGE PRIVILEGE (CONTINUED)
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
International Funds
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond
Portfolio
Smith Barney World Funds, Inc. -- International Balanced
Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
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
- -----------------------------------------------------------------
- --------------
* Available for exchange with Class A, Class C and Class Y shares
of each
Portfolio.
** Available for exchange with Class A, Class B and Class Y shares
of each
Portfolio. In addition, shareholders who own Class C shares of
a Portfolio
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 each Portfolio.
+ Available for exchange with Class B and Class C shares of each
Portfolio.
++ Available for exchange with Class A and Class Y shares of each
Portfolio.
In addition, shareholders who own Class C shares of a Portfolio
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 each
Portfolio.
36
<PAGE>
Smith Barney Funds, Inc.
EXCHANGE PRIVILEGE (CONTINUED)
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 other Smith Barney Mutual Funds will be subject to the
appropriate "sales
charge differential" upon the exchange of such shares for Class A
shares of a
fund sold with a higher sales charge. The "sales charge
differential" is lim-
ited to a percentage rate no greater than the excess of the sales
charge rate
applicable to 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 pur-
poses of the exchange privilege, shares obtained through automatic
reinvest-
ment of dividends and capital gain distributions are treated as
having paid
the same sales charges applicable to the shares on which the
dividends or dis-
tributions 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 A shares held in
a Portfolio
prior to November 7, 1994 that are subsequently exchanged for
shares of other
funds of the Smith Barney Mutual Funds will not be subject to a
sales charge
differential.
Class B Exchanges. In the event a Class B shareholder (unless
such share-
holder 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 a Portfolio,
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 Portfolio 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 a
Portfolio
that have been exchanged.
Class Y Exchanges. Class Y shareholders of each Portfolio who
wish to
exchange all or a portion of their Class Y shares for Class Y
shares in any of
the funds identified above may do so without imposition of any
charge.
Additional Information Regarding the Exchange Privilege. Although
the
exchange privilege is an important benefit, excessive exchange
transactions
can be detrimental to each Portfolio's performance and its
shareholders. The
Manager may determine that a pattern of frequent exchanges is
excessive
37
<PAGE>
Smith Barney Funds, Inc.
EXCHANGE PRIVILEGE (CONTINUED)
and contrary to the best interests of each Portfolio's other
shareholders. In
this event, the Manager will notify Smith Barney and Smith Barney
may, at its
discretion, decide to limit additional purchases and/or exchanges
by the share-
holder. 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 Portfolio or (b)
remain
invested in the Portfolio or exchange into any of the funds of the
Smith Barney
Mutual Funds ordinarily available, which position the shareholder
would be
expected to maintain for a significant period of time. All relevant
factors
will be considered in determining what constitutes an abusive
pattern of
exchanges.
Exchanges will be processed at the net asset value next
determined, plus any
applicable sales charge differential. Redemption procedures
discussed below are
also applicable for exchanging shares, and exchanges will be made
upon receipt
of all 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. Each Portfolio reserves the right to modify or
discontinue exchange
privileges upon 60 days' prior notice to shareholders.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of each Portfolio
tendered to it,
as described below, at a redemption price equal to their net asset
value per
share next determined after receipt of a written request in proper
form at no
charge other than any applicable CDSC. Redemption requests received
after the
close of regular trading on the NYSE are priced at the net asset
value next
determined. If a shareholder holds shares in more than one Class,
any request
for redemption must specify the Class being redeemed. In the event
of a failure
to specify which Class, or if the investor owns fewer shares of the
Class than
specified, the 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
38
<PAGE>
Smith Barney Funds, Inc.
REDEMPTION OF SHARES (CONTINUED)
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, pay-
ment 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 with-
out specific instruction and Smith Barney will benefit from the use
of tempo-
rarily uninvested funds. Redemption proceeds for shares purchased
by check,
other than a certified or official bank check, will be remitted
upon clearance
of the check, which may take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by
submitting a
written request to a Smith Barney Financial Consultant. Shares
other than
those held by Smith Barney as custodian may be redeemed through an
investor's
Financial Consultant, Introducing Broker or dealer in the selling
group or by
submitting a written request for redemption to:
Smith Barney Funds, Inc./[Name of Portfolio (please specify)]
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 Portfolio, the
Class and
number or dollar amount of shares to be redeemed, (b) identify the
sharehold-
er'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 redemp-
tion request. Any signature appearing on a redemption request,
share certifi-
cate 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 securi-
ties exchange. TSSG may require additional supporting documents for
redemp-
tions 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.
39
<PAGE>
Smith Barney Funds, Inc.
REDEMPTION OF SHARES (CONTINUED)
AUTOMATIC CASH WITHDRAWAL PLAN
Each Portfolio offers shareholders an automatic cash withdrawal
plan, under
which shareholders who own shares with a value of at least $10,000
may elect to
receive cash payments of at least $50 monthly or quarterly.
Retirement plan
accounts are eligible for automatic cash withdrawal plans only
where the share-
holder is eligible to receive qualified distributions and has an
account value
of at least $5,000. The withdrawal plan will be carried over on
exchanges
between funds or Classes of a Portfolio. Any applicable CDSC will
not be waived
on amounts withdrawn by a shareholder that exceed 1.00% per month
of the value
of the shareholder's shares subject to the CDSC at the time the
withdrawal plan
commences. (With respect to withdrawal plans in effect prior to
November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that
do not
exceed 2.00% per month of the value of the shareholder's shares
subject to the
CDSC.) For further information regarding the automatic cash
withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to redeem involuntarily any
shareholder's account
in a Portfolio if the aggregate net asset value of the shares held
in that
Portfolio account is less than $500. (If a shareholder has more
than one
account in any Portfolio, 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 involuntary liquidation.
PERFORMANCE
From time to time a Portfolio may include its total return,
average annual
total return, yield 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 each Portfolio. 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
40
<PAGE>
Smith Barney Funds, Inc.
PERFORMANCE (CONTINUED)
the maximum sales charge, if any, from the initial amount invested
and rein-
vestment of all income dividends and capital gain distributions on
the rein-
vestment dates at prices calculated as stated in this Prospectus,
then divid-
ing the value of the investment at the end of the period so
calculated by the
initial amount invested and subtracting 100%. The standard average
annual
total return, as prescribed by the SEC is derived from this total
return,
which provides the ending redeemable value. Such standard total
return infor-
mation also may 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 yield of a
Portfolio
Class refers to the net investment income earned by investments in
the class
over a thirty-day period. This net investment income is then
annualized, i.e.,
the amount of income earned by the investment during that
thirty-day period is
assumed to be earned each 30-day period for twelve periods and is
expressed as
a percentage of the investments. The yield quotation is calculated
according
to a formula prescribed by the SEC to facilitate comparison with
yields quoted
by other investment companies. The U.S. Government Securities
Portfolio calcu-
lates current dividend return for each Class by annualizing the
most recent
quarterly distribution from investment income, including net
equalization
credits or debits, and dividing by the net asset value or the
maximum public
offering price (including sales charge) on the last day of the
period for
which current dividend return is presented. Each of the Monthly
Payment Gov-
ernment Portfolio and the Income Return Account Portfolio
calculates current
dividend return for each Class by annualizing the most recent
monthly distri-
bution, including net equalization credits or debits, and dividing
by the net
asset value or the maximum public offering price (including sales
charge) on
the last day of the period for which current dividend return is
presented. The
current dividend return for each Class may vary from time to time
depending on
market conditions, the composition of its investment portfolio and
operating
expenses. These factors and possible differences in the methods
used in calcu-
lating current dividend return should be considered when comparing
a Class'
current return to yields published for other investment companies
and other
investment vehicles. Each Portfolio may also include comparative
performance
information in advertising or marketing its shares. Such
performance informa-
tion may include data from Lipper Analytical Services, Inc. and
other finan-
cial publications. Each Portfolio will include performance data for
Class A,
Class B, Class C and Class Y shares in any advertisement or
information
including performance data of that Portfolio.
41
<PAGE>
Smith Barney Funds, Inc.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund
rests with
the Fund's Board of Directors. The Directors approve all
significant agreements
between the Fund and the companies that furnish services to the
Fund, including
agreements with the Fund's distributor, investment manager,
custodian and
transfer agent. The day-to-day operations of the Portfolios are
delegated to
the Manager. The Statement of Additional Information contains
background infor-
mation regarding each Director and executive officer of the Fund.
MANAGER
Smith Barney Mutual Funds Management, Inc. (the "Manager")
manages the day-
to-day operations of each Portfolio pursuant to a management
agreement entered
into by the Fund on behalf of each Portfolio under which the
Manager offers
each Portfolio advice and assistance with respect to the
acquisition, holding
or disposal of securities and recommendations with respect to other
aspects and
affairs of each Portfolio and furnishes each Portfolio with
bookkeeping,
accounting and administrative services, office space and equipment,
and the
services of the officers and employees of the Fund. By written
agreement the
research and other departments and staff of Smith Barney will
furnish the Man-
ager with information, advice and assistance and will be available
for consul-
tation on the Fund's Portfolios, thus Smith Barney may also be
considered an
investment adviser to the Fund. Smith Barney's services are paid
for by the
Manager on the basis of direct and indirect costs to Smith Barney
of performing
such services; there is no charge to the Fund for such services.
For the Portfolios' last fiscal year the management fee was 0.44%
of each of
the Portfolio's average net assets. Payment under each Portfolio's
management
agreement is made as promptly as possible after the last day of
each month and
is computed on the aggregate net assets of all Portfolios during
the month.
Total expenses for the U.S. Government Securities Portfolio's
average net
assets for the last fiscal year were: 0.76%, 1.21%, 1.21% and 0.61%
for Class
A, Class B, Class C and Class Y shares, respectively. Total
expenses for the
Monthly Payment Government Portfolio's average net assets for the
last fiscal
year were: 0.87%, 1.20% and 1.32% for Class A, Class B and Class C
shares,
respectively. Total expenses for the Income Return Account
Portfolio's average
net assets for the last fiscal year were: 0.56%, 0.94% and 0.69%
for Class A,
Class C and Class Y shares, respectively.
42
<PAGE>
Smith Barney Funds, Inc.
MANAGEMENT OF THE FUND (CONTINUED)
The Manager was incorporated on March 12, 1968 under the laws of
Delaware. As
of March 31, 1995 the Manager had aggregate assets under management
of approxi-
mately $54 billion. The Manager, Smith Barney and Holdings are each
located at
388 Greenwich Street, New York, New York 10013. The term "Smith
Barney" in the
title of the Fund has been adopted by permission of Smith Barney
and is subject
to the right of Smith Barney to elect that the Fund stop using the
term in any
form or combination of its name.
PORTFOLIO MANAGEMENT
Patrick Sheehan is a Managing Director of Smith Barney, a Vice
President of
Smith Barney Funds, Inc. and Portfolio Manager of U.S. Government
Securities
Portfolio, Monthly Payment Government Portfolio and Income Return
Account Port-
folio. Mr. Sheehan manages the day to day operations of each of
these Portfo-
lios, including making all investment decisions. Mr. Sheehan also
manages Smith
Barney Funds, Inc.'s Short-Term U.S. Treasury Securities Portfolio.
Prior to
January 1992, Mr. Sheehan was a Portfolio Manager at Value Line
Inc., Senior
Vice President of Seaman's Bank for Savings, Assistant Vice
President of Capi-
tal Markets of Federal Home Loan Board of New York and Vice
President and Trea-
surer of Poughkeepsie Savings Bank.
Management's discussion and analysis, and additional performance
information
regarding each Portfolio during the fiscal year ended December 31,
1994 is
included in the Annual Report dated December 31, 1994. A copy of
the Annual
Report may be obtained upon request and without charge from a Smith
Barney
Financial Consultant or by writing or calling the Fund at the
address or phone
number listed on page one of this Prospectus.
DISTRIBUTOR
Smith Barney distributes shares of each Portfolio as principal
underwriter
and as such conducts a continuous offering pursuant to a "best
efforts"
arrangement requiring Smith Barney to take and pay for only such
securities as
may be sold to the public. Pursuant to a plan of distribution under
Rule 12b-1
under the 1940 Act (the "Plan") adopted by each of the U.S.
Government Securi-
ties Portfolio and the Monthly Payment Government Portfolio, Smith
Barney is
paid a service fee with respect to Class A, Class B and Class C
shares of each
such Portfolio at the annual rate of 0.25% of the average daily net
assets
attributable to these Classes. Smith Barney is also paid a
distribution fee
with respect to Class B and Class C shares of each such Portfolio
at the annual
rate of 0.50% and 0.45%, respectively, of the average daily net
assets attrib-
utable to
43
<PAGE>
Smith Barney Funds, Inc.
DISTRIBUTOR (CONTINUED)
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 a
distribution fee. Pursuant to the Plan adopted by the Income Return
Account
Portfolio, Smith Barney is paid a service fee with respect to such
Portfolio's
Class C shares at the annual rate of 0.15% of the average daily net
assets
attributable that Class. Smith Barney is also paid a distribution
fee with
respect to Class C shares of the Income Return Account Portfolio at
the annual
rate of 0.20% of the average daily net assets attributable to that
Class.
The fees are used by Smith Barney to pay its Financial
Consultants for ser-
vicing 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 pro-
spectuses to potential investors; payments to and expenses of Smith
Barney
Financial Consultants and other persons who provide support
services in con-
nection with the distribution of shares; interest and/or carrying
charges; and
indirect and overhead costs of Smith Barney associated with the
sale of Port-
folio shares, including lease, utility, communications and sales
promotion
expenses.
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
time of sale and, with respect to the Class A, Class B and Class C
shares of
each of the U.S. Government Securities Portfolio and the Monthly
Payment Gov-
ernment Portfolio, and to the Class C shares of the Income Return
Account
Portfolio, a continuing fee for servicing shareholder accounts for
as long as
a shareholder remains a holder of that Class. Smith Barney
Financial Consul-
tants may receive different levels of compensation for selling
different Clas-
ses of shares.
Actual distribution expenses for Class B and Class C shares of a
Portfolio
for any given year may exceed the fees received pursuant to the
Plan and will
be carried forward and paid by a Portfolio 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.
ADDITIONAL INFORMATION
The Fund, an open-end, diversified investment company, was
incorporated in
Maryland on December 2, 1966. The Fund has an authorized capital of
2,000,000,000 shares with a par value of $.01 per share. The Board
of Direc-
tors has authorized the issuance of fifteen series of shares, each
represent-
ing
44
<PAGE>
Smith Barney Funds, Inc.
ADDITIONAL INFORMATION (CONTINUED)
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. Class A,
Class B,
Class C, Class Y and Class Z (where available) shares of each
Portfolio repre-
sent interests in the assets of that Portfolio and have identical
voting, div-
idend, liquidation and other rights on the same terms and
conditions except
that expenses related to the distribution of each Class of shares
are borne
solely by each Class and each Class of shares has exclusive voting
rights with
respect to provisions of the Fund's Rule 12b-1 distribution plan
which pertain
to a particular Class. As described under "Voting" in the Statement
of Addi-
tional Information, the Fund ordinarily will not hold shareholder
meetings;
however, shareholders have the right to call a meeting upon a vote
of 10% of
the Fund's outstanding shares for the purpose of voting to remove
directors
and, as required by the 1940 Act, the Fund will assist shareholders
in calling
such a meeting. Shares do not have cumulative voting rights or
preemptive
rights and are fully paid, transferable and nonassessable when
issued for pay-
ment as described in this Prospectus.
PNC Bank, National Association, located at 17th and Chestnut
Streets, Phila-
delphia, Pennsylvania 19103, serves as custodian of each
Portfolio's invest-
ments.
TSSG, located at Exchange Place, Boston, Massachusetts 02109,
serves as the
Fund's transfer agent.
The Fund sends its shareholders a semi-annual report and an
audited annual
report, which include listings of the investment securities held by
the Fund
at the end of the period covered. In an effort to reduce the Fund's
printing
and mailing costs, the Fund plans to consolidate the mailing of its
semi-
annual and annual reports by household. This consolidation means
that a house-
hold having multiple accounts with the identical address of record
will
receive a single copy of each report. In addition, the Fund also
plans to con-
solidate the mailing of its Prospectus so that a shareholder having
multiple
accounts (that is, 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 account should contact
their Smith
Barney Financial Consultant or the Fund's transfer agent.
45
<PAGE>
Smith Barney Funds, Inc.
APPENDIX
GNMA Securities. Government National Mortgage Association
("GNMA"), an agency
of the United States Government, guarantees the timely payment of
monthly
installments of principal and interest on modified pass-through
Certificates,
whether or not such amounts are collected by the issuer of these
Certificates
on the underlying mortgages. Scheduled payments of principal and
interest are
made each month to holders of GNMA Certificates (such as the U.S.
Government
Securities Portfolio and the Monthly Payment Government Portfolio).
Unscheduled
prepayments of mortgages are passed through to holders of GNMA
Certificates at
par with the regular monthly payments of principal and interest,
which have the
effect of reducing future payments on such Certificates. The income
portions of
monthly payments received by these Portfolios will be included in
their net
investment income. See "Dividends, Distributions and Taxes."
GNMA Certificates have historically involved no credit risk;
however, due to
fluctuations in interest rates, the market value of such securities
will vary
during the period of a shareholder's investment in the U.S.
Government Securi-
ties Portfolio and the Monthly Payment Government Portfolio.
Prepayments and
scheduled payments of principal will be reinvested by each
Portfolio in then
available GNMA Certificates which may bear interest at a rate lower
or higher
than the Certificate from which the payment was received. As with
other debt
securities, the price of GNMA Certificates is likely to decrease in
times of
rising interest rates; however, in periods of falling interest
rates the poten-
tial for prepayment may reduce the general upward price increase of
GNMA Cer-
tificates that might otherwise occur. If a Portfolio buys GNMA
Certificates at
a premium, mortgage foreclosures or prepayments may result in a
loss to the
Portfolio of up to the amount of the premium paid since only timely
payment of
principal and interest is guaranteed.
Other U.S. Government Obligations. In addition to GNMA Securities
and direct
obligations of the U.S. Treasury (such as Treasury Bills, Notes and
Bonds),
U.S. Government Obligations in which the Fund may invest include:
(1) obliga-
tions of, or issued by, Banks for Cooperatives, Federal Land Banks,
Federal
Intermediate Credit Banks, Federal Home Loan Banks, the Federal
Home Loan Bank
Board, or the Student Loan Marketing Association; (2) other
securities fully
guaranteed as to principal and interest by the United States of
America; (3)
other obligations of, or issued by, or fully guaranteed as to
principal and
interest by the Federal National Mortgage Association or any agency
of the
A-1
<PAGE>
Smith Barney Funds, Inc.
APPENDIX (CONTINUED)
United States; and (4) obligations currently or previously sold by
the Federal
Home Loan Mortgage Corporation.
Repurchase Agreements. A repurchase agreement arises when the
Fund purchases
a security for a Portfolio and simultaneously agrees to resell it
to the vendor
at an agreed-upon future date, normally the next business day. The
resale price
is greater than the purchase price, which reflects an agreed-upon
rate of
return for the period the Portfolio holds the security and which is
not related
to the coupon rate on the purchased security. The Fund requires
continual main-
tenance of the market value of the collateral in amounts at least
equal to the
resale price, thus risk is limited to the ability of the seller to
pay the
agreed-upon amount on the delivery date; however, if the seller
defaults, real-
ization upon the collateral by the Fund may be delayed or limited
or the Port-
folio might incur a loss if the value of the collateral securing
the repurchase
agreement declines and might incur disposition costs in connection
with liqui-
dating the collateral. A Portfolio will only enter into repurchase
agreements
with broker/dealers or other financial institutions that are deemed
credit-
worthy by the Manager under guidelines approved by the Board of
Directors. It
is the policy of the Fund not to invest in repurchase agreements
that do not
mature within seven days if any such investment together with any
other illiq-
uid assets held by the Portfolio amount to more than 15% of that
Portfolio's
total assets.
Delayed Delivery. A delayed delivery transaction involves the
purchase of
securities at an agreed-upon price on a specified future date. At
the time the
Fund enters into a binding obligation to purchase securities on a
delayed
delivery basis the Portfolio has all the rights and risks attendant
to the own-
ership of the security and therefore must maintain with the
Custodian a segre-
gated account with assets of a dollar amount sufficient to make
payment for the
securities to be purchased. The value of the securities on the
delivery date
may be more or less than their purchase price. Securities purchased
on a
delayed delivery basis do not generally earn interest until their
scheduled
delivery date.
A-2
<PAGE>
[LOGO OF SMITH BARNEY
APPEARS HERE]
SMITH BARNEY
FUNDS, INC.
U.S. GOVERNMENT
SECURITIES PORTFOLIO
MONTHLY PAYMENT
GOVERNMENT PORTFOLIO
INCOME RETURN
ACCOUNT PORTFOLIO
388
Greenwich Street
New York,
New York 10013
FD 2321 D5
