As filed with the Securities and Exchange Commission
on September 1, 1995
Registration No. 33-60385
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No.1 [ ] Post-
Effective Amendment No.
SMITH BARNEY FUNDS, INC.
(Exact name of Registrant as
specified in Charter)
Area Code and Telephone Number: (800) 224-7523
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices) (Zip Code)
Christina T. Sydor, Esq.
Smith Barney Inc.
388 Greenwich Street New York, New York 10013 (22nd floor)
(Name and address of agent for service)
copies to:
John E. Baumgardner, Jr., Esq.
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
Approximate date of proposed public offering: As soon as
possible after the effective date of this Registration Statement.
Registrant has registered an indefinite amount of securities
pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended; accordingly, no fee is payable herewith.
Registrant's Rule 24f-2 Notice for the fiscal period ended
December 31, 1994 was filed with the Securities and Exchange
Commission on February 28, 1995.
Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until
the Registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act
of 1933 or until the Registration Statement shall become
effective on such date as the Commission, by action pursuant to
said Section 8(a), may determine.
Total Number of Pages:
SMITH BARNEY FUNDS, INC.
CONTENTS OF
REGISTRATION STATEMENT
This Registration Statement contains the following pages and
documents:
Front Cover
Contents Page
Cross-Reference Sheet
Letter to Shareholders
Notice of Special Meeting
Part A - Prospectus/Proxy Statement
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
SMITH BARNEY FUNDS, INC.
FORM N-14 CROSS REFERENCE SHEET
Pursuant to Rule 481(a) Under the Securities Act of 1933
Prospectus/Proxy
Part A Item No. and Caption Statement
Caption
Item 1. Beginning of Registration Cover Page;
Cross Reference
Statement and Outside Front Sheet
Cover Page of Prospectus
Item 2. Beginning and Outside Back Table of
Contents
Cover Page of Prospectus
Item 3. Synopsis Information and Summary; Risk
Factors;
Comparison of Risk
Factors
Investment Objectives and Policies
Item 4. Information About the Transaction Summary:
Reasons
for the
Reorganization;
Information About the
Reorganization;
Information on Shareholder's
Rights;
Exhibit A (Plan of Reorganization)
Item 5. Information About the Registrant Cover Page;
Summary; Information About
the Reorganization; Comparison of
Investment Objectives and Policies;
Comparative Information on Shareholder's
Rights; Additional Information About the
U.S. Government Securities Portfolio and the
Portfolio; Prospectus of the U.S. Government
Securities Portfolio dated April 28, 1995
Item 6. Information About the Summary;
Information About the
Company Being Acquired Reorganization;
Comparison of Investment
Objectives and Policies; Information on
Shareholder's Rights; Additional
Information About the Monthly Payment
Government Portfolio
Item 7. Voting Information Summary; Information
About the
Reorganization; Comparative Information
on Shareholder's Rights; Voting Information
Item 8. Interest of Certain Persons Financial
Statements and Experts; Legal
and Experts Matters
Item 9. Additional Information Not Applicable
Required for Reoffering By
Persons Deemed to be Underwriters
Statement of Additional
Part B Item No. and Caption Information
Caption
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page
Item 12. Additional Information Cover Page;
Statement of Additional About the Registrant
Information of Smith Barney Funds, Inc.
dated April 28, 1995
Item 13. Additional Information Cover Page;
Statement of Additional
About the Company Being Information of
Smith Barney Funds, Inc.
Acquired dated April 28, 1995
Item 14. Financial Statements Annual Report
of Smith Barney
Funds, Inc. dated
December 31, 1994
Part C Item No. and Caption Other
Information Caption
Item 15. Indemnification Incorporated by
reference to Part A
caption "Comparative Information on
Shareholder's Rights - Liability of
Directors"
Item 16. Exhibits Exhibits
Item 17. Undertakings Undertakings
SMITH BARNEY FUNDS, INC.
Investing for your future. Every day.
August , 1995
Dear Shareholder:
An Important Notice About Smith Barney Funds, Inc. -
Monthly Payment Government Portfolio
We would like to inform you of a proposal that has
recently been reviewed and unanimously endorsed by the
Board of Directors of Smith Barney Funds, Inc. concerning
the reorganization of the Smith Barney Funds-Monthly
Payment Government Portfolio.
The proposal calls for all or substantially all of
the Monthly Payment Government Portfolio's assets and
liabilities to be acquired by the Smith Barney Funds, Inc.-
U.S. Government Securities Portfolio. After this
reorganization, the Monthly Payment Government Portfolio
will be terminated, and you will become a shareholder of the
U.S. Government Securities Portfolio. You will receive
shares with a total net asset value equal to the total net
asset value of your Monthly Payment Government Portfolio
investment at the time of the transaction.
The Board of Directors believes that the proposed
reorganization is in the best interests of Monthly Payment
Government Portfolio shareholders and should provide
benefits due, in part, to savings in expenses paid by
shareholders. In our opinion, this will be a tax-free
transaction.
Please complete, sign and mail the enclosed proxy card...today!
A Special Meeting of Shareholders will be held on
October 6, 1995 to consider this transaction. We strongly
urge you to participate by reviewing, completing and
returning your proxy by no later than October 5, 1995 in the
postage-paid envelope provided.
For more details about the proposed transaction,
please refer to the enclosed proxy statement. If you sign
and date your proxy card, but do not provide voting
instructions, your shares will be voted FOR the proposal.
We thank you for your timely participation and
look forward to serving your investment needs with Smith
Barney Mutual Funds. If you have any questions, please call
your Financial Consultant who will be pleased to assist you.
Sincerely,
Heath B. McLendon
Chairman of the Board of
Smith Barney Funds, Inc.
SMITH BARNEY FUNDS, INC.- MONTHLY PAYMENT GOVERNMENT PORTFOLIO
388 Greenwich Street
New York, New York 10013
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On October 6, 1995
___________________
Notice is hereby given that a Special Meeting of
Shareholders (the "Meeting") of Smith Barney Funds, Inc.-
Monthly Payment Government Portfolio (the "Monthly Payment
Government Portfolio"), will be held at 388 Greenwich Street,
New York, New York on October 6, 1995, at 1:00 p.m. for the
following purposes:
1. To consider and act upon the Plan of
Reorganization (the "Plan") dated as of
June 6, 1995, providing for: (i) the acquisition of all
or substantially all of the assets of the Monthly
Payment Government Portfolio by the U.S. Government
Securities Portfolio, a separate series of Smith Barney
Funds, Inc. (the "U.S. Government Securities
Portfolio") in exchange for shares of the U.S.
Government Securities Portfolio and the assumption by
the U.S. Government Securities Portfolio of certain
liabilities of the Monthly Payment Government
Portfolio; (ii) the distribution of such shares of the
U.S. Government Securities Portfolio to shareholders of
the Monthly Payment Government Portfolio in liquidation
of the Monthly Payment Government Portfolio; and (iii)
the subsequent termination of the Monthly Payment
Government Portfolio.
2. To transact any other business which may properly
come before the Meeting or any adjournment thereof.
The Directors of Smith Barney Funds, Inc. have fixed the
close of business on July 21,1995, as the record date for the
determination of shareholders of the Monthly Payment Government
Portfolio entitled to notice of and to vote at this Meeting or
any adjournment thereof (the "Record Date").
IT IS IMPORTANT THAT PROXIES BE RETURNED
PROMPTLY.
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND IN PERSON ARE
URGED TO SIGN AND RETURN WITHOUT DELAY THE ENCLOSED
PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO
POSTAGE, SO THAT THEIR SHARES MAY BE REPRESENTED AT THE
MEETING. INSTRUCTIONS FOR THE PROPER EXECUTION OF
PROXIES ARE SET FORTH ON THE FOLLOWING PAGE. PROXIES
MAY BE REVOKED AT ANY TIME BEFORE THEY ARE EXERCISED BY
THE SUBSEQUENT EXECUTION AND SUBMISSION OF A REVISED
PROXY, BY GIVING WRITTEN NOTICE OF REVOCATION TO THE
MONTHLY PAYMENT GOVERNMENT PORTFOLIO AT ANY TIME BEFORE
THE PROXY IS EXERCISED OR BY VOTING IN PERSON AT THE
MEETING.
By Order of the Board of
Directors
Christina T. Sydor
Secretary
August , 1995
YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY WILL HELP
TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be
of assistance to you and avoid the time and expense involved in
validating your vote if you fail to sign your proxy card
properly.
1. Individual Accounts: Sign your name exactly as it
appears in the registration on the proxy
card.
2. Joint Accounts: Either party may sign, but the
name of the party signing should
conform exactly to the name shown on the registration on the
proxy card.
3. All Other Accounts: The capacity of the
individual signing the proxy card should be
indicated unless it is reflected in the form of registration.
For example:
Registration
Valid Signatures
Corporate Accounts
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
Trust Accounts
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee
u/t/d 12/28/78 Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr. UGMA John B. Smith
(2) John B. Smith John B. Smith, Jr.,
Executor
PROSPECTUS/PROXY STATEMENT DATED August , 1995
Acquisition of the Assets of
SMITH BARNEY FUNDS, INC.-- MONTHLY PAYMENT GOVERNMENT PORTFOLIO
388 Greenwich Street
New York, New York 10013
(800) 224-7523
By And In Exchange For Shares of
SMITH BARNEY FUNDS, INC.-- U.S. GOVERNMENT SECURITIES PORTFOLIO
388 Greenwich Street
New York, New York 10013
(800) 224-7523
This Prospectus/Proxy Statement is being furnished to
shareholders of Monthly Payment Government Portfolio, a separate
series of Smith Barney Funds, Inc. (the "Monthly Payment
Government Portfolio"), in connection with a proposed Plan of
Reorganization (the "Plan"), to be submitted to shareholders for
consideration at a Special Meeting of Shareholders to be held on
October 6, 1995 at 1:00 p.m., New York City time, at the offices
of Smith Barney Inc., located at 388 Greenwich Street, 26th
Floor, New York, New York, and any adjournments thereof
(collectively, the "Meeting").
The Plan provides for all or substantially all of the assets
of the Monthly Payment Government Portfolio to be acquired by the
U.S. Government Securities Portfolio, a separate series of Smith
Barney Funds, Inc. (the "U.S. Government Securities Portfolio"),
in exchange for shares of the U.S. Government Securities
Portfolio and the assumption by the U.S. Government Securities
Portfolio of certain liabilities of the Monthly Payment
Government Portfolio (hereinafter referred to as the
"Reorganization"; the Monthly Payment Government Portfolio and
the U.S. Government Securities Portfolio are sometimes referred
to hereinafter as the "Portfolios" and individually as a
"Portfolio"). Following the Reorganization, shares of the U.S.
Government Securities Portfolio will be distributed to
shareholders of the Monthly Payment Government Portfolio in
liquidation of the Monthly Payment Government Portfolio and the
Monthly Payment Government Portfolio will be terminated. As a
result of the proposed Reorganization, each shareholder of the
Monthly Payment Government Portfolio will receive that number of
shares of the U.S. Government Securities Portfolio having an
aggregate net asset value equal to the aggregate net asset value
of such shareholder's shares of the Monthly Payment Government
Portfolio. Holders of Class A shares in the Monthly Payment
Government Portfolio will receive Class A shares of the U.S.
Government Securities Portfolio, and no sales charge will be
imposed on the Class A shares of the U.S. Government Securities
Portfolio received by the Monthly Payment Government Portfolio
Class A shareholders. Holders of Class B and Class C shares in
the Monthly Payment Government Portfolio will receive Class B and
Class C shares, respectively, of the U.S. Government Securities
Portfolio; any contingent deferred sales charge ("CDSC") which is
applicable to a shareholder's investment will continue to apply,
and in calculating the applicable CDSC payable upon the
subsequent redemption of Class B or Class C shares of the U.S.
Government Securities Portfolio, the period during which a
Monthly Payment Government Portfolio shareholder held Class B or
Class C shares of the Monthly Payment Government Portfolio will
be counted. Holders of Class Y shares in the Monthly Payment
Government Portfolio will receive Class Y shares of the U.S.
Government Securities Portfolio. This transaction is being
structured as a tax-free reorganization.
The U.S. Government Securities Portfolio and the Monthly
Payment Government Portfolio are both open-end diversified
management investment companies with identical investment
objectives. Each of the U.S. Government Securities Portfolio's
and the Monthly Payment Government Portfolio's investment
objective is to seek high current income, liquidity and security
of principal by investing in obligations of the U.S. Government,
its agencies or instrumentalities and related repurchase and
reverse repurchase agreements. Each Portfolio invests primarily
in Government National Mortgage Association ("GNMA") certificates
of the modified pass-through type and will also normally include
U.S. Government Obligations. Smith Barney Mutual Funds Management
Inc. serves as investment manager (the "Manager") to both the
U.S. Government Securities Portfolio and the Monthly Payment
Government Portfolio.
The investment policies of the U.S. Government Securities
Portfolio are identical to those of the Monthly Payment
Government Portfolio and are described under "Summary of
Investment Objectives and Policies" in this Prospectus/Proxy
Statement.
This Prospectus/Proxy Statement, which should be retained
for future reference, sets forth concisely the information about
the U.S. Government Securities Portfolio that a prospective
investor should know before investing. Certain relevant
documents listed below, which have been filed with the Securities
and Exchange Commission ("SEC"), are incorporated by reference.
A Statement of Additional Information dated August , 1995
relating to this Prospectus/Proxy Statement and the
Reorganization, has been filed with the SEC and is incorporated
by reference into this Prospectus/Proxy Statement. A copy of
such Statement of Additional Information is available upon
request and without charge by calling or writing to the Monthly
Payment Government Portfolio at the telephone number or address
listed on the cover page of this Prospectus/Proxy Statement or by
contacting a Smith Barney Financial Consultant.
1. The Prospectus dated April 28, 1995 of Smith
Barney Funds, Inc. -- U.S. Government Securities
Portfolio and Monthly Payment Government Portfolio is
incorporated in its entirety by reference.
Also accompanying this Prospectus/Proxy Statement as
Exhibit A is a copy of the Plan of Reorganization for the
proposed transaction.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
Additional Materials 1
Summary 8
Risk Factors 10
Reasons for the Reorganization 10
Information about the Reorganization 11
Information about the U.S. Government Securities Portfolio
and
the Monthly Payment Government Portfolio 17
Summary of Investment Objectives and Policies 20
Comparative Information on Shareholders' Rights 21
Additional Information About the U.S. Government Securities
Portfolio and
the Monthly Payment Government Portfolio 22
Other Business 22
Voting Information 22
Financial Statements and Experts 24
Legal Matters 24
Exhibit A: Plan of Reorganization Appendix
ADDITIONAL MATERIALS
The following additional materials, which have
been incorporated by reference into the Statement of
Additional Information dated August , 1995 relating
to this Prospectus/Proxy Statement and the
Reorganization, will be sent to all shareholders
requesting a copy of such Statement of Additional
Information.
1.Statement of Additional Information of Smith
Barney Funds,
Inc.
dated
April 28,
1995.
2. Annual Report of Smith Barney Funds, Inc. dated
December 31, 1994.
FEE TABLE
Following are tables showing the current costs and expenses
of the U.S. Government Securities Portfolio and the Monthly
Payment Government Portfolio and the ProForma costs and expenses
expected to be incurred by the U.S. Government Securities
Portfolio after giving effect to the Transaction, each based on
the maximum sales charge or maximum CDSC that may be incurred at
the time of purchase or redemption:
<TABLE>
<S> <C> <C> <C>
CLASS A SHARES U.S. Government Monthly Payment
ProForma
Securities Government
Portfolio Portfolio
Shareholder Transaction Expenses
Maximum sales charge
imposed on purchases 4.50 % 4.50%
4.50%
(as a percentage of
offering price)
Maximum CDSC
(as a percentage of None* None*
None*
original cost or redemption
proceeds, whichever is lower)
Annual Portfolio Operating Expenses
(as a percentage of average
net assets)
Management fees 0.44% 0.44%
0.44%
12b-1 fees 0.25 0.25 0.25
Other expenses** 0.08 0.20 0.08
Total Portfolio Operating 0.77% 0.89%
0.77%
Expenses
*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.
**Based on estimated amounts for the fiscal year ending December
31, 1995.
</TABLE>
<TABLE>
<S> <C> <C> <C>
CLASS B SHARES U.S. Government Monthly Payment
ProForma
Securities Government
Portfolio Portfolio
Shareholder Transaction Expenses
Maximum sales charge
imposed on purchases None None
None
(as a percentage of
offering price)
Maximum CDSC
(as a percentage of 4.50% 4.50%
4.50%
original cost or redemption
proceeds, whichever is lower)
Annual Portfolio Operating Expenses
(as a percentage of average
net assets)
Management fees 0.44% 0.44%
0.44%
12b-1 fees* 0.75 0.75 0.75
Other expenses** 0.05 0.17 0.05
Total Portfolio Operating 1.24% 1.36%
1.24%
Expenses
______________________
*Upon conversion of Class B shares to Class A shares, such shares
will no longer be subject to a distribution fee, but will
continue to be subject to a 0.25% service fee.
**Based on estimated amounts for the fiscal year ending December
31, 1995.
</TABLE>
<TABLE>
<S> <C> <C> <C>
CLASS C SHARES* U.S. Government Monthly
Payment
ProForma
Securities Government
Portfolio Portfolio
Shareholder Transaction Expenses
Maximum sales charge
imposed on purchases None None
None
(as a percentage of
offering price)
Maximum CDSC 1.00% 1.00%
1.00%
(as a percentage of
original cost or redemption
proceeds, whichever is lower)
Annual Portfolio Operating Expenses
(as a percentage of average
net assets)
Management fees 0.44% 0.44%
0.44%
12b-1 fees* 0.70 0.70 0.70
Other expenses** 0.08 0.20 0.08
Total Portfolio Operating 1.22% 1.34%
1.22%
Expenses
*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.
** Based on estimated amounts for the fiscal year ending December
31, 1995.
</TABLE>
<TABLE>
<S> <C> <C> <C>
CLASS Y SHARES U.S. Government Monthly Payment
ProForma
Securities Government
Portfolio Portfolio
Shareholder Transaction Expenses
Maximum sales charge
imposed on purchases None None
None
(as a percentage of
offering price)
Maximum CDSC
(as a percentage of None None
None
original cost or redemption
proceeds, whichever is lower)
Annual Portfolio Operating Expenses
(as a percentage of average
net assets)
Management fees 0.44% 0.44%
0.44%
12b-1 fees -- -- --
Other expenses* 0.10 0.12
0.10
Total Portfolio Operating 0.54% 0.56%
0.54%
Expenses
* Based on estimated amounts for the fiscal year ending December
31, 1995.
</TABLE>
Examples
The following examples are intended to assist an investor in
understanding the various costs that an investor will bear
directly or indirectly. The examples assume payment of operating
expenses at the levels set forth in the tables above.
<TABLE>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years
10 Years*
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return
and (2) redemption at the end of
each time period:
Class A
U.S. Government Securities Portfolio$53 $68 $86
$136
Monthly Payment Government Portfolio54 72 92 150
ProForma 53 68 86
136
Class B
U.S. Government Securities Portfolio$58 $69 $78
$137
Monthly Payment Government Portfolio59 73 84 150
ProForma 58 69 78
137
Class C
U.S. Government Securities Portfolio$22 $39 $67
$148
Monthly Payment Government Portfolio24 42 73 161
ProForma 22 39 67
148
Class Y
U.S. Government Securities Portfolio$ 6 $17 $30 $68
Monthly Payment Government Portfolio 6 18 31 70
ProForma 6 17 30 68
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years
10 Years*
An investor would pay the following
expenses on the same annual return
and no redemption:
Class A
U.S. Government Securities Portfolio$53 $68 $86
$136
Monthly Payment Government Portfolio54 72 92
150
ProForma 53 68 86
136
Class B
U.S. Government Securities Portfolio$13 $39 $68
$137
Monthly Payment Government Portfolio14 43 74
150
ProForma 13 39 68
137
Class C
U.S. Government Securities Portfolio$12 $39 $67
$148
Monthly Payment Government Portfolio14 42 73
161
ProForma 12 39 67
148
Class Y
U.S. Government Securities Portfolio$ 6 $17 $30
$68
Monthly Payment Government Portfolio 6 18 31 70
ProForma 6 17 30
68
________________________
*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 examples also provide a means for the investor to compare ex
pense 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%. These examples should not be considered
representations of past or future expenses and actual expenses
may be greater or less than those shown.
</TABLE>
SUMMARY
This summary is qualified in its entirety by reference to
the additional information contained elsewhere in this
Prospectus/Proxy Statement, the Prospectus of the U.S. Government
Securities Portfolio and the Monthly Payment Government Portfolio
dated April 28, 1995, the Statement of Additional Information of
Smith Barney Funds, Inc. dated April 28, 1995, and the Plan, a
copy of which is attached to this Prospectus/Proxy Statement as
Exhibit A.
Proposed Reorganization. The Plan provides for the transfer
of all or substantially all of the assets of the Monthly Payment
Government Portfolio in exchange for shares of the U.S.
Government Securities Portfolio and the assumption by the U.S.
Government Securities Portfolio of certain liabilities of the
Monthly Payment Government Portfolio. The Plan also calls for
the distribution of shares of the U.S. Government Securities
Portfolio to the Monthly Payment Government Portfolio
shareholders in liquidation of the Monthly Payment Government
Portfolio. As a result of the Reorganization, each shareholder of
the Monthly Payment Government Portfolio will become the owner of
that number of full and fractional shares of the U.S. Government
Securities Portfolio having an aggregate net asset value equal to
the aggregate net asset value of their shares of the Monthly
Payment Government Portfolio, as of the close of business on the
date that the Monthly Payment Government Portfolio's assets are
exchanged for shares of the U.S. Government Securities Portfolio.
(Shareholders of Class A, Class B, Class C and Class Y shares of
the Monthly Payment Government Portfolio will receive Class A,
Class B, Class C and Class Y shares, respectively, of the U.S.
Government Securities Portfolio.) See "Information About the
Reorganization."
For the reasons set forth below under "Reasons for the
Reorganization," the Board of Directors of Smith Barney Funds,
Inc. (the "Fund"), including all of the "non-interested"
Directors, as that term is defined in the Investment Company Act
of 1940, as amended (the "1940 Act"), has unanimously concluded
that the Reorganization would be in the best interests of the
shareholders of each of the Monthly Payment Government Portfolio
and the U.S. Government Securities Portfolio and that the
interests of each such Portfolio's existing shareholders would
not be diluted as a result of the transaction contemplated by the
Reorganization, and therefore has submitted the Plan for approval
by the Monthly Payment Government Portfolio's shareholders. The
Board of Directors of the Fund recommends approval of the Plan
effecting the Reorganization.
Approval of the Reorganization will require the affirmative
vote of a majority of the outstanding shares of the Monthly
Payment Government Portfolio. See "Voting Information."
Tax Consequences. Prior to completion of the
Reorganization, the Fund will have received an opinion from
counsel that, upon the Reorganization no gain or loss will be
recognized by the Monthly Payment Government Portfolio or its
shareholders for Federal income tax purposes. The holding period
and tax basis of shares of the U.S. Government Securities
Portfolio that are received by each Monthly Payment Government
Portfolio shareholder will be the same as the holding period and
tax basis of the shares of the Monthly Payment Government
Portfolio previously held by such shareholder provided that the
Monthly Payment Government Portfolio shares were held as capital
assets. In addition, the holding period and tax basis of the
assets of the Monthly Payment Government Portfolio in the hands
of the U.S. Government Securities Portfolio as a result of the
Reorganization will be the same as in the hands of the Monthly
Payment Government Portfolio immediately prior to the
Reorganization.
Investment Objectives, Policies and Restrictions. The
Monthly Payment Government Portfolio and the U.S. Government
Securities Portfolio have identical investment objectives,
policies and restrictions. 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. At least 65% of each
Portfolio's assets are invested in Government National Mortgage
Association ("GNMA") Certificates.
Purchase and Redemption Procedures. Purchases of shares of
the U.S. Government Securities Portfolio and the Monthly Payment
Government Portfolio must be made through a brokerage account
maintained with Smith Barney Inc. ("Smith Barney"), the Funds'
distributor or a broker that clears securities transactions
through Smith Barney on a fully disclosed basis (an "Introducing
Broker"), or an investment dealer in the selling group at their
respective public offering prices (net asset value next
determined plus any applicable sales charge). Class A shares of
both the U.S. Government Securities Portfolio and the Monthly
Payment Government Portfolio are sold subject to a maximum
initial sales charge of 4.50% of the public offering price.
Purchases of Class A shares of either Portfolio, which when
combined with current holdings of Class A shares of such
Portfolio 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
within 12 months. Class B and Class C shares of both Portfolios
are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, and a CDSC payable
upon certain redemptions. Class Y shares of both Portfolios are
sold without an initial sales charge or CDSC, and are available
only to investors investing a minimum of $5,000,000.
Class A shares, except as set forth in the preceding
paragraph, and Class Y shares of both Portfolios may be redeemed
at their respective net asset values per share next determined
without charge. Class B shares of both Portfolios may be redeemed
at their net asset value per share, subject to a maximum CDSC of
4.50% of the lower of original cost or redemption proceeds,
declining by 0.50% the first year after purchase and by 1.00%
each year thereafter to zero. Class C shares of both Portfolios
may be redeemed at their net asset value per share, subject to a
CDSC of 1.00% if such shares are redeemed during the first 12
months following their purchase. Shares of both Portfolios held
by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. All other
shares may be redeemed through a Smith Barney Financial
Consultant, Introducing Broker or dealer in the selling group or
by forwarding a written request for redemption to The Shareholder
Services Group, Inc. ("TSSG"), a subsidiary of First Data
Corporation. See "Redemption of Shares" in the accompanying
Prospectus of the U.S. Government Securities Portfolio.
Exchange Privileges. The exchange privileges available to
shareholders of the U.S. Government Securities Portfolio are
identical to those available to shareholders of the Monthly
Payment Government Portfolio. Shareholders of both the Monthly
Payment Government Portfolio and the U.S. Government Securities
Portfolio may exchange at net asset value all or a portion of
their shares for shares of the same Class in certain funds of the
Smith Barney Mutual Funds. Any exchange will be a taxable event
for which a shareholder may have to recognize a gain or a loss
under Federal income tax provisions. No initial sales charge is
imposed on the shares being acquired, and no CDSC is imposed on
the shares being disposed of, through an exchange. However, a
sales charge differential may apply to exchanges of Class A
shares with other Smith Barney Mutual Funds. With respect to
Class B and Class C shares of the Portfolios, the Class B and
Class C shares acquired in the exchange will be deemed to have
been purchased on the same date as the Class B and Class C shares
that were exchanged. Class B shares of the Portfolios that are
exchanged for Class B shares of other Smith Barney Mutual Funds
imposing a higher CDSC will be subject to the higher applicable
CDSC.
Dividends. Each Portfolio's policy is to declare and pay
dividends from net investment income. The U.S. Government
Securities Portfolio declares quarterly income dividends, and
makes annual distributions of net realized capital gains, if any.
The Monthly Payment Government Portfolio declares monthly income
dividends, and makes annual distributions of net realized capital
gains, if any. The Fund's manager intends to propose that the
Fund's Board of Directors consider changing the dividend policy
of the U.S. Government Securities Portfolio from a quarterly
income dividend to a monthly income dividend. If approved, this
change is expected to become effective on October 1, 1995. Unless
a shareholder otherwise instructs, dividends and capital gains
distributions are reinvested automatically in additional shares
of the same Class at net asset value, subject to no sales charge
or CDSC. The distribution option currently in effect for a
shareholder of the Monthly Payment Government Portfolio will
remain in effect after the Reorganization. After the
Reorganization, however, the former Monthly Payment Government
Portfolio shareholders may change their distribution option at
any time by contacting a Smith Barney Financial Consultant or
TSSG in writing. See "Dividends, Distributions and Taxes" in the
accompanying prospectus of the U.S. Government
SecuritiesPortfolio.
Shareholder Voting Rights. The U.S. Government Securities
Portfolio and the Monthly Payment Government Portfolio are both
open-end, diversified investment companies. Both the U.S.
Government Securities Portfolio and the Monthly Payment
Government Portfolio are separate series of the Fund, a Maryland
corporation. Shareholders of both Portfolios have identical
voting rights. As permitted by Maryland law, normally no meetings
of shareholders will be held for the purpose of electing
directors unless and until such time as less than a majority of
the directors holding office have been elected by shareholders.
At that time, the directors of the Fund then in office will call
a shareholders' meeting for the election of directors.
Shareholders may, at any meeting called for such purpose, remove
a director by the affirmative vote of the holders of record of a
majority of the votes entitled to be cast for the election of
directors. For purposes of voting with respect to the
Reorganization, the Class A, Class B, Class C and Class Y shares
of the Monthly Payment Government Portfolio shall vote together
as a single class.
RISK FACTORS
Due to the fact that the investment objectives, policies and
restrictions of the U.S. Government Securities Portfolio and the
Monthly Payment Government Portfolio are identical, the
investment risks are also identical. Such risks are generally
those typically associated with investing in U.S. Government
Obligations. Such risks are discussed under the caption "Summary
of Investment Objectives and Policies".
REASONS FOR THE REORGANIZATION
The Board of Directors of the Fund has determined that it is
advantageous to combine the Monthly Payment Government Portfolio
with the U.S. Government Securities Portfolio. The Portfolios
have identical investment objectives and policies and the same
Manager and shareholder servicing agent.
The Board of Directors of the Fund has determined that the
Reorganization should provide certain benefits to shareholders of
the Monthly Payment Government Portfolio. In making such
determination, the Board of Directors considered, among other
things: (i) the terms and conditions of the Reorganization; (ii)
the savings in expenses borne by shareholders of the Monthly
Payment Government Portfolio expected to be realized by the
Reorganization; (iii) the fact that the Reorganization will be
effected as a tax-free reorganization; (iv) the comparative
investment performance of the Portfolios; and (v) the advantages
of eliminating duplication inherent in marketing two funds with
identical investment objectives.
In light of the foregoing, the Board of Directors of the
Fund, including the non-interested Directors, have decided that
it is in the best interests of the Monthly Payment Government
Portfolio and its shareholders to combine with the U.S.
Government Securities Portfolio. The Board of Directors has also
determined that a combination of the Monthly Payment Government
Portfolio and the U.S. Government Securities Portfolio would not
result in a dilution of the Monthly Payment Government
Portfolio's shareholders' interests.
The Board of Directors of the Fund also considered the
following factors, among others, in approving the Reorganization
and determining that it is advantageous for the U.S. Government
Securities Portfolio to acquire the assets of the Monthly Payment
Government Portfolio: (i) the terms and conditions of the
Reorganization; and (ii) the fact that the Reorganization will be
effected as a tax-free reorganization. Accordingly, the Board of
Directors of the Fund including a majority of the non-interested
Directors, has also determined that the Reorganization is in the
best interests of the U.S. Government Securities Portfolio's
shareholders and that the interests of the U.S. Government
Securities Portfolio's shareholders will not be diluted as a
result of the Reorganization.
INFORMATION ABOUT THE REORGANIZATION
Plan of Reorganization. The following summary of the Plan
is qualified in its entirety by reference to the Plan (Exhibit A
hereto). The Plan provides that the U.S. Government Securities
Portfolio will acquire all or substantially all of the assets of
the Monthly Payment Government Portfolio in exchange for shares
of the U.S. Government Securities Portfolio and the assumption by
the U.S. Government Securities Portfolio of certain liabilities
of the Monthly Payment Government Portfolio on October 6, 1995,
or such later date as may be adopted by resolution of the Fund's
Board of Directors (the "Closing Date"). Prior to the Closing
Date, the Monthly Payment Government Portfolio will endeavor to
discharge all of its known liabilities and obligations. The U.S.
Government Securities Portfolio will not assume any liabilities
or obligations of the Monthly Payment Government Portfolio other
than those reflected in an unaudited statement of assets and
liabilities of the Monthly Payment Government Portfolio prepared
as of the close of regular trading on the New York Stock
Exchange, Inc. (the "NYSE"), currently 4:00 p.m. New York time,
on the Closing Date. The U.S. Government Securities Portfolio
will assume the liability for payment of any unpaid amounts under
the Monthly Payment Government Portfolio's Rule 12b-1 plan which
were carried over as of the Closing Date. The number of full and
fractional Class A, Class B, Class C and Class Y shares of the
U.S. Government Securities Portfolio to be issued to the Monthly
Payment Government Portfolio shareholders will be determined on
the basis of the U.S. Government Securities Portfolio's and the
Monthly Payment Government Portfolio's relative net asset values
per Class A, Class B, Class C and Class Y shares, respectively,
computed as of the close of regular trading on the NYSE on the
Closing Date. The net asset value per share of each Class will
be determined by dividing assets, minus liabilities, by the total
number of outstanding shares.
Both the Monthly Payment Government Portfolio and the U.S.
Government Securities Portfolio utilize the same procedures to
determine the value of their respective portfolio securities.
This method of valuation will be employed for the Reorganization
and will be consistent with the requirements set forth in the
Portfolios' Prospectus, Rule 22c-1 under the 1940 Act, and with
the interpretation of such rule by the SEC's Division of
Investment Management.
At or prior to the Closing Date, the Monthly Payment
Government Portfolio will, and the U.S. Government Securities
Portfolio may, declare a dividend or dividends which, together
with all previous such dividends, shall have the effect of
distributing to their respective shareholders all taxable income
for the taxable year ending on or prior to the Closing Date
(computed without regard to any deduction for dividends paid). In
addition, the Monthly Payment Government Portfolio's dividend
will include all of its net capital gains realized in the taxable
year ending on or prior to the Closing Date (after reductions for
any capital loss carryforward).
As soon after the Closing Date as conveniently practicable,
the Monthly Payment Government Portfolio will liquidate and
distribute pro rata to shareholders of record as of the close of
business on the Closing Date the full and fractional shares of
the U.S. Government Securities Portfolio received by the Monthly
Payment Government Portfolio. Such liquidation and distribution
will be accomplished by the establishment of accounts in the
names of the Monthly Payment Government Portfolio's shareholders
on the share records of the U.S. Government Securities
Portfolio's shareholder servicing agent. Each account will
represent the respective pro rata number of full and fractional
shares of the U.S. Government Securities Portfolio due to each of
the Monthly Payment Government Portfolio's shareholders. After
such distribution has been made and the affairs have been wound
up, the Monthly Payment Government Portfolio will be terminated.
The consummation of the Reorganization is subject to the
conditions set forth in the Plan. Notwithstanding approval of the
Monthly Payment Government Portfolio's shareholders, the Plan may
be terminated at any time at or prior to the Closing Date by
consent of the Board of Directors of the Fund.
Approval of the Plan will require the affirmative vote of a
majority of the outstanding shares of the Monthly Payment
Government Portfolio. If the Reorganization is not approved by
shareholders of the Monthly Payment Government Portfolio, the
Board of Directors of the Fund will consider other possible
courses of action, including liquidation of the Monthly Payment
Government Portfolio.
Description of the U.S. Government Securities Portfolio's
Shares. Full and fractional shares of the respective class of
shares of common stock of the U.S. Government Securities
Portfolio will be issued to the Monthly Payment Government
Portfolio in accordance with the procedures detailed in the Plan
and as described in the U.S. Government Securities Portfolio's
Prospectus. Generally, the U.S. Government Securities Portfolio
does not issue share certificates to shareholders unless a
specific request is submitted to the U.S. Government Securities
Portfolio's shareholder servicing agent. The shares of the U.S.
Government Securities Portfolio to be issued to the Monthly
Payment Government Portfolio shareholders and registered on the
shareholder records of the shareholder servicing agent will have
no preemptive rights.
Charter Amendment. Solely for purposes of Maryland
corporate law, the reorganization will be effected as a
reclassification of shares of the Monthly Payment Government
Portfolio into shares of the U.S. Government Securities
Portfolio. Accordingly, approval of the Plan will also
constitute approval of an amendmnt to the charter of the
Corporation authorizing such reclassification. At the time of
closing, the officers of Smith Barney Funds, Inc. will cause to
be filed with the Maryland State Department of Assessments and
Taxation Articles of Amendment that effect such reclassification.
Federal Income Tax Consequences. For Federal income tax
purposes, the exchange of assets of the Monthly Payment
Government Portfolio for shares of the U.S. Government Securities
Portfolio is intended to qualify as a tax-free reorganization
under Section 368 (a) of the Internal Revenue Code of 1986, as
amended (the "Code"). As a condition to the closing of the
Reorganization, the Monthly Payment Government Portfolio and the
U.S. Government Securities Portfolio will receive an opinion from
Sullivan & Cromwell, to the effect that, on the basis of certain
assumptions by counsel and certain representations by the Monthly
Payment Government Portfolio and the U.S. Government Securities
Portfolio, as well as the existing provisions of the Code, U.S.
Treasury regulations issued thereunder, current administrative
rules, pronouncements and court decisions, for Federal income tax
purposes, upon consummation of the Reorganization, the following
will apply:
(1) the transfer of all or substantially all of
the Monthly Payment Government Portfolio's assets
in exchange for the U.S. Government Securities
Portfolio's shares and the assumption by the U.S.
Government Securities Portfolio of certain
liabilities of the Monthly Payment Government
Portfolio will constitute a "reorganization"
within the meaning of Section 368 (a)(1)(C) of the
Code, and the U.S. Government Securities Portfolio
and the Monthly Payment Government Portfolio will
be each a "party to a reorganization" within the
meaning of Section 368(b) of the Code;
(2) no gain or loss will be recognized by the
U.S. Government Securities Portfolio upon the
receipt of the assets of the Monthly Payment
Government Portfolio in exchange for the U.S.
Government Securities Portfolio's shares and the
assumption by the U.S. Government Securities
Portfolio of certain scheduled liabilities of the
Monthly Payment Government Portfolio;
(3) no gain or loss will be recognized by the
Monthly Payment Government Portfolio upon the
transfer of the Monthly Payment Government
Portfolio's assets to the U.S. Government
Securities Portfolio in exchange for the U.S.
Government Securities Portfolio's shares and the
assumption by the U.S. Government Securities
Portfolio of certain scheduled liabilities of the
Monthly Payment Government Portfolio or upon the
distribution (whether actual or constructive) of
the U.S. Government Securities Portfolio's shares
to the Monthly Payment Government Portfolio's
shareholders;
(4) no gain or loss will be recognized by
shareholders of the Monthly Payment Government
Portfolio upon the exchange of their Monthly
Payment Government Portfolio shares for the U.S.
Government Securities Portfolio shares and the
assumption by the U.S. Government Securities
Portfolio of certain scheduled liabilities of the
Monthly Payment Government Portfolio;
(5) the aggregate tax basis of the U.S.
Government Securities Portfolio shares to be
received by each Monthly Payment Government
Portfolio shareholder pursuant to the
Reorganization will be the same as the aggregate
tax basis of the Monthly Payment Government
Portfolio shares surrendered in exchange therefor.
The holding period of the U.S. Government
Securities Portfolio shares to be received by each
Monthly Payment Government Portfolio shareholder
will include the period during which the shares of
the Monthly Payment Government Portfolio which are
surrendered in exchange therefor were held by such
shareholder (provided the Monthly Payment
Government Portfolio shares were held as capital
assets on the date of the Reorganization);
(6) the tax basis of the Monthly Payment
Government Portfolio's assets to be acquired by
the U.S. Government Securities Portfolio will be
the same as the tax basis of such assets to the
Monthly Payment Government Portfolio immediately
prior to the Reorganization. The holding period of
the assets of the Monthly Payment Government
Portfolio in the hands of the U.S. Government
Securities Portfolio will include the period
during which such assets were held by the Monthly
Payment Government Portfolio.
The tax consequences descibed above may not apply to Monthly
Payment Government Portfolio shareholders that acquired shares
upon the exercise of employee stock options or otherwise as
compensation, that hold their shares as part of a "straddle" or
"conversion transaction" or that are insurance companies,
securities dealers, financial institutions or foreign persons.
Shareholders of the Monthly Payment Government Portfolio should
consult their tax advisors regarding the effect, if any, of the
proposed Reorganization in light of their individual
circumstances. Since the foregoing discussion only relates to
the Federal income tax consequences of the Reorganization,
shareholders of the Monthly Payment Government Portfolio should
also consult their tax advisors as to state and local tax
consequences, if any, of the Reorganization.
Capitalization. The following table, which is unaudited,
shows the capitalization of the U.S. Government Securities
Portfolio and the Monthly Payment Government Portfolio as of July
21, 1995 and on a pro forma basis as of that date, giving effect
to the proposed acquisition of assets at net asset value:
<TABLE>
<S> <C> <C> <C>
(In thousands, except
per share values)
(Unaudited)
U.S. GovernmentMonthly Payment Pro forma for
Class A SharesSecurities PortfolioGovernment Portfolio
Reorganization
Net Assets................ $ 357,524,334 $ 40,050,198 $
397,574,532
Net asset value per share. 13.29 12.63 13.29
Shares outstanding........ 26,889,235 3,170,649
29,912,426
U.S. GovernmentMonthly Payment Pro forma for
Class B SharesSecurities PortfolioGovernment Portfolio
Reorganization
Net Assets................ $ 6,836,809 $ 574,543 $
7,411,353
Net asset value per share. 13.30 12.60 13.30
Shares outstanding........ 513,982 45,615
557,195
U.S. GovernmentMonthly Payment Pro forma for
Class C SharesSecurities PortfolioGovernment Portfolio
Reorganization
Net Assets................ $ 20,904,280 $ 3,045,666 $
23,949,946
Net asset value per share. 13.28 12.63 13.28
Shares outstanding........ 1,573,790 241,195
1,803,180
U.S. GovernmentMonthly Payment Pro forma for
Class Y SharesSecurities PortfolioGovernment Portfolio
Reorganization
Net Assets................ $ 7,336,646 0 $
7,336,646
Net asset value per share. 13.30 0 13.30
Shares outstanding........ 551,612 0
551,612
</TABLE>
As of the Record Date, there were 3,170,648.906
outstanding Class A shares, 45,614.606 outstanding Class B
shares, 241,195.211 outstanding Class C and 0.00 outstanding
Class Y shares of the Monthly Payment Government Portfolio
and 26,889,235.087 outstanding Class A shares, 513,981.652
outstanding Class B shares, 1,573,789.877 outstanding Class
C shares and 551,612.118 outstanding Class Y shares of the
U.S. Government Securities Portfolio. As of the Record
Date, the officers and directors of the Monthly Payment
Government Portfolio as a group beneficially owned less than
1% of the outstanding shares of the Monthly Payment
Government Portfolio. Except as set forth below, to the
best knowledge of the Directors of the Fund, as of the
Record Date, no shareholder or "group" (as that term is used
in Section 13(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"), owned beneficially or of record 5% or more
of a Class of shares of the Monthly Payment Government
Portfolio.
<TABLE>
Percentage of Class Owned
of Record
or Beneficially
Name and Fund and As of the
Upon Consummation
Address Class Record Date
of the Reorganization
<S> <C> <C> <C>
MONT/GRANDVIEW Monthly Payment 5.13%
0.54%
RESERVE FUND, INC. Government Port.
Attn: Jan Elliott Class A
405 Grand Avenue
Dayton, OH 45405
Raymond J. Coupe Monthly Payment 17.59%
1.43%
Smith Barney Inc. IRA Government Port.
Custodian Class B
3531 Courtside Circle
Huntington Beach, CA 92649
J.H. Winters Inc. Monthly Payment 14.21%
1.16%
P.O. Box 445 Government Port.
Burlingame, CA 94011 Class B
Ingrid Ommundsen Monthly Payment 11.67%
0.95%
Smith Barney Inc. Government Port.
Rollover Cust Class B
723 60th Street
Brooklyn, NY 11220
Percentage of Class Owned
of Record
or Beneficially
Name and Fund and As of the
Upon Consummation
Address Class Record Date
of the Reorganization
Lincoln Trust Co. C/F Monthly Payment 5.66%
0.46%
Invt. Annuity of Paul F Kasper Government Port.
Policy #53001632 Class B
P.O. Box 5831 T.A.
Denver, CO 80217
Winslow Williams Monthly Payment 5.53%
0.45%
June K Williams JTWROS Government Port.
P.O. Box 3103 Class B
Stony Creek, CT 06405
Konrad R Solochier & Edna Monthly Payment 5.35%
0.44%
M Solochier CO-TTEES Government Port.
UAD 12-2-91 Class B
Solochier Family Trust
306 NE Holly Ave
Port St. Lucie, FL 34952
Loretta Schulte Monthly Payment 5.21%
0.42%
10 N Maguire #306 Government Port.
Tuscon, AZ 85710 Class B
City of Falcon Heights Monthly Payment 9.50%
1.26%
Attn: Susan Hoyt Government Port.
2077 W Larpenteur Avenue Class C
Falcon Heights, MN 55113
Martha Araujo as Conservator Monthly Payment 9.14%
1.21%
for Manuel Araujo Government Port.
47-26 157th Street Class C
Flushing, NY 11355
</TABLE>
INFORMATION ABOUT THE U.S. GOVERNMENT SECURITIES PORTFOLIO &
MONTHLY PAYMENT GOVERNMENT PORTFOLIO
Management's Discussion and Analysis of Market Conditions
and Portfolio Review.
For the year ended December 31, 1994, the total return for Class
A shares of
the Smith Barney Funds, Inc.: Monthly Payment Government
Portfolio was
negative 1.38% and the total return for the U.S. Government
Securities
Portfolio was negative 1.40%. Both of the Portfolios outperformed
the Lehman
Brothers GNMA Mutual Fund Index which produced a total return of
negative
1.50% for the same period. According to Lipper Analytical
Services, both
Portfolios outperformed the average Ginnie Mae fund, which
returned a
negative 2.49% for the year.
Market Review
Interest rates moved steadily upward during the past year causing
a
substantial decline in bond prices. In fact, 1994 has been
characterized as
the worst year for bonds since record keeping began in 1927. By
December 31,
the yield on the benchmark 30-year Treasury bond had risen to
7.88%, compared
with 6.35% at the start of the year. The rise in short-term rates
was even
more striking. The yield on the two-year Treasury note, for
example, rose
from 4.23% in January, to 7.69% by December.
Rates were propelled upward by the Federal Reserve Board's
("Fed") six
increases in the federal funds rate--the rate banks charge each
other for
overnight loans. The Fed, concerned that inflationary pressures
were
building, moved toward this more restrictive monetary policy in
an effort to
stem potential future inflation before it became an issue. On
February 4,
1994, the Fed raised the federal funds rate to 3.25%, and by the
end of
December, it had pushed the rate to 5.5%.
In the mortgage-backed market, the current coupon rate for
securities issued
by the Government National Mortgage Association ("GNMA") began
the year
yielding 6.68% and climbed to a yield of 8.89% by year end. Also,
with
interest rates rising, homeowners were less inclined to refinance
their
existing mortgages, and prepayments declined rapidly. This drop
in
prepayments had the effect of lengthening the average duration of
mortgage-backed securities. Duration is a measure of a bond's
volatility when
interest rates move up or down. The longer the duration, the more
sensitive
the bond is to interest rate changes.
Portfolio Strategy
Shortly after the first increase in the federal funds rate in
February, we
sold longer-term Treasury securities in order to reduce the
Portfolios'
duration. The GNMA Index began the year with a duration of 3.2
years, but as
prepayments slowed, its duration lengthened. Throughout much of
1994 we kept
the Portfolios' duration shorter than the Index's by about one-
half year,
primarily by holding a reserve of cash equivalents equal to 15%
of each
Portfolio. By year end, we had reduced our cash position and
lengthened our
duration to 5.25 years, compared with 5.5 years for the GNMA
Index, through
the addition of short-term Treasuries.
Outlook
Despite the Fed's efforts to cool the economy, strong capital
spending and
employment growth indicate a fourth-quarter Gross Domestic
Product (GDP) rate
that could exceed 4.0% when the final data for 1994 is tallied.
It is
generally understood that a rate which surpasses 2.5% may point
to future
inflation. A healthy GDP number could cause the Fed to increase
rates again
when its policy-making committee meets at the end of January.
In our view, inflation, as measured by the Consumer Price Index,
will
probably trend towards 3.5% in 1995 which will represent an
increase but not
pose a problem. We believe that after an erratic first quarter,
the
environment for fixed-income investments will turn more positive.
Accordingly, we plan to position the Portfolios more bullishly by
lengthening
duration as the quarter ends.
PLOT POINTS
<TABLE>
Monthly Lehman Brothers
Payment GNMA Mutual
Date Government Fund Index
<S> <C> <C>
4/16/86 9,601 10,000
12/86 10,289 10,754
12/87 10,603 11,220
12/88 11,485 12,207
12/89 13,210 14,120
12/90 14,464 15,612
12/91 16,669 18,117
12/92 17,752 19,461
12/93 18,854 20,740
6/94 18,294 20,128
7/94 18,601 20,520
8/94 18,651 21,157
9/94 18,391 20,858
10/94 18,318 20,825
11/94 18,311 20,767
12/94 18,560 20,997
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares
at
inception on April 16, 1986 assuming deduction of the maximum
4.00% sales
charge at the time of investment and reinvestment of dividends
(after
deduction of applicable sales charge) and capital gains (at net
asset value)
through December 31, 1994. The Lehman Brothers GNMA Mutual Fund
Index is
composed of 15-year and 30-year fixed-rate securities backed by
mortgage
pools of the Government National Mortgage Association. The Index
is unmanaged
and is not subject to the management and trading expenses of a
mutual fund.
The performance of the Portfolio's other classes may be greater
or less than
the Class A shares performance indicated on this chart, depending
on whether
greater or lesser sales charges and fees were incurred by
shareholders
investing in other classes.
<TABLE> Lehman Brothers
U.S. Government GNMA Mutual
Date Securities Fund Index
<S> <C> <C>
10/09/84 9,601 10,000
12/84 9,942 10,794
12/85 11,829 13,518
12/86 13,049 15,210
12/87 13,345 15,866
12/88 14,455 17,262
12/89 16,578 19,969
12/90 18,161 22,080
12/91 21,048 25,624
12/92 22,416 27,522
12/93 23,777 29,334
6/94 23,044 28,467
7/94 23,495 29,022
8/94 23,549 29,922
9/94 23,226 29,500
10/94 23,134 29,453
11/94 23,116 29,370
12/94 23,372 29,696
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares
on October
9, 1984 assuming deduction of the maximum 4.00% sales charge at
the time of
investment and reinvestment of dividends (after deduction of
applicable sales
charge) and capital gains (at net asset value) through December
31, 1994. The
Lehman Brothers GNMA Mutual Fund Index is composed of 15-year and
30-year
fixed-rate securities backed by mortgage pools of the Government
National
Mortgage Association. The Index is unmanaged and is not subject
to the
management and trading expenses of a mutual fund. The performance
of the
Portfolio's other classes may be greater or less than the Class A
performance
indicated on this chart, depending on whether greater or lesser
sales charges
and fees were incurred by shareholders investing in other
classes.
SUMMARY OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion, which summarizes the investment
objectives, policies and restrictions of the U.S. Government
Securities Portfolio and the Monthly Payment Government
Portfolio, is based upon and qualified in its entirety by the
investment objectives, policies and restrictions section of the
Prospectus of the U.S. Government Securities Portfolio and the
Monthly Payment Government Portfolio. For a full discussion of
the investment objectives, policies and restrictions of each
Portfolio, refer to the Prospectus, which accompanies this
Prospectus/Proxy Statement, under the captions, "Investment
Objectives and Management Policies."
Investment Objective. The principal investment objective of
the U.S. Government Securities Portfolio is identical to that of
the Monthly Payment Government Portfolio, in that each seeks 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. There can be no assurance that either Portfolio will
be able to achieve its investment objective. Both the U.S.
Government Securities Portfolio's and the Monthly Payment
Government Portfolio's investment objective is fundamental and,
as such, may be changed only by the "vote of a majority of the
outstanding voting securities," as defined in the 1940 Act. The
investment policies of the U.S. Government Securities Portfolio
and the Monthly Payment Government Portfolio are non-fundamental
and, as such, may be changed by the Board of Directors, without
shareholder approval, provided such change is not prohibited by
the investment restrictions (which are set forth in the Fund's
Statement of Additional Information) or applicable law, and any
such change will first be disclosed in the then current
prospectus.
Primary Investments. 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 guaranteed by the United States, its
agencies or its instrumentalities and related 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 seeks to invest substantially
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 purchased for these Portfolios 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 Portfolio.
The average life of GNMA Certificates varies with the maturities
of the underlying mortgages (with maximum maturities of 30 years)
but it 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
in agreements with dealers in GNMA Certificates to purchase or
sell an agreed-upon principal amount of GNMA Certificates at a
specified price on a certain price on a certain date; provided,
however that settlement occurs within 120 days of the trade date.
Restrictions. Each Portfolio has adopted investment
restrictions to protect the shareholders, which restrictions may
not be changed without the approval of the holders of a majority,
as defined in the 1940 Act, of the voting securities of the
respective Portfolio. Each of the U.S. Government Securities
Portfolio and the Monthly Payment Government Portfolio may not:
1. Purchase any securities other than the obligations issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities, some of which may be subject to repurchase
agreements. There is no limit on the amount of its assets which
may be invested in the securities of any one issuer of such
obligations; 2. Purchase securities on margin, sell securities
short (provided however each Portfolio may sell short if it
maintains a segregated account of cash or U.S. Government
Obligations with the Custodian, so that the amount deposited in
it plus the collateral deposited with the broker equals the
current market value of the securities sold short and is not less
than the market value of the securities at the time they were
sold short) or purchase mortgage-related securities issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities); 3. Borrow money, except from banks for
temporary purposes and then in amounts not in excess of 5% of the
value of each Portfolio's assets at the time of such borrowing;
or mortgage, pledge or hypothecate any assets except in
connection with any such borrowings and in amounts not in excess
of 7 1/2% of the value of the Fund's assets at the time of such
borrowing. (This borrowing provision is not for investment
leverage, but solely to facilitate management of each Portfolio
by enabling each Portfolio to meet redemption requests where the
liquidation of portfolio securities is deemed to be
disadvantageous or inconvenient). Borrowings may take the form
of a sale of portfolio securities accompanied by a simultaneous
agreement as to their repurchase; 4. Make loans, except through
the purchase of debt obligations (described in restriction 1
above), repurchase agreements and loans of each Portfolio's
securities; and 5. Act as an underwriter of securities except to
the extent the Fund may deemed to be an underwriter in connection
with the sale of portfolio holdings.
Risk Factors. The U.S. Government Securities Portfolio and
the Monthly Payment Government Portfolio may enter into
Repurchase Agreements, which are contracts under which a security
is acquired for a relatively short period (usually not more than
one week), subject to the obligation of the seller to repurchase
and the buyer to resell such security at a fixed time and price.
This could involve certain risks in the event of default or
insolvency of the other party. To increase investment income,
each Portfolio may lend its securities to brokers, dealers or
other financial institutions, which loans are secured by cash or
U.S. Government obligations and are limited to not more than one-
third of the value of the total assets of the Portfolio. 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. Loans will only
be made to borrowers whom the Fund's manager deems to be of good
standing and will not be made unless, in the judgment of the
manager, the interest to be earned from such loans woud justify
the risk.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
Both the Monthly Payment Government Portfolio and the U.S.
Government Securities Portfolio are open-end, diversified
management investment companies registered under the 1940 Act and
separate series of the Fund, a Maryland corporation.
Shareholders of each Portfolio have identical rights under the
Fund's Articles of Incorporation, By-Laws and applicable Maryland
law.
ADDITIONAL INFORMATION ABOUT
THE U.S. GOVERNMENT SECURITIES PORTFOLIO
AND THE MONTHLY PAYMENT GOVERNMENT PORTFOLIO
The Monthly Payment Government Portfolio. Information about
the Monthly Payment Government Portfolio is incorporated herein
by reference from its current Prospectus dated April 28, 1995, a
copy of which is enclosed herewith, and in the Fund's Statement
of Additional Information dated April 28, 1995, which has been
filed with the SEC. A copy of such Statement of Additional
Information is available upon request and without charge by
writing the Monthly Payment Government Portfolio at 388 Greenwich
Street, New York, New York 10013 or by calling (800) 224-7523.
The U.S. Government Securities Portfolio. Information
concerning the operation and management of the U.S. Government
Securities Portfolio is incorporated herein by reference from
it's current Prospectus dated April 28, 1995, a copy of which is
enclosed herewith, and the Fund's Statement of Additional
Information dated April 28, 1995, which has been filed with the
SEC. A copy of such Statement of Additional Information is
available upon request and without charge by writing the U.S.
Government Securities Portfolio at 388 Greenwich Street, New
York, New York 10013 or by calling (800) 224-7523.
Both the U.S. Government Securities Portfolio and the
Monthly Payment Government Portfolio are subject to the
informational requirements of the Exchange Act and in accordance
therewith file reports and other information including proxy
material, reports and charter documents with the SEC. These
reports can be inspected and copies obtained at the Public
Reference Facilities maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the New York Regional Office
of the SEC, 75 Park Place, New York, New York 10007. Copies of
such material can also be obtained from the Public Reference
Branch, Office of Consumer Affairs and Information Services, SEC,
Washington, D.C. 20549 at prescribed rates.
OTHER BUSINESS
The Directors of the Fund do not intend to present any other
business at the Meeting. If, however, any other matters are
properly brought before the Meeting, the persons named in the
accompanying form of proxy will vote thereon in accordance with
their judgment.
VOTING INFORMATION
This Prospectus/Proxy Statement is furnished in connection
with a solicitation of proxies by the Board of Directors of the
Fund to be used at the Special Meeting of Shareholders to be held
at 1:00 p.m. on October 6, 1995, at 388 Greenwich Street, New
York, New York 10013 and at any adjournments thereof. This
Prospectus/Proxy Statement, along with a Notice of the Meeting
and a proxy card, is first being mailed to shareholders of the
Monthly Payment Government Portfolio on or about September 5,
1995. Only shareholders of record as of the close of business on
the Record Date will be entitled to notice of, and to vote at,
the Meeting or any adjournment thereof. The holders of a
majority of the shares of the Monthly Payment Government
Portfolio outstanding at the close of business on the Record Date
present in person or represented by proxy will constitute a
quorum for the Meeting. For purposes of determining a quorum for
transacting business at the Meeting, abstentions and broker "non-
votes" (that is, proxies from brokers or nominees indicating that
such persons have not received instructions from the beneficial
owner or other persons entitled to vote shares on a particular
matter with respect to which the brokers or nominees do not have
discretionary power) will be treated as shares that are present
but which have not been voted. For this reason, abstentions and
broker non-votes will have the effect of a "no" vote for purposes
of obtaining the requisite approval of the Plan. If the enclosed
form of proxy is properly executed and returned in time to be
voted at the Meeting, the proxies named therein will vote the
shares represented by the proxy in accordance with the
instructions marked thereon. Unmarked proxies will be voted FOR
the proposed Reorganization and FOR any other matters deemed
appropriate. A proxy may be revoked at any time on or before the
Meeting by written notice to Smith Barney Funds, Inc.- Monthly
Payment Government Portfolio, 388 Greenwich Street, New York, New
York 10013, 22nd Floor, c/o the Corporate Secretary. Unless
revoked, all valid proxies will be voted in accordance with the
specifications thereon or, in the absence of such specifications,
FOR approval of the Plan and the Reorganization contemplated
thereby.
Approval of the Plan will require the affirmative vote of a
majority of the outstanding shares of the Monthly Payment
Government Portfolio. Shareholders of Class A, Class B, Class C
and Class Y, shares, if any, of the Monthly Payment Government
Portfolio shall vote together as a single class. Shareholders of
the Monthly Payment Government Portfolio are entitled to one vote
for each share.
Proxies are primarily solicited by mail. Additional
solicitations may be made by telephone, telegraph or personal
interviews conducted by officers or employees of Smith Barney and
its affiliates and/or by TSSG, the transfer agent of the Fund.
The Fund has retained Applied Mailing Systems, Inc. to assist in
the solicitation of proxies, at an estimated cost in the range of
$10,000 (depending on the extent of the services provided).
Expenses of the Reorganization, including the costs of proxy
solicitation, the preparation of this Prospectus/Proxy Statement
and enclosures attached hereto and reimbursement of expenses for
forwarding solicitation material to beneficial owners of shares
of the Monthly Payment Government Prospectus will be borne by the
U.S. Government Securities Portfolio and the Monthly Payment
Government Portfolio in proportion to their shares.
Applied Mailing Systems, Inc. may call shareholders to ask
if they would be willing to have their votes recorded by
telephone. The telephone voting procedure is designed to
authenticate the shareholder's identity by asking the shareholder
to provide his social security number, in the case of an
individual, or a taxpayer identification number, in the case of
an entity. The shareholder's telephone vote will be recorded and
a confirmation will be sent to the shareholder to ensure that the
vote has been taken in accordance with the shareholder's
instructions. Shareholders voting by telephone may vote for or
against each proposal separately. Although a shareholder's vote
may be taken by telephone, each shareholder will receive a copy
of this Proxy Statement and may vote by mail using the enclosed
proxy card. The Fund believes that this telephonic voting system
will comply with Maryland state law and will obtain an opinion of
counsel to that effect prior to implementing such procedures.
In the event that sufficient votes to approve the
Reorganization are not received by October 6, 1995, the persons
named as proxies may propose one or more adjournments of the
Meeting to permit further solicitation of proxies. In
determining whether to adjourn the Meeting, the following factors
may be considered: the percentage of votes actually cast, the
percentage of negative votes actually cast, the nature of any
further solicitation and the information to be provided to
shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the
holders of a majority of the shares present in person or by proxy
and entitled to vote at the Meeting. The persons named as
proxies will vote upon such adjournment after consideration of
the best interests of all shareholders.
The votes of the shareholders of the U.S. Government
Securities Portfolio are not being solicited by this
Prospectus/Proxy Statement.
FINANCIAL STATEMENTS AND EXPERTS
The audited statements of assets and liabilities,
including the schedule of investments, of the Monthly Payment
Government Portfolio and the U.S. Government Securities Portfolio
as of December 31, 1994, and the related statements of
operations, for the year then ended, changes in net assets for
each of the years in the two-year period then ended and financial
highlights for each of the years in the five-year period then
ended, have been incorporated by reference into the Statement of
Additional Information relating to this Prospectus/Proxy
Statement in reliance on the report of KPMG Peat Marwick LLP,
independent auditors for the Monthly Payment Government Portfolio
and the U.S. Government Securities Portfolio, given on the
authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of shares of the U.S. Government Securities
Portfolio will be passed upon by Sullivan & Cromwell, 125 Broad
Street, New York, NY 10004. In rendering such opinion, Sullivan
& Cromwell may rely on an opinion of Piper & Marbury L.L.P.,
Baltimore, Maryland, as to certain matters under Maryland law.
THE BOARD OF DIRECTORS OF THE FUND, INCLUDING THE "NON-
INTERESTED" DIRECTORS, UNANIMOUSLY RECOMMEND APPROVAL
OF THE PLAN, AND ANY UNMARKED PROXIES WITHOUT
INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF
APPROVAL OF THE PLAN.
EXHIBIT A
PLAN OF REORGANIZATION
THIS PLAN OF REORGANIZATION (the "Plan") is adopted
as of this 6th day of June, 1995, by Smith Barney Funds,
Inc. ("Smith Barney Funds"), a Maryland corporation with its
principal place of business at 388 Greenwich Street, New
York, New York 10013, on behalf of the U.S. Government
Securities Portfolio (the "Acquiring Fund"), and the Monthly
Payment Government Portfolio (the "Acquired Fund").
This Plan is intended to be and is adopted as a plan
of reorganization and liquidation within the meaning of
Section 368(a)(1)(C) of the United States Internal Revenue
Code of 1986, as amended (the "Code"). The reorganization
(the "Reorganization") will consist of the transfer of all
or substantially all of the assets of the Acquired Fund in
exchange for Class A, Class B, Class C and Class Y shares of
common stock of the Acquiring Fund (collectively, the
"Acquiring Fund Shares" and each, an "Acquiring Fund Share")
and the assumption by the Acquiring Fund of certain
scheduled liabilities of the Acquired Fund and the
distribution, after the Closing Date herein referred to, of
Acquiring Fund Shares to the shareholders of the Acquired
Fund in liquidation of the Acquired Fund and the termination
of the Acquired Fund, all upon the terms and conditions
hereinafter set forth in this Plan.
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF THE ACQUIRED
FUND'S SCHEDULED LIABILITIES AND LIQUIDATION AND
TERMINATION OF THE ACQUIRED FUND
1.1. Subject to the terms and conditions herein set
forth, the Acquired Fund agrees to transfer its assets as
set forth in paragraph 1.2 to the Acquiring Fund, and the
Acquiring Fund agrees in exchange therefor: (i) to deliver
to the Acquired Fund the number of Class A Acquiring Fund
Shares, including fractional Class A Acquiring Fund Shares,
determined by dividing the value of the Acquired Fund's net
assets attributable to its Class A shares, computed in the
manner and as of the time and date set forth in paragraph
2.1, by the net asset value of one Class A Acquiring Fund
Share, computed in the manner and as of the time and date
set forth in paragraph 2.2; (ii) to deliver to the Acquired
Fund the number of Class B Acquiring Fund Shares, including
fractional Class B Acquiring Fund Shares, determined by
dividing the value of the Acquired Fund's net assets
attributable to its Class B shares, computed in the manner
and as of the time and date set forth in paragraph 2.1, by
the net asset value of one Class B Acquiring Fund Share,
computed in the manner and as of the time and date set forth
in paragraph 2.2; (iii) to deliver to the Acquired Fund the
number of Class C Acquiring Fund Shares, including
fractional Class C Acquiring Fund Shares, determined by
dividing the value of the Acquired Fund's net assets
attributable to its Class C shares computed in the manner
and as of the time and date set forth in paragraph 2.1, by
the net asset value of one Class C Acquiring Fund Share,
computed in the manner and as of the time and date set forth
in paragraph 2.2; (iv) to deliver to the Acquired Fund the
number of Class Y Acquiring Fund Shares, including
fractional Class Y Acquiring Fund Shares, determined by
dividing the value of the Acquired Fund's net assets
attributable to its Class Y shares, computed in the manner
and as of the time and date set forth in paragraph 2.1, by
the net asset value of one Class Y Acquiring Fund Share,
computed in the manner and as of the time and date set forth
in paragraph 2.2; and (v) to assume certain scheduled
liabilities of the Acquired Fund, as set forth in paragraph
1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing").
1.2. The assets of the Acquired Fund to be acquired by
the Acquiring Fund shall consist of all or substantially all
of its property, including, without limitation, all cash,
securities and dividends or interest receivables which are
owned by the Acquired Fund and any deferred or prepaid
expenses shown as an asset on the books of the Acquired Fund
on the closing date provided in paragraph 3.1 (the "Closing
Date").
1.3. The Acquired Fund will endeavor to discharge all
its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume all liabilities,
expenses, costs, charges and reserves reflected on an
unaudited Statement of Assets and Liabilities of the
Acquired Fund as of the Valuation Date (as defined in
paragraph 2.1), in accordance with generally accepted
accounting principles consistently applied from the prior
audited period. The Acquiring Fund shall assume only those
liabilities of the Acquired Fund reflected in that unaudited
Statement of Assets and Liabilities and shall not assume any
other liabilities, whether absolute or contingent, not
reflected thereon.
1.4. As soon after the Closing Date as is conveniently
practicable (the "Liquidation Date"), the Acquired Fund will
liquidate and distribute pro rata to the Acquired Fund's
shareholders of record determined as of the close of
business on the Closing Date (the "Acquired Fund
Shareholders"), the Acquiring Fund Shares it receives
pursuant to paragraph 1.1. Shareholders of Class A, Class
B, Class C and Class Y shares of the Acquired Fund shall
receive Class A, Class B, Class C and Class Y shares,
respectively, of the Acquiring Fund. Such liquidation and
distribution will be accomplished by the transfer of the
Acquiring Fund Shares then credited to the account of the
Acquired Fund on the books of the Acquiring Fund to open
accounts on the share records of the Acquiring Fund in the
name of the Acquired Fund's shareholders and representing
the respective pro rata number of the Acquiring Fund Shares
due such shareholders. All issued and outstanding shares of
the Acquired Fund will simultaneously be canceled on the
books of the Acquired Fund, although share certificates
representing interests in the Acquired Fund will represent a
number of Acquiring Fund Shares after the Closing Date as
determined in accordance with paragraph 1.1. The Acquiring
Fund shall not issue certificates representing the Acquiring
Fund Shares in connection with such exchange.
1.5. Ownership of Acquiring Fund Shares will be shown
on the books of the Acquiring Fund's transfer agent.
Acquiring Fund Shares will be issued in the manner described
in the Acquiring Fund's current prospectus and statement of
additional information.
1.6. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered
holder of the Acquired Fund Shares on the books of the
Acquired Fund as of that time shall, as a condition of such
issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7. The Acquired Fund shall, following the Closing
Date and the making of all distributions pursuant to
paragraph 1.4, be terminated under the laws of the State of
Maryland and in accordance with its governing documents.
2. VALUATION
2.1. The value of the Acquired Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value
of such assets computed as of the close of regular trading
on the New York Stock Exchange, Inc. (the "NYSE") on the
Closing Date (such time and date being hereinafter called
the "Valuation Date"), using the valuation procedures set
forth in the Acquiring Fund's then current prospectus or
statement of additional information.
2.2. The net asset value of Acquiring Fund Shares
shall be the net asset value per share computed as of the
close of regular trading on the NYSE on the Valuation Date,
using the valuation procedures set forth in the Acquiring
Fund's then current prospectus or statement of additional
information.
2.3. All computations of value shall be made by Smith
Barney Mutual Funds Management Inc. in accordance with their
regular practice as pricing agent for the Acquired Fund and
the Acquiring Fund, respectively.
3. CLOSING AND CLOSING DATE
3.1. The Closing Date shall be October 6, 1995, or
such later date as the Acquired Fund and the Acquiring Fund
may adopt by resolution of Smith Barney Funds' Board of
Directors. All acts taking place at the Closing shall be
deemed to take place simultaneously as of the close of
business on the Closing Date unless otherwise provided. The
Closing shall be held as of 5:00 p.m. at the offices of
Smith Barney Inc., 388 Greenwich Street, New York, New York
10013, or at such other time and/or place as Smith Barney
Funds may adopt by resolution of its Board of Directors.
3.2. In the event that on the Valuation Date (a) the
NYSE or another primary trading market for portfolio
securities of the Acquiring Fund or the Acquired Fund shall
be closed to trading or trading thereon shall be restricted
or (b) trading or the reporting of trading on the NYSE or
elsewhere shall be disrupted so that accurate appraisal of
the value of the net assets of the Acquiring Fund or the
Acquired Fund is impracticable, the Closing Date shall be
postponed until the first business day after the day when
trading shall have been fully resumed and reporting shall
have been restored.
3.3. The Acquired Fund shall deliver at the Closing a
list of the names and addresses of the Acquired Fund's
shareholders and the number and percentage ownership of
outstanding shares owned by each such shareholder
immediately prior to the Closing. The Acquiring Fund shall
issue and deliver a confirmation evidencing the Acquiring
Fund Shares to be credited to the Acquired Fund's account on
the Closing Date.
3.4. The Closing is contingent upon receipt by Smith
Barney Funds of a favorable opinion of Sullivan & Cromwell,
addressed to Smith Barney Funds and satisfactory to
Christina T. Sydor, Esq., as Secretary of Smith Barney
Funds, based upon certain assumptions by counsel and certain
representations by the Acquiring Fund and the Acquired Fund
substantially to the effect that for federal income tax
purposes:
(a) the transfer of all or substantially all of the
Acquired Fund's assets in exchange for the Acquiring
Fund Shares and the assumption by the Acquiring Fund of
certain scheduled liabilities of the Acquired Fund will
constitute a "reorganization" within the meaning of
Section 368(a)(1)(C) of the Code, and the Acquiring
Fund and the Acquired Fund will each be a "party to a
reorganization" within the meaning of Section 368(b) of
the Code; (b) no gain or loss will be recognized by the
Acquiring Fund upon the receipt of the assets of the
Acquired Fund in exchange for the Acquiring Fund Shares
and the assumption by the Acquiring Fund of certain
scheduled liabilities of the Acquired Fund; (c) no gain
or loss will be recognized by the Acquired Fund upon
the transfer of the Acquired Fund's assets to the
Acquiring Fund in exchange for the Acquiring Fund
Shares and the assumption by the Acquiring Fund of
certain scheduled liabilities of the Acquired Fund or
upon the distribution (whether actual or constructive)
of the Acquiring Fund Shares to the Acquired Fund's
shareholders; (d) no gain or loss will be recognized by
shareholders of the Acquired Fund upon the exchange of
their Acquired Fund shares for the Acquiring Fund
Shares and the assumption by the Acquiring Fund of
certain scheduled liabilities of the Acquired Fund; (e)
the aggregate tax basis for the Acquiring Fund Shares
to be received by each of the Acquired Fund's
shareholders pursuant to the Reorganization will be the
same as the aggregate tax basis of the Acquired Fund
shares held by such shareholder immediately prior to
the Reorganization, and the holding period of the
Acquiring Fund Shares to be received by each Acquired
Fund shareholder will include the period during which
the Acquired Fund shares exchanged therefor were held
by such shareholder (provided that the Acquired Fund
shares were held as capital assets on the date of the
Reorganization); and (f) the tax basis of the Acquired
Fund's assets to be acquired by the Acquiring Fund will
be the same as the tax basis of such assets to the
Acquired Fund immediately prior to the Reorganization,
and the holding period of the assets of the Acquired
Fund in the hands of the Acquiring Fund will include
the period during which those assets were held by the
Acquired Fund.
4. BROKERAGE FEES AND EXPENSES
4.1. No brokers or finders will be entitled to receive
any payments in connection with the transactions provided
for herein.
4.2.(a) Except as may be otherwise provided herein,
the Acquiring Fund and the Acquired Fund shall each be
liable, in proportion to their assets, for the expenses
incurred in connection with entering into and carrying out
the provisions of this Plan, including the expenses of: (i)
counsel and independent accountants associated with the
Reorganization; (ii) printing and mailing the
Prospectus/Proxy Statement and soliciting proxies in
connection with the meeting of shareholders of the Acquired
Fund; (iii) any special pricing fees associated with the
valuation of the Acquired Fund's or the Acquiring Fund's
portfolio on the Closing Date; (iv) expenses associated with
preparing this Plan and preparing and filing the
Registration Statement under the 1933 Act covering the
Acquiring Fund Shares to be issued in the Reorganization;
(v) registration or qualification fees and expenses of
preparing and filing such forms, if any, necessary under
applicable state securities laws to qualify the Acquiring
Fund Shares to be issued in connection with the
Reorganization. The Acquired Fund shall be liable for: (i)
all fees and expenses related to the liquidation and
termination of the Acquired Fund; and (ii) fees and expenses
of the Acquired Fund's custodian and transfer agent incurred
in connection with the Reorganization. The Acquiring Fund
shall be liable for any fees and expenses of the Acquiring
Fund's custodian and transfer agent incurred in connection
with the Reorganization.
(b) Consistent with the provisions of paragraph
1.3, the Acquired Fund, prior to the Closing, shall pay for
or include in the unaudited Statement of Assets and
Liabilities prepared pursuant to paragraph 1.3 all of its
known and reasonably estimated expenses associated with the
transactions contemplated by this Plan.
5. TERMINATION
5.1. This Plan and the transactions contemplated
hereby may be terminated and abandoned by resolution of the
Board of Directors of Smith Barney Funds, at any time prior
to the Closing Date if circumstances should develop that, in
the opinion of the Board, make proceeding with this Plan
inadvisable
5.2. In the event of any such termination, the
Acquired Fund and the Acquiring Fund shall each bear the
expenses incurred by it incidental to the preparation and
carrying out of this Agreement as provided in paragraph 4.
6. GOVERNING LAW
This Plan shall be governed by and construed in
accordance with the laws of the State of New York.
STATEMENT OF ADDITIONAL INFORMATION DATED, AUGUST
1995
Acquisition Of The Assets Of
MONTHLY PAYMENT GOVERNMENT PORTFOLIO
a separate investment portfolio of
SMITH BARNEY FUNDS, INC.
388 Greenwich Street
New York, New York 10013
(800) 224-7523
By And In Exchange For Class A, Class B, Class C and C
lass Y Shares Of
U.S. GOVERNMENT SECURITIES PORTFOLIO
a separate investment portfolio of
SMITH BARNEY FUNDS, INC.
388 Greenwich Street
New
York, New York 10013
(800) 224-7523
This Statement of Additional Information, relating
specifically to the proposed transfer of all or
substantially all of the assets of the Monthly Payment
Government Portfolio (the "Acquired Fund") to the U.S.
Government Securities Portfolio (the "Acquiring Fund") in
exchange for Class A, Class B, Class C and Class Y shares of
the Acquiring Fund and the assumption by the Acquiring Fund
of certain scheduled liabilities of the Acquired Fund,
consists of this cover page and the following described
documents, each of which accompanies this Statement of
Additional Information and is incorporated herein by
reference.
1. Statement of Additional Information of Smith Barney
Funds, Inc. dated April 28, 1995 for both the U.S.
Government Securities Portfolio and the Monthly Payment
Government Portfolio.
2. Annual Report of Smith Barney Funds, Inc. for the
fiscal year ended December 31, 1994.
3. Pro Forma Financial Statements.
This Statement of Additional Information is not a
prospectus. A Prospectus/Proxy Statement, dated August ,
1995, relating to the above-referenced matter may be
obtained without charge by calling or writing either the
Acquiring Fund or the Acquired Fund at the telephone numbers
or addresses set forth above or by contacting any Smith
Barney Financial Consultant or by calling toll-free 1-800-
224-7523. This Statement of Additional Information should
be read in conjunction with the Prospectus/Proxy Statement
dated August , 1995.
The date of this Statement of Additional Information is
August , 1995.
PROSPECTUS OF
SMITH BARNEY FUNDS, INC. - U.S. GOVERNMENT SECURITIES PORTFOLIO &
SMITH BARNEY FUNDS, INC. - MONTHLY PAYMENT GOVERNMENT PORTFOLIO
DATED April 28, 1995
<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
STATEMENT OF ADDITIONAL INFORMATION
OF
SMITH BARNEY FUNDS, INC.
DATED April 28, 1995
Part B
April 28, 1995
SMITH BARNEY FUNDS, INC.
388 Greenwich Street
New York, New York 10013
STATEMENT OF ADDITIONAL INFORMATION
Shares of Smith Barney Funds, Inc. (the "Fund") are offered
currently with a choice of six Portfolios: the Income and
Growth Portfolio, the U.S. Government Securities Portfolio,
the Monthly Payment Government Portfolio, the Income Return
Account Portfolio, the Utility Portfolio and the Short-Term
U.S. Treasury Securities Portfolio. (collectively referred
to as "Portfolios" and individually as "Portfolio").
This Statement of Additional Information is not a
prospectus. It is intended to provide more detailed
information about Smith Barney Funds, Inc. as well as
matters already discussed in the Prospectus of the
applicable Portfolio and therefore should be read in
conjunction with such Portfolio's Prospectus which may be
obtained from the Fund or a Smith Barney Financial
Consultant.
TABLE OF CONTENTS
Directors and Officers 2
Investment Policies 4
Investment Restrictions 7
Additional Tax Information 11
IRA and Other Prototype Retirement Plans 12
Performance Information 13
Valuation of Shares 16
Purchase and Redemption of Shares 17
Investment Management Agreement
and Other Services 17
Custodian 20
Independent Auditors 20
Voting 20
Financial Statements 26
Appendix - Ratings of Debt Obligations 27
DIRECTORS AND OFFICERS
*JESSICA M. BIBLIOWICZ, Director and President
Executive Vice President of Smith Barney Inc. ("Smith Barney");
Director of twelve investment companies associated with Smith
Barney, President of forty investment companies associated with
Smith Barney. Prior to January 1994, Director of Sales and
Marketing for Prudential Mutual Funds; Prior to September 1991,
Assistant Portfolio Manager for Shearson Lehman Brothers; 35.
RALPH D. CREASMAN, Director
Retired, 4 Moss Hammock Lane, The Landings, Skidaway Island,
Savannah, Georgia 31411. Director of ten investment companies
associated with Smith Barney. Formerly Chairman, President and
Chief Executive Officer of Lionel D. Edie & Co., Inc. (investment
counselors), Chairman of Edie International S.A. and President
and Director of Edie Ready Assets Trust, Fundamerica of Japan,
Edie Special Growth Fund and Edie Capital Fund; 73.
JOSEPH H. FLEISS, Director
Retired, 3849 Torrey Pines Blvd., Sarasota, Florida 34238.
Director of ten investment companies associated with Smith
Barney. Formerly Senior Vice President of Citibank, Manager of
Citibank's Bond Investment Portfolio and Money Management Desk
and a Director of Citicorp Securities Co., Inc; 77.
DONALD R. FOLEY, Director
Retired, 3668 Freshwater Drive, Jupiter, Florida 33477. Director
of ten investment companies associated with Smith Barney.
Formerly Vice President of Edwin Bird Wilson, Incorporated
(advertising); 72.
PAUL HARDIN, Director
Chancellor of the University of North Carolina at Chapel Hill,
University of North Carolina, 103 S. Building, Chapel Hill, North
Carolina 27599; Director of twelve investment companies
associated with Smith Barney; and a Director of The Summit
Bancorporation; 63.
FRANCIS P. MARTIN, Director
Practicing physician, 2000 North Village Avenue, Rockville
Centre, New York 11570. Director of ten investment companies
associated with Smith Barney. Formerly President of the Nassau
Physicians' Fund, Inc.; 70.
*HEATH B. McLENDON, Chairman of the Board and Chief Executive
Officer
Managing Director of Smith Barney ; Director of forty-one
investment companies associated with Smith Barney; President of
Smith Barney Mutual Funds Management Inc. (the "Manager");
Chairman of the Board of Smith Barney Strategy Advisors Inc.;
prior to July 1993, Senior Executive Vice President of Shearson
Lehman Brothers; Vice Chairman of the Board of Asset Management;
61.
RODERICK C. RASMUSSEN, Director
Investment Counselor, 81 Mountain Road, Verona, New Jersey 07044.
Director of ten investment companies associated with Smith
Barney. Formerly Vice President of Dresdner and Company Inc.
(investment counselors); 68.
* Designates an "interested person" as defined in the Investment
Company Act of 1940 whose business address is 388 Greenwich
Street, New York, New York 10013.
*BRUCE D. SARGENT, Director and Vice President
Managing Director of Smith Barney and Vice President and
Director of the Manager and of four investment companies
associated with Smith Barney; 51.
JOHN P. TOOLAN, Director
Retired, 13 Chadwell Place, Morristown, New Jersey 07960.
Director of ten investment companies associated with Smith
Barney. Formerly, Director and Chairman of Smith Barney Trust
Company, Director of Smith Barney Holdings Inc. and the Manager
and Senior Executive Vice President, Director and Member of the
Executive Committee of Smith Barney; 64.
C. RICHARD YOUNGDAHL, Director
Retired, 339 River Drive, Tequesta, Florida 33469. Director of
ten investment companies associated with Smith Barney and Member
of the Board of Directors of D.W. Rich & Company, Inc. Formerly
Chairman of the Board of Pensions of the Lutheran Church in
America, Chairman of the Board and Chief Executive Officer of
Aubrey G. Lanston & Co. (dealers in U.S. Government securities)
and President of the Association of Primary Dealers in U.S.
Government Securities; 79.
*LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Smith Barney, Senior Vice President and
Treasurer of forty-one investment companies associated with Smith
Barney, and Director and Senior Vice President the Manager; 37.
*PATRICK SHEEHAN, Vice President
Managing Director of Smith Barney and Vice President of two
investment companies associated with Smith Barney. Prior to
January 1992, Portfolio Manager of Value Line Inc., Senior Vice
President of Seaman's Bank for Savings, Assistant Vice President
of Capital Markets of Federal Home Loan Board of New York and
Vice President and Treasurer of Poughkeepsie Savings Bank; 47.
*THOMAS M. REYNOLDS, Controller and Assistant Secretary
Director of Smith Barney and Controller and Assistant Secretary
of ten investment companies associated with Smith Barney. Prior
to September 1991, Assistant Treasurer of Aquila Management
Corporation and its associated investment companies; 35.
*CHRISTINA T. SYDOR, Secretary
Managing Director of Smith Barney and Secretary of certain other
investment companies associated with Smith Barney and the
Manager; 44.
On April 11, 1995, directors and officers owned in the aggregate
less than 1% of the outstanding shares of each Portfolio.
* Designates an "interested person" as defined in the Investment
Company Act of 1940 whose business address is 388 Greenwich
Street, New York, New York 10013.
The following table shows the compensation paid by the Fund to
each incumbent director during the Fund's last fiscal year. None
of the oficers of the Fund received any compensation from the
Fund for such period. Officers and interested directors of the
Fund are compensated by Smith Barney.
COMPENSATION TABLE
Total
Pension or Compensation Number of
Retirement from Fund Funds for
AggregateBenefits Accrued and Fund Which
director
Compensation as part of Complex Serves Within
Name of Person from Fund Fund Expenses Paid to Directors
Fund Complex
Jessica M. Bibliowicz* $0 $0 $0 12
Ralph D. Creasman 10,254 0 51,500 10
Joseph H. Fleiss 10,254 0 50,900 10
Donal R. Foley 10,254 0 51,500 10
Paul Hardin 5,802 0 27,800** 12**
Heath B. McLendon* 0 0 0 41
Francis P. Martin 10,254 0 51,500 10
Roderick C. Rasmussen 10,254 0 51,500 10
Bruce D. Sargent* 0 0 0 3
John P. Toolan10,254 0 51,500 10
C. Richard Youngdahl 10,254 0 51,500 10
* Designates an "interested director".
** Reflects the compensation paid to Dr. Hardin and the number of
funds within the Fund Complex for which Dr. Hardin serves as a
director as of the date of this Statement of Additional
Information. For the fiscal year ended December 31, 1994, Mr.
Hardin served as a director of 25 funds within the Fund Complex
and was paid $96,400.
INVESTMENT POLICIES
The Articles of Incorporation of the Fund permit the Board of
Directors to establish additional Portfolios of the Fund from
time to time. The investment objectives, policies and
restrictions applicable to additional Portfolios would be
established by the Board of Directors at the time such Portfolios
were established and may differ from those set forth in the
Prospectus and this Statement of Additional Information.
The Fund effects portfolio transactions with a view towards
attaining the investment objectives of the Portfolios and is not
limited to a predetermined rate of portfolio turnover. A high
portfolio turnover results in correspondingly greater transaction
costs in the form of dealer spreads or brokerage commissions and
other transaction costs that a Portfolio will bear directly, and
may result in the realization of net capital gains which are
taxable when distributed to shareholders. See " Financial
Highlights" in the Prospectus and "Investment Management
Agreement and Other Services - Brokerage" in this Statement of
Additional Information.
Each Portfolio, other than the Short-Term U.S. Treasury
Securities Portfolio, may invest in investment grade bonds, i.e.
U.S. Government Obligations or bonds rated Aaa, Aa, A and Baa by
Moody's Investors Service, Inc. ("Moody's") or AAA, AA, A and BBB
by Standard & Poor's ("S&P").
Repurchase and Reverse Repurchase Agreements. Each Portfolio may
on occasion enter into repurchase agreements, wherein the seller
agrees to repurchase a security from the Portfolio at an agreed-
upon future date, normally the next business day. The resale
price is greater than the purchase price, which reflects the
agreed-upon rate of return for the period the Portfolio holds the
security and which is not related to the coupon rate on the
purchased security. The Fund requires continual maintenance of
the market value of the collateral in amounts at least equal to
the resale price, thus risk is limited to the ability of the
seller to pay the agreed-upon amount on the delivery date;
however, if the seller defaults, realization upon the collateral
by the Portfolio may be delayed or limited or the Portfolio might
incur a loss if the value of the collateral securing the
repurchase agreement declines and might incur disposition costs
in connection with liquidating the collateral. A Portfolio will
only enter into repurchase agreements with broker/dealers or
other financial institutions that are deemed creditworthy by the
Manager under guidelines approved by the Board of Directors. It
is the policy of the Fund not to invest in repurchase agreements
that do not mature within seven days if any such investment
together with any other illiquid assets held by a Portfolio
amount to more than 15% of that Portfolio's total assets.
The Fund has never entered into reverse repurchase agreements
even though it is permitted to do so on behalf of the Income
Return Account Portfolio, the U.S. Government Securities
Portfolio, the Monthly Payment Government Portfolio, and the
Utility Portfolio. The Fund does not currently intend to commit
to such agreements more than 5% of the net assets of any of these
four Portfolios, although the fundamental policies of the Income
Return Account Portfolio and the Utility Portfolio permit each
Portfolio to invest up to 1/3 of its total assets in reverse
repurchase agreements, and this right is reserved. Each of these
Portfolios may enter into reverse repurchase agreements with
broker/dealers and other financial institutions. Such agreements
involve the sale of Portfolio securities with an agreement to
repurchase the securities at an agreed-upon price, date and
interest payment and have the characteristics of borrowing.
Since the proceeds of borrowings under reverse repurchase
agreements are invested, this would introduce the speculative
factor known as "leverage." The securities purchased with the
funds obtained from the agreement and securities collateralizing
the agreement will have maturity dates no later than the
repayment date. Generally the effect of such a transaction is
that the Fund can recover all or most of the cash invested in the
portfolio securities involved during the term of the reverse
repurchase agreement, while in many cases it will be able to keep
some of the interest income associated with those securities.
Such transactions are only advantageous if the Portfolio has an
opportunity to earn a greater rate of interest on the cash
derived from the transaction than the interest cost of obtaining
that cash. Opportunities to realize earnings from the use of the
proceeds equal to or greater than the interest required to be
paid may not always be available, and the Fund intends to use the
reverse repurchase technique only when the Manager believes it
will be advantageous to the Portfolio. The use of reverse
repurchase agreements may exaggerate any interim increase or
decrease in the value of the participating Portfolio's assets.
The Fund's custodian bank will maintain a separate amount for the
Portfolio with securities having a value equal to or greater than
such commitments.
Securities Lending. Each Portfolio, other than the Income
Return Account Portfolio and the Short-Term U.S. Treasury
Securities Portfolio, may seek to increase its net investment
income by lending its securities provided such loans are callable
at any time and are continuously secured by cash or U.S.
Government Obligations equal to no less than the market value,
determined daily, of the securities loaned. The Portfolio will
receive amounts equal to dividends or interest on the securities
loaned. It will also earn income for having made the loan
because cash collateral pursuant to these loans will be invested
in short-term money market instruments. In connection with
lending of securities the Fund may pay reasonable finders,
administrative and custodial fees. Management will limit such
lending to not more than one-third of the value of the total
assets of each of the U.S. Government Securities Portfolio, the
Monthly Payment Government Portfolio, and the Utility Portfolio,
and the investment restriction of the Income and Growth Portfolio
limits it to less than 20% of such Portfolio's net assets. Where
voting or consent rights with respect to loaned securities pass
to the borrower, management will follow the policy of calling the
loan, in whole or in part as may be appropriate, to permit the
exercise of such voting or consent rights if the issues involved
have a material effect on the Portfolio's investment in the
securities loaned. Apart from lending its securities and
acquiring debt securities of a type customarily purchased by
financial institutions, none of the foregoing Portfolios will
make loans to other persons. The risks in lending portfolio
securities, as with other extensions of secured credit, consist
of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Loans will only
be made to borrowers whom the Manager deems to be of good
standing and will not be made unless, in the judgment of the
Manager, the interest to be earned from such loans would justify
the risk.
Foreign Investments. The Income and Growth Portfolio, and
the Utility Portfolio each may invest its assets in the
securities of foreign issuers. Investments in foreign securities
involve certain risks not ordinarily associated with investments
in securities of domestic issuers. Such risks include currency
exchange control regulations and costs, the possibility of
expropriation, seizure, or nationalization of foreign deposits,
less liquidity and volume and more volatility in foreign
securities markets and the impact of political, social, economic
or diplomatic developments or the adoption of other foreign
government restrictions that might adversely affect the payment
of principal and interest on securities in a Portfolio. If it
should become necessary, the Fund might encounter greater
difficulties in invoking legal processes abroad than would be the
case in the United States. In addition, there may be less
publicly available information about a non-U.S. company, and non-
U.S. companies are not generally subject to uniform accounting
and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies. Furthermore,
some of these securities may be subject to foreign brokerage and
withholding taxes.
For many foreign securities, there are U.S. dollar-
denominated American Depositary Receipts ("ADRs"), which are
traded in the United States on exchanges or over the counter and
are sponsored and issued by domestic banks. ADRs represent the
right to receive securities of foreign issuers deposited in a
domestic bank or a correspondent bank. ADRs do not eliminate all
the risk inherent in investing in the securities of foreign
issuers. However, by investing in ADRs rather than directly in
foreign issuers' stock, the Portfolio can avoid currency risks
during the settlement period for either purchases or sales. In
general, there is a large, liquid market in the United States for
many ADRs. The information available for ADRs is subject to the
accounting, auditing and financial reporting standards of the
domestic market or exchange on which they are traded, which
standards are more uniform and more exacting that those to which
many foreign issuers may be subject.
Restricted Securities. The Utility Portfolio may invest in
securities the disposition of which is subject to legal or
contractual restrictions. The sale of restricted securities
often requires more time and results in higher brokerage charges
or dealer discounts and other selling expenses than does the sale
of securities eligible for trading on a national securities
exchange that are not subject to restrictions on resale.
Restricted securities often sell at a price lower than similar
securities that are not subject to restrictions on resale.
Additional Policies - Income and Growth Portfolio and Utility
Portfolio
Although the Income and Growth Portfolio and the Utility
Portfolio may, as described below, sell short "against the box,"
buy or sell puts or calls and borrow money, the Income and Growth
Portfolio has not done so during the last fiscal year and neither
Portfolio has any intention of doing so in the foreseeable
future.
Although the Income and Growth Portfolio may lend money or
assets, as described in investment restriction 18 on page 11, the
Portfolio has not engaged in this practice within the last year
and does not currently intend to engage in loans other than short-
term loans.
While the Income and Growth Portfolio is permitted to invest
in warrants (including 2% or less of the Portfolio's total net
assets in warrants that are not listed on the New York Stock
Exchange or American Stock Exchange), the Portfolio has not
purchased any warrants during its last fiscal year and has no
intention of doing so in the foreseeable future. For purposes of
computing the foregoing percentage, warrants acquired by the
Portfolio in units or attached to securities will be deemed to be
without value.
In addition, although each of the Income and Growth
Portfolio and the Utility Portfolio may buy or sell put and call
options up to 15% of its net assets, provided such options are
listed on a national securities exchange, neither Portfolio has
done so in the last year, and neither Portfolio currently intends
to commit more than 5% of its assets to be invested in or subject
to put and call options. A "call option" gives a holder the
right to purchase a specific stock at a specified price referred
to as the "exercise price," within a specific period of time
(usually 3, 6, or 9 months). A "put option" gives a holder the
right to sell a specific stock at a specified price within a
specified time period. The initial purchaser of a call option
pays the "writer" a premium, which is paid at the time of
purchase and is retained by the writer whether or not such option
is exercised. Put and call options are currently traded on The
Chicago Board Options Exchange and several other national
exchanges. Institutions, such as the Fund, that sell (or
"write") call options against securities held in their investment
portfolios retain the premium. If the writer determines not to
deliver the stock prior to the option's being exercised, the
writer may purchase in the secondary market an identical option
for the same stock with the same price and expiration date in
fulfillment of the obligation. In the event the option is
exercised the writer must deliver the underlying stock to fulfill
the option obligation. The brokerage commissions associated with
the buying and selling of call options are normally
proportionately higher than those associated with general
securities transactions.
In selecting investments, the Utility Portfolio will use the
following criteria: the company must have a good earnings
record; the company must have experienced management; the
security must have competitive yields; and the utility must have
a favorable regulatory climate and be located within a growing
service area.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and
fundamental policies that cannot be changed without approval by a
"vote of a majority of the outstanding voting securities" of each
Portfolio affected by the change as defined in the Investment
Company Act of 1940 (the "Act") and Rule 18f-2 thereunder (see
"Voting").
Without the approval of a majority of its outstanding voting
securities the Income and Growth Portfolio may not:
1. Invest more than 5% of the value of its total assets in
any one issuer (except securities of the U.S. Government and its
instrumentalities); 2. Invest more than 25% of the value of its
total assets in any one industry; 3. Invest more than 5% of its
total assets in issuers with less than three years of continuous
operation (including that of predecessors) or so-called
"unseasoned" equity securities that are not either admitted for
trading on a national stock exchange or regularly quoted in the
over-the-counter market; 4. Purchase more than 10% of any class
of outstanding securities, or any class of voting securities, of
any one issuer; 5. Purchase any securities on margin; 6. Make
short sales of securities or maintain a short position unless at
all times when a short position is open, the Portfolio owns or
has the right to obtain, at no added cost, securities identical
to those sold short; 7. Borrow money, except as a temporary
measure for extraordinary or emergency purposes, and then not in
excess of the lesser of 10% of its total assets taken at cost or
5% of the value of its total assets; 8. Mortgage or pledge any
of its assets; 9. Act as a securities underwriter or invest in
real estate or commodities (the purchase by the Portfolio of
securities for which there is an established market of companies
engaged in real estate activities or investments shall not be
deemed to be prohibited by this fundamental investment
limitation); 10. Invest in securities of another investment
company except as permitted by Section 12(d)(1) of the Investment
Company Act of 1940 or as part of a merger, consolidation, or
acquisition; 11. Invest in or hold securities of an issuer if
those officers and directors of the Fund, its Adviser, or Smith
Barney owning beneficially more than 1/2 of 1% of the securities
of such issuer together own more than 5% of the securities of
such issuer; 12. Invest in "restricted securities", that is,
securities which at the time of purchase by the Portfolio would
have to be registered under the Securities Act of 1933 before
they could be sold; 13. Invest in any company for the purpose of
exercising control of management; 14. Have more than 15% of its
net assets at any time invested in or subject to puts, calls or
combinations thereof and may not purchase or sell options that
are not listed on a national securities exchange; 15. Invest in
interests in oil or gas or other mineral exploration or
development programs; 16. Participate on a joint or joint and
several basis in any securities trading account; 17. Purchase or
sell any securities other than shares of the Fund from or to the
Adviser or any officer or director of the Adviser or the Fund;
and 18. Lend money or assets, except that the Portfolio may
purchase a portion of issues of publicly distributed bonds,
debentures or notes and may invest in certificates of deposit or
commercial paper, and may lend a portion of its portfolio
securities to broker-dealers and financial institutions, provided
that any such loan must be secured at all times by cash or U.S.
Government Obligations equal at all times to at least 100% of the
market value of the portfolio securities loaned. The Portfolio
will not make a portfolio securities loan if immediately
thereafter as a result thereof, portfolio securities with a
market value of 20% or more of the Portfolio's total net assets
would be subject to such loans.
Without the approval of a majority of its outstanding voting
securities the U.S. Government Securities Portfolio and the
Monthly Payment Government Portfolio each may not:
1. Purchase any securities other than obligations issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities, some of which may be subject to repurchase
agreements. There is no limit on the amount of its assets which
may be invested in the securities of any one issuer of such
obligations; 2. Purchase securities on margin, sell securities
short (provided however each Portfolio may sell short if it
maintains a segregated account of cash or U.S. Government
Obligations with the Custodian, so that the amount deposited in
it plus the collateral deposited with the broker equals the
current market value of the securities sold short and is not less
than the market value of the securities at the time they were
sold short) or purchase mortgage-related securities issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities); 3. Borrow money, except from banks for
temporary purposes and then in amounts not in excess of 5% of the
value of each Portfolio's assets at the time of such borrowing;
or mortgage, pledge or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess
of 7 1/2% of the value of the Fund's assets at the time of such
borrowing. (This borrowing provisions is not for investment
leverage, but solely to facilitate management of each Portfolio
by enabling each Portfolio to meet redemption requests where the
liquidation of portfolio securities is deemed to be
disadvantageous or inconvenient.) Borrowings may take the form
of a sale of portfolio securities accompanied by a simultaneous
agreement as to their repurchase; 4. Make loans, except through
the purchase of debt obligations (described in restriction 1
above), repurchase agreements and loans of each Portfolio's
securities; and 5. Act as an underwriter of securities except to
the extent the Fund may be deemed to be an underwriter in
connection with the sale of portfolio holdings.
Without the approval of a majority of its outstanding voting
securities the Income Return Account Portfolio may not:
1. Purchase common stocks, preferred stocks, warrants,
other equity securities or municipal obligations; 2. Borrow
money except from banks for temporary purposes in an amount up to
10% of the value of its total assets and may pledge its assets in
an amount up to 10% of the value of its total assets only to
secure such borrowings. The Portfolio will borrow money only to
accommodate requests for the redemption of shares while effecting
an orderly liquidation of portfolio securities or to clear
securities transactions and not for leveraging purposes. This
restriction shall not be deemed to prohibit the Portfolio from
entering into reverse repurchase agreements so long as not more
than 33 1/3% of the Portfolio's total assets are subject to such
agreements; 3. With respect to 75% of its assets, invest more
than 5% of its assets in the securities of any one issuer, except
securities issued or guaranteed as to principal and interest by
the U.S. Government, its agencies or instrumentalities; 4.
Purchase securities on margin or sell securities short; 5. Write
or purchase put or call options; 6. Underwrite the securities of
other issuers or knowingly purchase securities subject to
restrictions on disposition under the Securities Act of 1933
(i.e. "restricted securities"); 7. Purchase or sell commodities
or commodity futures contracts, oil and gas interests or real
estate (however, the Portfolio may purchase mortgage-related
securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities); 8. Make loans to others (except
through the purchase of debt obligations as described in the
Fund's then current Prospectus), except that the Fund may
purchase and simultaneously resell for later delivery,
obligations issued or guaranteed as to principal and interest by
the U.S. Government or its agencies or instrumentalities;
provided, however, that the Portfolio will not enter into such a
repurchase agreement if, as a result thereof, more than 10% of
its total assets (taken at current value) at that time would be
subject to repurchase agreements maturing in more than seven
days; 9. Invest in companies for the purpose of exercising
control;
10. Invest in securities of other investment companies, except
as they may be acquired as part of a merger, consolidation or
acquisition of assets; 11. Purchase any securities, other than
obligations of the U.S. Government, its agencies or its
instrumentalities, if immediately after such purchase more than
25% of the Portfolio's total assets would be invested in the
securities of issuers in the same industry; and 12. Issue senior
securities as defined in the Act except insofar as the Fund may
be deemed to have issued a senior security by reason of (a)
entering into any repurchase agreement or reverse repurchase
agreement; or (b) permitted borrowings of money.
Without the approval of a majority of its outstanding voting
securities, the Utility Portfolio may not:
1. With respect to 75% of its total assets, invest more
than 5% of its total assets in the securities of any single
issuer (except securities of the U.S. Government and its agencies
and instrumentalities); 2. Invest more than 25% of its total
assets in a particular industry, except that the Portfolio will
invest more than 25% of its total assets in the securities of
utility companies; 3. Purchase more than 10% of the outstanding
voting securities of an issuer; 4. Purchase any securities on
margin; 5. Make short sales of securities or maintain a short
position unless at all times when a short position is open, the
Portfolio owns or has the right to obtain, at no added cost,
securities identical to those sold short; 6. Purchase or sell
real estate or interests therein, although the Portfolio may
purchase securities of issuers which engage in real estate
operations and securities secured by real estate or interests
therein; 7. Invest in securities of another investment company
except by purchase in the open market involving only customary
brokerage commissions or as part of a merger, consolidation, or
acquisition; 8. Purchase or sell puts, calls, straddles, spreads
or combinations thereof except as described in this Statement of
Additional Information and may not purchase or sell options that
are not listed on a national securities exchange; 9. Purchase
oil, gas or other mineral leases, rights or royalty contracts or
exploration or development programs, except that the Portfolio
may invest in the securities of companies which operate, invest
in, or sponsor such programs; 10. Borrow money (including
borrowings through entering into reverse repurchase agreements)
in excess of 33 1/3% of its total assets (including the amount of
money borrowed but excluding any liabilities and indebtedness not
constituting senior securities), or letters of credit solely for
purposes of participating in a captive insurance company
sponsored by the Investment Company Institute to provide fidelity
and directors and officers liability insurance, or pledge its
assets other than to secure such borrowings or in connection with
short sales, when-issued and delayed delivery transactions and
similar investment strategies. Whenever borrowings exceed 5% of
the value of the Portfolio's total assets, the Portfolio will not
make any additional investments; and 11. Make loans, except the
Portfolio may purchase debt obligations, may enter into
repurchase agreements and may lend securities.
In order to comply with certain state statutes and policies,
the Utility Portfolio also will not, as a matter of operating
policy:
1. Purchase puts, calls, straddles, spreads, and any
repurchase thereof if by reason thereof the value of its
aggregate investment in such classes of securities will exceed 5%
of its total assets; 2. Make illiquid investments, i.e.,
purchase securities which cannot be readily resold to the public
because of legal or contractual restrictions on resale or for
which no readily available market exits or engage in a repurchase
agreement maturing in more than seven days if, as a result
thereof, more than 10% of the value of the total assets of the
Portfolio could be invested in such securities; 3. Purchase any
security if as a result the Portfolio would then have more than
5% of its total assets (taken at current value) invested in
securities of companies (including predecessors) that have been
in operation for less that three years or in equity securities
for which market quotations are not readily available; 4.
Purchase or sell commodities or commodity futures contracts or
options thereon, or interests in commodity pools; 6. Purchase or
retain the securities of any issuer if the officers and directors
of the Fund or its investment adviser owning beneficially more
than 1/2 of 1% of the issuer's securities together own
beneficially more than 5% of the issuer's securities; and 7.
Purchase warrants if as a result the Portfolio would then have
more than 5% of its net assets (determined at the time of
investment) invested in warrants. Warrants will be valued at the
lower of cost or market and investment in warrants which are not
listed on the New York Stock Exchange or the American Stock
Exchange will be limited to 2% of the Portfolio's net assets
(determined at the time of investment). For the purpose of this
limitation, warrants acquired in units or attached to securities
are deemed to be without value.
Without the approval of a majority of its outstanding voting
securities, the Short-Term U.S. Treasury Securities Portfolio may
not:
1. Invest more than 5% of the value of its total assets in
the securities of any one issuer (other than obligations issued
or guaranteed by the United States Government, its agencies or
instrumentalities); 2. Purchase common stocks, preferred stocks,
warrants, other equity securities, corporate bonds, municipal
bonds or industrial revenue bonds; 3. Borrow money except from
banks for temporary purposes in an amount up to 10% of the value
of its total assets. The Portfolio will borrow money only to
accommodate requests for the redemption of shares while effecting
an orderly liquidation of portfolio securities or to clear
securities transactions and may not for leveraging purposes.
Whenever borrowings exceed 5% of the value of the Portfolio's
total assets, the Portfolio will not make any additional
investments. This restriction will not be deemed to prohibit the
Fund from obtaining letters of credit solely for purpose of
participating in a captive insurance company sponsored by the
Investment Company Institute to provide fidelity and directors
and officers liability insurance; 4. Pledge, hypothecate,
mortgage or otherwise encumber its assets, except in an amount up
to 10% of the value of its total assets, but only to secure
borrowings for temporary purposes; 5. Sell securities short or
purchase securities on margin; 6. Write or purchase put or call
options; 7. Underwrite the securities of other issuers or
purchase restricted securities; 8. Purchase or sell real estate,
real estate investment trust securities, commodities or commodity
contracts or oil and gas interests; 9. Make loans to others
except through the purchase of qualified debt obligations in
accordance with the Portfolio's investment objective and
policies; 10. Issue senior securities as defined in the Act
except insofar as the Portfolio may be deemed to have issued a
senior security by reason of: (a) borrowing money in accordance
with restrictions described above or (b) by purchasing securities
on a when-issued or delayed delivery basis or purchasing or
selling securities on a forward commitment basis; and 11. Invest
in securities of other investment companies, except as they may
be acquired as part of a merger, consolidation, acquisition of
assets or plan of reorganization.
The foregoing percentage restrictions apply at the time an
investment is made; a subsequent increase or decrease in
percentage may result from changes in values or net assets.
ADDITIONAL TAX INFORMATION
The following summary addresses the principal United States
income tax considerations regarding the purchase, ownership and
disposition of shares in a Portfolio of the Fund.
General.
Each Portfolio within the Fund is generally treated as a
separate corporation for federal income tax purposes, and thus
the provisions of the Internal Revenue Code of 1986, as amended
(the "Code") generally will be applied to each Portfolio
separately, rather than to the Fund as a whole. For tax purposes
therefor, net long-term and short-term capital gains, net income
and operating expenses will be determined separately for each
Portfolio.
Each Portfolio within the Fund intends to qualify and elect
to be treated for each taxable year as a "regulated investment
company" under Sections 851-855 of the Code. To so qualify, each
Portfolio must, among other things, (i) derive at least 90% of
its gross income in each taxable year from dividends, interest,
proceeds from loans of stock and securities, gains from the sale
or other disposition of stock, securities or foreign currency, of
certain other income (including but not limited to gains from
options, futures and forward contracts) derived from its business
of investing stock, securities or currency; (ii) derive less than
30% of its gross income in each taxable year from the sale or
other disposition of any of the following which was held for less
than three months: (a) stocks or securities, (b) options, futures
or forward contracts (other than options, futures or forward
contracts on foreign currency), but only if such currency (or
options futures of forward contracts) is not directly related to
each Portfolio's principal business of investing in stock or
securities (or options or futures with respect to stock or
securities); and (iii) diversify its holding so that , at the end
of each quarter of its taxable years, the following two
conditions are met: (a) at least 50% of the market value of the
Portfolio's total assets is represented by cash, U.S. Government
securities, securities of other regulated investment companies
and other securities, with such other securities limited, in
respect of any one issuer, to an amount not greater than 5% of
the Portfolio's assets and not more than 10% of the outstanding
voting securities of such issuer; and (b) not more than 25% of
the value of the Portfolio's assets is invested in securities of
any one issuer (other than U.S. Government securities or
securities of other regulated investment companies). The
diversification requirements described above may limit a
Portfolio's ability to engage in hedging transactions by writing
or buying options or by entering into futures or forward
contracts.
At December 31, 1994 the unused capital loss carryovers of
the Fund by Portfolio were approximately as follows: U.S.
Government Securities Portfolio, $31,251,158; Monthly Payment
Government Portfolio, $2,102,900; Income Return Account
Portfolio, $1,816,221; and Short-Term U.S. Treasury Portfolio,
$3,929,597. For federal income tax purposes, these amounts are
available to be applied against future securities gains, if any,
realized. The carryovers expire as follows:
December 31,
(in thousands)
1995 1996 1997 2002
U.S. Government Securities Portfolio $27,365$ 392$898 $2,596
Monthly Payment Government Portfolio 1,673 --- --- 430
Income Return Account Portfolio --- 1,032 237 547
Short-Term U.S. Treasury --- --- --- 3,930
Distributions
If the net asset value of shares of a Portfolio is reduced
below a shareholder's costs as a result of a distribution by the
Portfolio, such distribution will be taxable even though it
represents a return of invested capital.
Redemption of Shares.
Any gain or loss realized on the redemption or exchange of
Portfolio shares by a shareholder who is not a dealer in
securities will be treated as long-term capital loan or loss if
the shares have been held for more than one year, and otherwise
as short-term capital gain or loss.
However, any loss realized by a shareholder upon the
redemption or exchange of Portfolio shares held six months or
less will be treated as a long-term capital loss to the extent of
any long-term capital gain distributors received by the
shareholder with respect to such shares. Additionally, any loss
realized on a redemption or exchange of Portfolio shares will be
disallowed to the extent the shares disposed of are replaced
within a period of 61 days beginning 30 days before and ending 30
days after such disposition, such as pursuant to reinvestment of
dividends in Portfolio shares.
IRA AND OTHER PROTOTYPE RETIREMENT PLANS
Copies of the following plans with custody or trust agreements
have been approved by the Internal Revenue Service and are
available from the Fund or Smith Barney; investors should consult
with their own tax or retirement planning advisors prior to the
establishment of a plan.
IRA, Rollover IRA and Simplified Employee Pension - IRA
The Tax Reform Act of 1986 (the "Tax Reform Act") changed the
eligibility requirements for participants in Individual
Retirement Accounts ("IRAs"). Under the Tax Reform Act's new
provisions, if you or your spouse has earned income and neither
your nor your spouse is an active participant in any employer-
sponsored retirement plan, each of you may establish an IRA and
make maximum annual contributions equal to the lesser of earned
income or $2,000. If your spouse is not employed, you may
contribute and deduct on your joint venture a total of $2,250
between two IRA's.
If you or you spouse is an active participant in an employer-
sponsored retirement plan, a deduction for contributions to an
IRA might still be allowed in full or in part, depending on your
combined adjusted gross income. For married couples filing
jointly, a full deduction of contributions to an IRA will be
allowed where the couples' adjusted gross income is below $40,001
($25,001 for an unmarried individual); a partial deduction will
be allowed when adjusted gross income is between $40,001 -
$50,000 ($25,001 - $35,000 for an unmarried individual); and no
deduction when adjusted income is $50,000 ($35,000 for an
unmarried individual). Shareholders should consult their tax
advisors concerning the effects of the Tax Reform Act on the
deductibility of their IRA contributions.
A Rollover IRA is available to defer taxes on lump sum
payments and other qualifying rollover amounts (no maximum)
received from another retirement plan.
An employer who has established a Simplified Employee Pension
- IRA ("SEP-IRA") on behalf of eligible employees may make a
maximum annual contribution to each participant's account of 15%
(up to $22,500) of each participant's compensation.
In addition, certain small employers (those who have 25 or
fewer employees) can establish a Simplified Employees Pension
Plan - Salary Reduction Plan ("SEP - Salary Reduction Plan")
under which employees can make elective pre-tax contributions of
up to $9,240 of gross income. Consult your tax advisor for
special rules regarding establishing either type of SEP.
An ERISA disclosure statement providing additional details is
included with each IRA application sent to participants.
Paired Defined Contribution Prototype
Corporations (including Subchapter S corporations) and non-
corporate entities may purchase shares of the Fund through the
Smith Barney Prototype Paired Defined Contribution Plan. The
prototype permits adoption of profit-sharing provisions, money
purchase pension provisions, or both, to provide benefits for
eligible employees and their beneficiaries. The prototype
provides for a maximum annual tax deductible contribution on
behalf of each Participant of up to 25% of compensation, but not
to exceed $30,000 (provided that a money purchase pension plan or
both a profit-sharing plan and a money purchase pension plan are
adopted thereunder).
PERFORMANCE INFORMATION
From time to time the Fund may advertise a Portfolio's total
return, average annual total return and yield in advertisements.
In addition, in other types of sales literature the Fund may also
advertise a Portfolio's current dividend return. These figures
are based on historical earnings and are not intended to indicate
future performance. The total return shows what an investment in
the Portfolio would have earned over a specified period of time
(one, five or ten years) assuming the payment of the maximum
sales load when the investment was first made, that all
distributions and dividends by the Portfolio were reinvested on
the reinvestment dates during the period less the maximum sales
load charged upon reinvestment and less all recurring fees. The
average annual total return is derived from this total return,
which provides the ending redeemable value. The Fund may also
quote a Portfolio's total return for present shareholders that
eliminates the sales charge on the initial investment.
Each Portfolio's average annual total return with respect to
its Class A Shares for the one-year period, five-year period, if
any, and for the life of the Portfolio (except for the Income &
Growth Portfolio and U.S. Government Securities Portfolio which
displays performance data for ten years) ended December 31, 1994
is as follows:
One Year Five Years Life Inception Date
Income & Growth(9.10)%5.38%11.10%* 2/26/72
Income Return0.05 6.16 7.15 3/4/85
U.S. Government(5.89) 6.46 8.99* 10/9/84
Monthly Payment(5.83) 6.38 7.57 4/16/86
Utility (13.14) N/A 4.90 12/28/90
Short-Term U.S.(2.15) N/A 3.98 11/11/91
* Representative of ten years, not life of the Income & Growth
Portfolio and U.S. Government Securities Portfolio.
Each Portfolio's average annual total return with respect to its
Class B Shares (where applicable) for the life of such
Portfolio's Class B shares through December 31, 1994 is as
follows:
Portfolio Life Inception Date
Income & Growth (6.22)% 11/7/94
Utility (3.18) 11/7/94
U.S. Gov't (2.46) 11/7/94
Monthly Payment (2.86) 11/10/94
Each Portfolio's average annual total return with respect to its
Class C Shares (where applicable) for the one-year period and
life of such Portfolio's Class C shares through December 31, 1994
is as follows:
Portfolio One Year Life Inception Date
Income & Growth (5.86)% 4.88% 12/2/92
Utility (10.10) 0.77 12/2/92
Income Return 0.86 2.79 12/16/92
U.S. Government (3.09) 2.19 12/2/92
Monthly Payment (3.05) 2.26 12/2/92
Each Portfolio's average annual total return with respect to its
Class Y Shares (where applicable) for the life of such
Portfolio's Class Y shares through December 31, 1994 is as
follows:
Portfolio Life Inception Date
Income Return 2.63% 2/1/93
U.S. Government 1.98 1/12/93
Each Portfolio's average annual total return with respect to its
Class Z Shares (where applicable) for the life of such
Portfolio's Class Z shares through December 31, 1994 is as
follows:
Portfolio Life Inception Date
Income Return 0.38% 11/7/94
U.S. Government 2.15 11/7/94
Income & Growth (0.73) 11/7/94
Note that effective October 3, 1994 Class C shares were
reclassified as additional Class A shares with respect to the
Income and Growth Portfolio, the Utility Portfolio and the
Capital Appreciation Portfolio and that effective November 7,
1994 Class C shares were redesignated Class Y shares with respect
to the U.S. Government Securities Portfolio, the Monthly Payment
Government Portfolio and the Income Return Account Portfolio.
Note further that effective November 7, 1994 then existing Class
B shares of each Portfolio were designated as Class C shares.
Each Portfolio (except the Short-Term U.S. Treasury Securities
Portfolio) began to offer new Class B shares on November 7, 1994.
Each Portfolio's yield is computed by dividing the net
investment income per share earned during a specified thirty day
period by the maximum offering price per share on the last day of
such period and annualyzing the result. For purposes of the
yield calculation, interest income is determined based on a yield
to maturity percentage for each long-term debt obligation in the
Portfolio; income on short-term obligations is based on current
payment rate.
The Fund calculates current dividend return for the U.S.
Government Securities Portfolio by analyzing the most recent
quarterly distribution from investment income, including net
equalization credits or debits, and dividing by the net asset
value or the maximum public offering price (including sales
charge) on the last day of the period for which current dividend
return is presented. The Fund calculates current dividend return
for the Income and Growth Portfolio and the Utility Portfolio by
dividing the dividends from investment income declared during the
most recent twelve months by the net asset value or the maximum
public offering price (including sales charge) on the last day of
the period for which current dividend return is presented. The
Fund calculates current dividend return for the Capital
Appreciation Portfolio by dividing the distribution from
investment income declared during the most recent six-month
period by the net asset value or the maximum public offering
price (including sales charge) on the last day of the period for
which current dividend return is presented. The Fund calculates
current dividend return for the Monthly Payment Government
Portfolio, the Income Return Account Portfolio and the Short-Term
U.S. Treasury Securities Portfolio by analyzing the most recent
monthly distribution, including net equalization credits and
debits, and dividing by the net asset value or the maximum public
offering price (including sales charge) on the last day of the
period for which current dividend return is presented. From time
to time, the Fund may include a Portfolio's current dividend
return in information furnished to present or prospective
shareholders and in advertisements.
A Portfolio's current dividend return may vary from time to
time depending on market conditions, the composition of its
investment portfolio and operating expenses. These factors and
possible differences in the methods used in calculating current
dividend return should be considered when comparing the
Portfolio's current dividend return to yields published for other
investment companies in other investment vehicles. Current
dividends return should also be considered relative to changes in
the value of the Portfolio's shares and to the risks associated
with the Portfolio's investment objective and policies. For
example, in comparing current dividend returns with those offered
by Certificates of Deposit ("CDs"), it should be noted that CDs
are insured (up to $100,000) and offer a fixed rate of return.
Returns of the Income Return Account Portfolio and the Short-Term
U.S. Treasury Securities Portfolio may from time to time be
compared with returns of money market funds measured by
Donoghue's Money Fund Report, a widely-distributed publication on
money market funds.
Performance information may be useful in evaluating a Portfolio
and for providing a basis for comparison with other financial
alternatives. Since the performance of each Portfolio changes in
response to fluctuations in market conditions, interest rates and
Portfolio expenses, no performance quotation should be considered
a representation as to the Portfolio's performance for any future
period.
Smith Barney Funds - Income and Growth Portfolio
Historic Highs
(Ten $1,000 annual investments at the highest offering price.)
Date of the Year's High Price
For the Income and
Growth Portfolio Maximum Offering Shares
(1985-1994) Price
Purchased
12/20/85 $10.93 91.491
9/14/86 12.67 78.927
8/14/87 14.12 70.822
10/21/88 12.03 83.126
9/1/89 14.14 70.721
1/12/90 12.83 77.942
11/13/91 13.26 75.415
8/4/92 13.64 73.314
12/13/93 14.80 67.568
1/31/94 14.39 69.493
VALUATION OF SHARES
The net asset value of each Portfolio's Classes of shares will
be determined on any day that the New York Stock Exchange is
open. The New York Stock Exchange is closed on the following
holidays: New Year's Day, President's Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas
Day.
PURCHASE AND REDEMPTION OF SHARES
The Fund has committed itself to pay in cash all requests for
redemption by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net
asset value of the Fund at the beginning of such period. Such
commitment is irrevocable without the prior approval of the
Securities and Exchange Commission. Redemptions in excess of the
above limit may be paid in portfolio securities, in cash or any
combination or both, as the Board of Directors may deem
advisable; however, payments shall be made wholly in cash unless
the Board of Directors believes that economic conditions exist
that would make such a practice detrimental to the best interests
of the Fund and its remaining shareholders. If a redemption is
paid in portfolio securities, such securities will be valued in
accordance with the procedures described under "Valuation of
Shares" in the Prospectus and a shareholder would incur brokerage
expenses if these securities were then converted to cash.
INVESTMENT MANAGEMENT AGREEMENT AND OTHER SERVICES
Manager
For the year 1992, 1993 and 1994 the management fees for each
Portfolio were as follows:
Portfolio 1992 1993 1994
U.S. Gov't$$1,892,949$2,178,838$1,987,629
Income Return189,754 257,413 208,151
Monthly Payment188,472235,187 226,622
Utility 689,892 799,734 557,472
Inc. and Growth 3,381,0083,654,3784,079,437
Short-Term Treas. 557,833808,698735,555
Pursuant to the Management Agreement, the management fee for
each of the Income and Growth Portfolio and the Utility Portfolio
is calculated at a rate in accordance with the following
schedule: 0.60% of the first $500 million of average daily net
assets; 0.55% of the next $500 million; and 0.50% of average
daily net assets over $1 billion. The management fee for the
U.S. Government Securities Portfolio, the Monthly Payment
Government Portfolio and the Income Return Account Portfolio is
calculated at a rate in accordance with the following schedule:
0.50% of the first $200 million of aggregate average daily net
assets of the three Portfolios, and 0.40% of the aggregate
average daily net assets of the three Portfolios in excess of
$200 million. The management fee for the Short-Term U.S.
Treasury Securities Portfolio is calculated at the annual rate of
0.45% of such Portfolios average daily net assets.
The Management Agreement for each of the Fund's Portfolios
further provides that all other expenses not specifically assumed
by the Manager under the Management Agreement on behalf of the
Portfolio are borne by the Fund. Expenses payable by the Fund
include, but are not limited to, all charges of custodians
(including sums as custodian and sums for keeping books and for
rendering other services to the Fund) and shareholder servicing
agents, expenses of preparing, printing and distributing all
prospectuses, proxy material, reports and notices to
shareholders, all expenses of shareholders' and directors'
meetings. filing fees and expenses relating to the registration
and qualification of the Fund's shares and the Fund under Federal
or state securities laws and maintaining such registrations and
qualifications (including the printing of the Fund's registration
statements), fees of auditors and legal counsel, costs of
performing portfolio valuations, out-of-pocket expenses of
directors and fees of directors who are not "interested persons"
as defined in the Act, interest, taxes and governmental fees,
fees and commissions of every kind, expenses of issue, repurchase
or redemption of shares, insurance expense, association
membership dues, all other costs incident to the Fund's existence
and extraordinary expenses such as litigation and indemnification
expenses. Direct expenses are charged to each Portfolio; general
corporate expenses are allocated on the basis of relative net
assets.
Plan of Distribution
Pursuant to a Plan of Distribution adopted by the Fund on
behalf of each Portfolio under Rule 12b-1 under the Investment
Company Act of 1940 (the "Plan"), Smith Barney incurs the
expenses of distributing each Portfolio's Class A, Class B, Class
C and Class Y shares. See "Distributor" in each Portfolio's
applicable Prospectus.
For the year ended December 31, 1994, the table below
represents the fees which have been accrued and/or paid to Smith
Barney under the Plans of Distribution pursuant to Rule 12b-1
for the Fund's Portfolios. The distribution expenses for 1994
included compensation of Financial Consultants and printing costs
of prospectuses and marketing materials.
Portfolio Class A Class B Class C Class Y Total
U.S. Gov't $232,042 $1,230$159,261 $18,269 $410,802
Income Return N/A N/A 12,920 7,682 20,602
Monthly Payment N/A 0 23,791 N/A 50,511
Utility 211,655 340 82,164 N/A 294,159
Inc. and Growth1,779,433 257 282,942 N/A 2,062,633
Short-Term Treas.572,083 N/A N/A 0 572,083
During the fiscal years 1992 and 1993 aggregate sales
commissions of $8,668,237 and $8,756,000 respectively, were paid
to Smith Barney by the purchasers of Fund shares. For the
fiscal year 1994, aggregate sales commissions of approximately
$1,992,000 were paid to Smith Barney by the purchasers of Fund
shares. A contingent deferred sales charge ("CDSC") may be
imposed on certain redemptions of Class A, Class B shares and
Class C shares. The amount of the CDSC will depend on the number
of years since the shareholder made the purchase payment from
which the amount is being redeemed. For Class B shares, for each
of the Income and Growth Portfolio and the Utility Portfolio the
maximum CDSC is 5.00% of redemption proceeds, declining by 1.00%
each year after the date of purchase to zero. For Class B shares
of each of the U.S. Government Securities Portfolio and the
Monthly Payment Government Portfolio the maximum CDSC is 4.50% of
redemption proceeds, declining by 0.50% the first year after
purchase and by 1.00% each year thereafter to zero. A CDSC of
1.00% is imposed on redemptions of Class A which when combined
with Class A shares offered with a sales charge currently held by
an investor equal or exceed $500,000 in the aggregate and Class C
shares if such redemptions occur within 12 months from the date
such investment was made. Any sales charge imposed on
redemptions is paid to the distributor of the Fund shares.
Note that effective October 3, 1994 Class C shares were
reclassified as additional Class A shares with respect to the
Income and Growth Portfolio, the Utility Portfolio and the
Capital Appreciation Portfolio and that effective November 7,
1994 Class C shares were redesignated Class Y shares with respect
to the U.S. Government Securities Portfolio, the Monthly Payment
Government Portfolio and the Income Return Account Portfolio.
Note further that effective November 7, 1994 Class B shares of
each Portfolio were designated as Class C shares.
Each Portfolio (except the Short-Term U.S. Treasury Securities
Portfolio) began to offer new Class B shares on November 7, 1994.
Brokerage
The Manager is responsible for allocating the Fund's brokerage.
Orders may be directed to any broker including, to the extent and
in the manner permitted by applicable law, Smith Barney. Smith
Barney has acted as the Fund's principal broker on behalf of the
Income and Growth Portfolio and the Utility Portfolio (no
commissionable transactions have been paid to date on behalf of
the U.S. Government Securities Portfolio, the Monthly Payment
Government Portfolio or the Income Return Account Portfolio, or
the Short-Term U.S. Treasury Securities Portfolio) and has
received a substantial portion of brokerage fees paid by such
Portfolios. No Portfolio will deal with Smith Barney in any
transaction in which Smith Barney acts as principal.
The Fund attempts to obtain the most favorable execution of
each portfolio transaction, that is, the best combination of net
price and price and prompt reliable execution. In the opinion of
the Manager or the Subadviser, as the case may be, however, it is
not possible to determine in advance that any particular broker
will actually be able to effect the most favorable execution
because, in the context of a constantly changing market, order
execution involves judgments as to price, commission rates,
volume, the direction of the market and the likelihood of future
change. In making its decision as to which broker or brokers are
most likely to provide the most favorable execution, the
management of the Fund takes into account the relevant
circumstances. These include, in varying degrees, the size of
the order, the importance of prompt execution, the breadth and
trends of the market in the particular security, anticipated
commission rates, the broker's familiarity with such security
including its contacts with possible buyers and sellers and its
level of activity in the security, the possibility of a block
transaction and the general record of the broker for prompt,
competent and reliable service in all aspects of order
processing, execution and settlement.
Commissions are negotiated and take into account the difficulty
involved in execution of a transaction, the time it took to
conclude, the extent of the broker's commitment of its own
capital, if any, and the price received. Anticipated commission
rates are an important consideration in all trades and are
weighed along with the other relevant factors affecting order
execution set forth above. In allocating brokerage among those
brokers who are believed to be capable of providing equally
favorable execution, the Fund takes into consideration the fact
that a particular broker may, in addition to execution
capability, provide other services to the Fund such as research
and statistical information. It is not possible to place a
dollar value on such services nor does their availability reduce
the expenses of the Manager, the Subadviser or Smith Barney in
connection with services rendered to other advisory clients and
not all such services may be used in connection with the Fund.
Shown below are the total brokerage fees paid by the Fund on
behalf of the Income and Growth Portfolio and the Utility
Portfolio during 1992, 1993 and 1994. Also shown is the portion
paid to Smith Barney and the portion paid to other brokers for
the execution of orders allocated in consideration of research
and statistical services or solely for their ability to execute
the order. During fiscal year 1994, the total amount of
commissionable transactions was $661,159,000; $158,888,000
(24.0%) of which was directed to Smith Barney and executed by
unaffiliated brokers and $502,271,000 (76.0%) of which was
directed to other brokers.
Commissions
To Others For
Execution and
For Execution Only Research
and
Statistical
Total To Smith Barney To Others Services
1992 571,556 316,151 * 48.419,988 15.6
235,417 36.0
1993 1,169,691342,492* 29.3 242,492 20.7 584,707 50.0
1994 1,062,407177,691* 16.7 271,982 25.6 613,334 57.7
* Directed to Smith Barney and executed by unaffiliated
brokers.
The Board of Directors of the Fund has adopted certain
policies and procedures incorporating the standards of Rule 17e-1
issued by the Securities and Exchange Commission under the Act
which requires that the commissions paid to Smith Barney must be
"reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other brokers in
connection with comparable transactions involving similar
securities during a comparable period of time." The Rule and the
policy and procedures also contain review requirements and
require the Manager to furnish reports to the Board of Directors
and to maintain records in connection with such reviews.
CUSTODIAN
Portfolio securities and cash owned by the Fund are held in
the custody of PNC Bank, National Association, 17th and Chestnut
Streets, Philadelphia, Pennsylvania 19103 (foreign securities,
if any, will be held in the custody of the Barclays Bank, PLC)
In the event of the liquidation or dissolution of the Fund,
shares of a Portfolio are entitled to receive the assets
belonging to that Portfolio that are available for distribution
and a proportionate distribution, based upon the relative net
assets of the respective Portfolios, of any general assets not
belonging to any particular Portfolio that are available for
distribution.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York
10154, have been selected as independent auditors for the Fund
for its fiscal year ending December 31, 1995 to audit and report
on the financial statements and supplementary financial
information of the Fund.
VOTING
As permitted by Maryland law, there will normally be no
meetings of shareholders for the purpose of electing directors
unless and until such time as less than a majority of the
directors holding office have been elected by shareholders. At
that time, the directors then in office will call a shareholders'
meeting for the election of directors. The directors must call a
meeting of shareholders for the purpose of voting upon the
question or removal of any director when requested in writing to
do so by the record holders of not less than 10% of the
outstanding shares of the Fund. At such a meeting, a director
may be removed after the holders of record of not less than a
majority of the outstanding shares of the Fund have declared that
the director be removed either by declaration in writing or by
votes cast in person or by proxy. Except as set forth above, the
directors shall continue to hold office and may appoint successor
directors.
As used in the Prospectus and this Statement of Additional
Information, a "vote of a majority of the outstanding voting
securities" means the affirmative vote of the lesser of (a) more
than 50% of the outstanding shares of the Fund (or the affected
Portfolio or class) or (b) 67% or more of such shares present at
a meeting if more than 50% of the outstanding shares of the Fund
(or the affected Portfolio or class) are represented at the
meeting in person or by proxy. A Portfolio or class shall be
deemed to be affected by a matter unless it is clear that the
interests of each Portfolio or class in the matter are identical
or that the matter does not affect any interest of the Portfolio
or class. Under the Rule the approval of a management agreement
or any change in a fundamental investment policy would be
effectively acted upon with respect to a Portfolio only if
approved by a "vote of a majority of the outstanding voting
securities" of the Portfolio affected by the matter; however, the
ratification of independent accountants, the election of
directors, and the approval of a distribution agreement that is
submitted to shareholders are not subject to the separate voting
requirements and may be effectively acted upon by a vote of the
holders of a majority of all Fund shares voting without regard to
Portfolio. As of April 11, 1995, the Smith Barney 401(k)
Employee Savings Plan, 388 Greenwich Street, New York, New York,
10013, owned of record, but not beneficially, 6,764,056.881
(100%) of the outstanding Class Z shares of the Income and Growth
Portfolio; the Smith Barney 401(k) Employee Savings Plan, 388
Greenwich Street, New York, New York, 10013, owned of record, but
not beneficially, 1,581,464.673 (100%) of the outstanding Class Z
shares of the U.S. Government Securities Portfolio; and the Smith
Barney 401(k) Employee Savings Plan, 388 Greenwich Street, New
York, New York, 10013, owned of record, but not beneficially,
739,425.414 (100%) of the outstanding Class Z shares of the
Income Return Account Portfolio. The following table contains a
list of shareholders who of record or beneficially own at least
5% of the outstanding shares of a particular class of shares of a
Portfolio of the Fund:
U.S. Government Securities Portfolio
Class B
Charlie G. Herring
Smith Barney Inc. Rollover Cust.
1147 Hunters Drive
Stone Mountain, GA 30083-2544
owned 11,773.396 (5.86%) shares
Class Y
Virginia P. Swindal Tr.
UAD 4-9-92
Virginia P. Swindal Rev Trust
5111 South Nichols Street
Tampa, FL 33611-4132
owned 60,757.000 (9.66%) shares
Baxter P. Freeze & Anne Freeze TRS
U/A/D 4/24/92
Baxter P. Freeze Charitable Trust
1515 Wickliff Avenue
High Point, NC 27262-4551
owned 77,532.849 (12.33%) shares
Arthur Smith Corporation
c/o Phyllis Smith
4888 Loop Central Drive
Suite 500
Houston, TX 77081-2214
owned 105,560.000 (16.79%) shares
Bost & Co.
FBO Labranche & CO.
One Cabot Road
Mutual Fund Operations
Medford, MA 02155
owned 558,358.16 (6.90%) shares
Raul Cuadrado
3250 Riveria Drive
Coral Gables, FL 33134-6477
owned 36,390.102 (5.79%) shares
Charles Dockery
Smith Barney Inc. Rollover Cust
338 Deauville Road
Statesville, NC 28677-7501
owned 35,919.486 (5.71%) shares
Nolan Gotcher
232 Spyglass Drive
Advance, NC 27006-9566
owned 35,588 (5.66%) shares
Monthly Payment Government Portfolio
Class B shares
J.H. Winters Inc.
P.O. Box 445
Burlingame, CA 94011-0445
owned 6,480.167 (25.59%) shares
Lincoln Trust Co. C/F
Invt. Annuity of Paul Kasper
P.O. Box 5831 T.A.
Denver, CO 80217
owned 2,543.772 (10.05%) shares
Winslow Williams
June K. Williams
300 Ridge Road
Richmond, VA 23229-7449
owned 2,520.383 (9.95%) shares
Konrad R. Solochier & Edna M.
Solochier Family Trust
FBO Konrad and Edna Solochier
306 NE Holly Ave.
Port St. Lucie, FL 34952
owned 2,441.215 (9.64%) shares
William J. Keck
Smith Barney Inc. Rollover Cust
2649 Via Pacheco
Palos Vedes, CA 90275
owned 2,123.375 (8.39%) shares
George E. Fitch Jr.
Smith Barney Inc. Rollover Cust
2649 Via Pacheco
Palos Verdes Est CA 90274-4349
owned 1,271.886 (5.02%) shares
Class C shares
Martha Araujo as Conservator
FOR Manuel Araujo
47-26 157th Street
Flushing, NY 11355-2346
owned 22,034.696 (8.30%) shares
City of Falcon Heights
Attn: Tom Kelly
2077 West Larpeatlur Avenue
Falcon Heights, MN 55113-5551
owned 22,919.000 (8.63%) shares
Income Return Account Portfolio
Class A
Haffner's Car Care Corp.
Attn: E. Haffner Fournier
69 Parket Street
Lawrence, MA 01843-1532
owned 100,436.024 (5.21%) shares
Kerry E. Barnett, Receiver
FOR North-West Insurance Co.
c/o Jack Sanguin
350 Morgan Bldg., 720 S.W. Washington
Portland, OR 97205-3500
owned 437,391.568 (22.71%) shares
Class C
Marshall E. Redding / IRA
Smith Barney IRA Cust.
2530 Atlantic Avenue, Suite - A
Long Beach, CA 90806-2741
owned 21,720.353 (7.42%) shares
Brendan T. Cremen
Susan Delany Cremen
c/o Delany
17 Libarary Road
Shankill
County Dublin, Ireland
owned 19,071.371 (6.51%) shares
Process Supplies And
Accessories Incorporated
Profit Sharing Plan
Attn. Larry E. Wright
P.O. 11025
Knoxville, TN 37939
owned 16,112.859 (5.50%) shares
Class Y
Mark Rothbaum & Associates Inc.
Pension Plan U/A/D 7/1/80
Mark Rothbaum TTEE
P.O. Box K
Redding, CT 06875-0236
owned 49,745.154 (21.03%) shares
The Interfaith Coalition Fr.
the Andrew Recovery Effort
Attn: Mary Louise Cole/Director
111 S.W. Fifth Avenue, #104
Miami, FL 33130-1381
owned 34,423.627 (14.55%) shares
Beatrice S. Wind
Smith Barney IRA Cust.
8101 S.W. 72nd Avenue
Miami, FL 33143-7609
owned 50,177.516 (21.44%) shares
Kurt F. Wilkening
243 Robin Drive
Sarasota, FL 34236
owned 55,097.057 (23.29%) shares
Elizabeth Lynn Schneider &
Theodre J. Vittoria
Beatrice S. Wind Charitable
630 Fifth Avenue
New York, NY 10111
owned 22,109.115 (9.35%) shares
David B. Heyler Jr.
Myrtle Elaine Cornish Trust
FBO South Coast Botanic Garden
Foundation
2049 Century PArk East # 1200
Los Angeles, CA 90067
owned 18,785.201 (7.94) shares
Utility Portfolio
Class B shares
Derrell Johnson &
Carol Robinson Co.
FBO Rady and Assoc. Inc.
910 Collier
Fort Worth, TX 76102-3524
owned 9,829.283 (5.68%) shares
Katherine W. Washburne
2022 N. 71st Street
Milwaukee, WI 53213
owned 9,156.37 (5.29%) shares
FINANCIAL STATEMENTS
The following financial information is hereby incorporated by
reference to the indicated pages of the Fund's 1994 Annual
Reports to Shareholders, copies of which are furnished with this
Statement of Additional Information.
Page(s) in
Annual Report:
Income & Growth U.S.Gov't
et al
Average Annual Total Return 3-5 3-4, 6-8
Line Graph Showing Growth of $10,000 Investment 6 5,9
Statements of Assets and Liabilities
dated December 31, 1994 11 12
Statements of Changes in Net Assets
for the years ended December 31, 1994 and 1993 13 14
Statements of Operations
for the year ended December 31, 1994 12 13
Notes to Financial Statements 14-18 15-20
Financial Highlights 19-21 21-23
Independent Auditors' Report 22 24
Page(s) in
Annual Report:
Income Return
et al
Average Annual Total Return 3-4,6
Line Graph Showing Growth of $10,000 Investment 5,7
Statement of Assets and Liabilities
dated December 31, 1994 10
Statement of Changes in Net Assets
for the years ended December 31, 1994 and 1993 12
Statement of Operations
for the year ended December 31, 1994 11
Notes to Financial Statements 13-16
Financial Highlights 17-19
Independent Auditors' Report 20
Page(s) in
Annual Report:
Utility
Average Annual Total Return 3-4
Line Graph Showing Growth of $10,000 Investment 5
Statement of Assets and Liabilities
dated December 31, 1994 8
Statement of Changes in Net Assets
for the years ended December 31, 1994 and 1993 10
Statement of Operations
for the year ended December 31, 1994 9
Notes to Financial Statements 11-14
Financial Highlights 15
Independent Auditors' Report 16
APPENDIX - RATINGS OR DEBT OBLIGATIONS
BOND (AND NOTES) RATINGS
Moody's Investors Service, Inc.
Aaa - Bonds that are rated "Aaa" are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated "Aa" are judged to be of high
quality by all standards. Together with the "Aaa" group they
comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may
not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be
other elements present that make the long term risks appear
somewhat larger than in "Aaa" securities.
A - Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate by elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds that are rated "Baa" are considered as medium
grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C - Bonds which are rated C are the lowest class of bonds and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Con (..) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are
rated conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned
in operating experience, (c) rentals which begin when facilities
are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis
of condition.
Note: The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation
AAA - Debt rated "AAA" has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal
is extremely strong.
AA - Debt rated "AA" has a very strong capacity to pay
interest and repay principal and differs from the highest rated
issues only in small degree.
A- Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB - Debt rated "BBB" is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated 'BB', 'B', 'CCC', 'CC' and 'C'
is regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. 'BB' indicates the
lowest degree of speculation and 'C' the highest degree of
speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from 'AA' to 'B' may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating
is provisional. A provisional rating assumes the successful
completion of the project being financed by the debt being rated
and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should
exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the
principal amount of those bonds where the underlying deposit
collateral is fully insured by the Federal Savings & Loan
Insurance Corp. or the Federal Deposit Insurance Corp.
* Continuance of the rating is contingent upon S&P's receipt
of closing documentation confirming investments and cash flow.
* Continuance of the rating is contingent upon S&P's receipt
of an executed copy of the escrow agreement.
NR Indicates no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P
does not rate a particular type of obligation as a matter of
policy.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Issuers rated "Prime-1" (or related supporting institutions)
have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment will normally be evidenced by the
following characteristics: leading market positions in well-
established industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earnings
coverage of fixed financial changes and high internal cash
generation; well-established access to a range of financial
markets and assured sources of alternate liquidity.
Issuers rated "Prime-2" (or related supporting institutions)
have strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Standard & Poor's Corporation
A-1 - This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong.
Those issuers determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
A-2 - Capacity for timely payment on issues with this
designation is strong. However, the relative degree of safety is
not as high as for issues designated A-1.
ANNUAL REPORT
OF
SMITH BARNEY FUNDS-U.S. GOVERNMENT SECURITIES PORTFOLIO &
SMITH BARNEY FUNDS-MONTHLY PAYMENT GOVERNMENT PORTFOLIO
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
<PAGE>
1994 ANNUAL REPORT
SMITH BARNEY
FUNDS, INC.
MONTHLY PAYMENT
GOVERNMENT
PORTFOLIO
U.S. GOVERNMENT
SECURITIES PORTFOLIO
---------------------
DECEMBER 31, 1994
[LOGO] SMITH BARNEY MUTUAL FUNDS
INVESTING FOR YOUR FUTURE.
EVERY DAY.
<PAGE>
MONTHLY PAYMENT GOVERNMENT AND U.S. GOVERNMENT SECURITIES
PORTFOLIOS
Dear Shareholders:
For the year ended December 31, 1994, the total return for Class
A shares of
the Smith Barney Funds, Inc.: Monthly Payment Government
Portfolio was
negative 1.38% and the total return for the U.S. Government
Securities
Portfolio was negative 1.40%. Both of the Portfolios outperformed
the Lehman
Brothers GNMA Mutual Fund Index which produced a total return of
negative
1.50% for the same period. According to Lipper Analytical
Services, both
Portfolios outperformed the average Ginnie Mae fund, which
returned a
negative 2.49% for the year.
Market Review
Interest rates moved steadily upward during the past year causing
a
substantial decline in bond prices. In fact, 1994 has been
characterized as
the worst year for bonds since record keeping began in 1927. By
December 31,
the yield on the benchmark 30-year Treasury bond had risen to
7.88%, compared
with 6.35% at the start of the year. The rise in short-term rates
was even
more striking. The yield on the two-year Treasury note, for
example, rose
from 4.23% in January, to 7.69% by December.
Rates were propelled upward by the Federal Reserve Board's
("Fed") six
increases in the federal funds rate--the rate banks charge each
other for
overnight loans. The Fed, concerned that inflationary pressures
were
building, moved toward this more restrictive monetary policy in
an effort to
stem potential future inflation before it became an issue. On
February 4,
1994, the Fed raised the federal funds rate to 3.25%, and by the
end of
December, it had pushed the rate to 5.5%.
In the mortgage-backed market, the current coupon rate for
securities issued
by the Government National Mortgage Association ("GNMA") began
the year
yielding 6.68% and climbed to a yield of 8.89% by year end. Also,
with
interest rates rising, homeowners were less inclined to refinance
their
existing mortgages, and prepayments declined rapidly. This drop
in
prepayments had the effect of lengthening the average duration of
mortgage-backed securities. Duration is a measure of a bond's
volatility when
interest rates move up or down. The longer the duration, the more
sensitive
the bond is to interest rate changes.
1
<PAGE>
Portfolio Strategy
Shortly after the first increase in the federal funds rate in
February, we
sold longer-term Treasury securities in order to reduce the
Portfolios'
duration. The GNMA Index began the year with a duration of 3.2
years, but as
prepayments slowed, its duration lengthened. Throughout much of
1994 we kept
the Portfolios' duration shorter than the Index's by about one-
half year,
primarily by holding a reserve of cash equivalents equal to 15%
of each
Portfolio. By year end, we had reduced our cash position and
lengthened our
duration to 5.25 years, compared with 5.5 years for the GNMA
Index, through
the addition of short-term Treasuries.
Outlook
Despite the Fed's efforts to cool the economy, strong capital
spending and
employment growth indicate a fourth-quarter Gross Domestic
Product (GDP) rate
that could exceed 4.0% when the final data for 1994 is tallied.
It is
generally understood that a rate which surpasses 2.5% may point
to future
inflation. A healthy GDP number could cause the Fed to increase
rates again
when its policy-making committee meets at the end of January.
In our view, inflation, as measured by the Consumer Price Index,
will
probably trend towards 3.5% in 1995 which will represent an
increase but not
pose a problem. We believe that after an erratic first quarter,
the
environment for fixed-income investments will turn more positive.
Accordingly, we plan to position the Portfolios more bullishly by
lengthening
duration as the quarter ends.
Sincerely,
/s/ Stephen Treadway
Stephen Treadway
Chairman and Chief Executive Officer
January 31, 1995
2
<PAGE>
Smith Barney Funds, Inc.
Monthly Payment Government Portfolio
Historical Performance - Class A Shares
<TABLE>
Net Asset Value
-------------------
Beginning End of Income Capital
Gain Total
Year Ended of Year Year Dividend
Distributions Returns /(1)/
--------- ------ ------ -------- ---------
---- -------
<S> <C> <C> <C> <C>
<C>
12/31/94 $12.85 $11.86 $0.81 $0.00
(1.36)%
12/31/93 12.96 12.85 0.88 0.06
6.51
12/31/92 13.12 12.96 0.96 0.05
6.83
12/31/91 12.41 13.12 1.11 0.03
15.66
12/31/90 12.37 12.41 1.11 0.00
9.89
12/31/89 11.74 12.37 1.11 0.00
15.45
12/31/88 11.83 11.74 1.09 0.00
8.75
12/31/87 12.59 11.83 0.99 0.01
2.09
4/16/86*-12/31/86 12.50 12.59 0.81 0.00
7.44
===== =====
Total $8.87 $0.15
===== =====
</TABLE>
It is the Fund's policy to distribute dividends monthly and
capital gains, if
any, annually.
Average Annual Total Return - Class A Shares
<TABLE>
Without
With
Sales
Charge/(1)/ Sales Charge/(2)/
------------
------------
<S> <C>
<C>
Year Ended 12/31/94 (1.36)%
(5.83)%
Five Years Ended 12/31/94 7.36
6.38
4/16/86* through 12/31/94 8.13
7.57
</TABLE>
Historical Performance - Class B Shares
<TABLE>
Net Asset Value
------------------
Beginning End of Income
Capital Gain Total
Year Ended of Year Year Dividend
Distributions Returns /(1)/
---------- -------- ------ -------- ------
------- -------
<S> <C> <C> <C> <C>
<C>
11/10/94*-12/31/94 $11.78 $11.85 $0.12
$0.00 1.64%
====== ====== =====
===== =====
</TABLE>
Average Annual Total Return - Class B Shares
<TABLE>
Without
With
Sales
Charge/(1)/ Sales Charge/(2)/
------------
------------
<S> <C>
<C>
11/10/94* through 12/31/94 1.64%
(2.86)%
</TABLE>
* Inception.
3
<PAGE>
SMITH BARNEY FUNDS, INC.
MONTHLY PAYMENT GOVERNMENT PORTFOLIO
Historical Performance - Class C Shares
<TABLE>
Net Asset Value
------------------
Beginning End of Income Capital
Gain Total
Year Ended of Year Year Dividend
Distributions Returns /(1)/
---------- -------- ------ -------- ---------
---- -------
<S> <C> <C> <C> <C>
<C>
12/31/94 $12.85 $11.86 $0.73 $0.00
(2.07)%
12/31/93 12.96 12.85 0.79 0.06
5.77
12/02/92*-12/31/92 12.89 12.96 0.08 0.00
1.15
===== =====
Total $1.60 $0.06
===== =====
</TABLE>
Average Annual Total Return - Class C Shares
<TABLE>
Without
With
Sales
Charge/(1)/ Sales Charge/(2)/
------------
------------
<S> <C>
<C>
Year Ended 12/31/94 (2.07)%
(3.05)%
12/2/92* through 12/31/94 2.26
2.26
</TABLE>
Cumulative Total Return
<TABLE>
Without
Sales Charge/(1)/
------------
<S>
<C>
Class A (4/16/86* through 12/31/94)
98.98%
Class B (11/10/94* through 12/31/94)
1.64
Class C (12/2/92* through 12/31/94)
4.77
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain
distributions at
net asset value and does not reflect a deduction of the
applicable sales
charge with respect to Class A shares or the applicable
contingent deferred
sales charges ("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain
distributions at
net asset value. In addition, Class A shares reflect the
deduction of the
maximum initial sales charge of 4.50%, Class B shares reflect the
deduction
of a 4.50% CDSC, which applies if shares are redeemed less than
one year from
initial purchase and declines by 1.00% per year until no CDSC is
incurred and
Class C shares reflect the deduction of a 1.00% CDSC if shares
are redeemed
within the first year of purchase.
*Inception.
4
<PAGE>
SMITH BARNEY FUNDS, INC.
MONTHLY PAYMENT GOVERNMENT PORTFOLIO
HISTORICAL PERFORMANCE
GROWTH OF $10,000 INVESTED IN CLASS A SHARES OF THE
MONTHLY
PAYMENT GOVERNMENT PORTFOLIO VS. LEHMAN BROTHERS GNMA
MUTUAL FUND INDEX+
(UNAUDITED)
----------------------------------------------------------------
-------------
April 1986 - December 1994
[CHART APPEARS HERE]
<TABLE> Monthly Lehman Brothers
Payment GNMA Mutual
Date Government Fund Index
<S> <C> <C>
4/16/86 9,601 10,000
12/86 10,289 10,754
12/87 10,603 11,220
12/88 11,485 12,207
12/89 13,210 14,120
12/90 14,464 15,612
12/91 16,669 18,117
12/92 17,752 19,461
12/93 18,854 20,740
6/94 18,294 20,128
7/94 18,601 20,520
8/94 18,651 21,157
9/94 18,391 20,858
10/94 18,318 20,825
11/94 18,311 20,767
12/94 18,560 20,997
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares
at
inception on April 16, 1986 assuming deduction of the maximum
4.00% sales
charge at the time of investment and reinvestment of dividends
(after
deduction of applicable sales charge) and capital gains (at net
asset value)
through December 31, 1994. The Lehman Brothers GNMA Mutual Fund
Index is
composed of 15-year and 30-year fixed-rate securities backed by
mortgage
pools of the Government National Mortgage Association. The Index
is unmanaged
and is not subject to the management and trading expenses of a
mutual fund.
The performance of the Portfolio's other classes may be greater
or less than
the Class A shares performance indicated on this chart, depending
on whether
greater or lesser sales charges and fees were incurred by
shareholders
investing in other classes.
All figures represent past performance and are not a
guarantee of future
results. Investment returns and principal value will fluctuate,
and
redemption value may be more or less than the original cost. No
adjustment
has been made for shareholder tax liability on dividends or
capital gains.
5
<PAGE>
SMITH BARNEY FUNDS, INC.
U.S. GOVERNMENT SECURITIES PORTFOLIO
Historical Performance - Class A Shares
<TABLE>
Net Asset Value
-------------------
Beginning End of Income Capital
Gain Total
Year Ended of Year Year Dividend
Distributions Returns /(1)/
---------- -------- ------ -------- --------
----- --------
<S> <C> <C> <C> <C>
<C>
12/31/94 $13.66 $12.50 $0.96 $0.00
(1.48)%
12/31/93 13.87 13.66 0.98 0.11
6.40
12/31/92 14.10 13.87 1.08 0.08
6.85
12/31/91 13.22 14.10 1.13 0.05
16.29
12/31/90 13.17 13.22 1.18 0.00
9.95
12/31/89 12.56 13.17 1.21 0.00
15.11
12/31/88 12.68 12.56 1.20 0.00
8.72
12/31/87 13.89 12.68 1.31 0.24
2.67
12/31/86 13.95 13.89 1.44 0.04
10.76
12/31/85 12.76 13.95 1.22 0.00
19.59
10/9/84*-12/31/84 12.50 12.76 0.20 0.00
3.32
====== =====
Total $11.91 $0.52
====== =====
</TABLE>
It is the Fund's policy to distribute dividends quarterly and
capital gains,
if any, annually.
Average Annual Total Return - Class A Shares
<TABLE>
Without
With
Sales
Charge/(1)/ Sales Charge/(2)/
-----------
------------
<S> <C>
<C>
For the Year Ended 12/31/94 (1.48)%
(5.89)%
Five Years Ended 12/31/94 7.45
6.46
10/9/84* through 12/31/94 9.48
8.99
</TABLE>
Historical Performance - Class B Shares
<TABLE>
Net Asset Value
----------------
Beginning End of Income
Capital Gain Total
Year Ended of Year Year Dividend
Distributions Returns/(1)/
---------- --------- ------ -------- ------
------- -------
<S> <C> <C> <C> <C>
<C>
11/7/94*-12/31/94 $12.47 $12.51 $0.12
$0.00 2.04%
</TABLE>
*Inception.
6
<PAGE>
SMITH BARNEY FUNDS, INC.
U.S. GOVERNMENT SECURITIES PORTFOLIO
Average Annual Total Return - Class B Shares
<TABLE>
Without
With
Sales
Charge/(1)/ Sales Charge/(2)/
------------
------------
<S> <C>
<C>
11/7/94* through 12/31/94 2.04%
(2.46)%
</TABLE>
Historical Performance - Class C Shares
<TABLE>
Net Asset Value
-----------------
Beginning End of Income
Capital Gain Total
Year Ended of Year Year Dividend
Distributions Returns/(1)/
---------- --------- ------ -------- ---
---------- -------
<S> <C> <C> <C> <C>
<C>
12/31/94 $13.66 $12.50 $0.87
$0.00 (2.11)%
12/31/93 13.86 13.66 0.88
0.11 5.74
12/2/92*-12/31/92 14.01 13.86 0.30
0.00 1.07
=====
=====
Total $1.78
$0.11
=====
=====
</TABLE>
Average Annual Total Return - Class C Shares
<TABLE>
Without
With
Sales
Charge/(1)/ Sales Charge/(2)/
------------
------------
<S> <C>
<C>
Year Ended 12/31/94 (2.11)%
(3.09)%
12/2/92* through 12/31/94 2.19
2.19
</TABLE>
Historical Performance - Class Y Shares
<TABLE>
Net Asset Value
-----------------
Beginning End of Income
Capital Gain Total
Year Ended of Year Year Dividend
Distributions Returns/(1)/
---------- --------- ------ -------- -----
-------- -------
<S> <C> <C> <C> <C>
<C>
12/31/94 $13.67 $12.51 $0.95
$0.00 (1.53)%
1/12/93*-12/31/93 13.97 13.67 0.95
0.11 5.55
=====
=====
Total $1.90
$0.11
=====
=====
</TABLE>
Average Annutal Total Return - Class Y Shares
<TABLE>
Without
With
Sales
Charge/(1)/ Sales Charge/(2)/
------------
------------
<S> <C>
<C>
Year Ended 12/31/94 (1.53)%
(1.53)%
1/12/93* through 12/31/94 1.98
1.98
</TABLE>
* Inception.
7
<PAGE>
SMITH BARNEY FUNDS, INC.
U.S. GOVERNMENT SECURITIES PORTFOLIO
Historical Performance - Class Z Shares
<TABLE>
Net Asset Value
-----------------
Beginning End of Income
Capital Gain Total
Year Ended of Year Year Dividend
Distributions Returns/(1)/
---------- ------- ------ -------- ------
------- -------
<S> <C> <C> <C> <C>
<C>
11/7/94*-12/31/94 $12.47 $12.50 $0.24
$0.00 (2.15)%
</TABLE>
Average Annual Total Return - Class Z Shares
<TABLE>
Without
With
Sales Charge/(1)/
Sales Charge/(2)/
------------
------------
<S> <C>
<C>
11/7/94* through 12/31/94 (2.15)%
(2.15)%
</TABLE>
Cumulative Total Return
<TABLE>
Without
Sales Charge/(2)/
------------
<S>
<C>
Class A (10/9/84* through 12/31/94)
152.62%
Class B (11/7/94* through 12/31/94)
2.04
Class C (12/2/92* through 12/31/94)
4.62
Class Y (1/12/93* through 12/31/94)
3.94
Class Z (11/7/94* through 12/31/94)
(2.15)
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain
distributions at
net asset value and does not reflect a deduction of the
applicable sales
charge with respect to Class A shares or the contingent deferred
sales
charges ("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain
distributions at
net asset value. In addition, Class A shares reflect the
deduction of the
maximum initial sales charge of 4.50%, Class B shares reflect the
deduction
of a 4.50%, which applies CDSC if shares are redeemed less than
one year from
initial purchase and declines by 1.00% per year until no CDSC is
incurred and
Class C shares reflect the deduction of a 1.00% CDSC if shares
are redeemed
within the first year of purchase.
* Inception.
8
<PAGE>
SMITH BARNEY FUNDS, INC.
U.S. GOVERNMENT SECURITIES PORTFOLIO
Historical Performance
GROWTH OF $10,000 INVESTED IN CLASS A SHARES OF THE
U.S. GOVERNMENT SECURITIES PORTFOLIO VS. LEHMAN
BROTHERS
GNMA MUTUAL FUND INDEX+
(UNAUDITED)
October 1984 - December 1994
[CHART APPEARS HERE]
<TABLE> Lehman Brothers
U.S. Government GNMA Mutual
Date Securities Fund Index
<S> <C> <C>
10/09/84 9,601 10,000
12/84 9,942 10,794
12/85 11,829 13,518
12/86 13,049 15,210
12/87 13,345 15,866
12/88 14,455 17,262
12/89 16,578 19,969
12/90 18,161 22,080
12/91 21,048 25,624
12/92 22,416 27,522
12/93 23,777 29,334
6/94 23,044 28,467
7/94 23,495 29,022
8/94 23,549 29,922
9/94 23,226 29,500
10/94 23,134 29,453
11/94 23,116 29,370
12/94 23,372 29,696
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares
on October
9, 1984 assuming deduction of the maximum 4.00% sales charge at
the time of
investment and reinvestment of dividends (after deduction of
applicable sales
charge) and capital gains (at net asset value) through December
31, 1994. The
Lehman Brothers GNMA Mutual Fund Index is composed of 15-year and
30-year
fixed-rate securities backed by mortgage pools of the Government
National
Mortgage Association. The Index is unmanaged and is not subject
to the
management and trading expenses of a mutual fund. The performance
of the
Portfolio's other classes may be greater or less than the Class A
performance
indicated on this chart, depending on whether greater or lesser
sales charges
and fees were incurred by shareholders investing in other
classes.
All figures represent past performance and are not a
guarantee of future
results. Investment returns and principal value will fluctuate,
and
redemption value may be more or less than the original cost. No
adjustment
has been made for shareholder tax liability on dividends or
capital gains.
9
<PAGE>
SMITH BARNEY FUNDS, INC.
Schedules of Investments
December 31, 1994
<TABLE>
<CAPTION>
MONTHLY PAYMENT GOVERNMENT SECURITIES PORTFOLIO
FACE COUPON
AMOUNT SECURITY RATE
MATURITY** VALUE
---------- ---------- ------ ---
----- -----------
<S> <C> <C> <C>
<C>
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS--93.8%
$ 9,303,000 GNMA Certificates 6.50%
12/01/23 $8,079,250
5,590,000 GNMA Certificates 7.00
3/15/23 5,027,825
7,685,000 GNMA Certificates 7.50
11/15/22 7,144,624
3,101,000 GNMA Certificates 8.00
9/15/21 2,971,405
5,791,000 GNMA Certificates 8.50
11/15/19 5,702,408
2,441,000 GNMA Certificates 9.00
10/15/17 2,467,426
2,410,000 GNMA Certificates 9.50
11/15/17 2,490,932
1,317,000 GNMA Certificates 10.00
7/15/20 1,387,699
4,389,000 GNMA II Certificates 8.50
4/20/22 4,283,615
3,000,000 U.S. Treasury Note 7.25
11/30/96 2,977,170
TOTAL U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS (Cost--$44,497,486)
42,532,354
SHORT-TERM INVESTMENTS--6.2%
3,000,000 U.S. Treasury Bill
(Cost--$2,808,572) 7.06*
12/14/95 2,803,950
TOTAL INVESTMENTS--100% (Cost--$47,306,058+)
$45,336,304
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
SMITH BARNEY FUNDS, INC.
Schedules of Investments (continued)
December 31, 1994
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES PORTFOLIO
<S> <C> <C> <C>
FACE COUPON
AMOUNT SECURITY RATE
MATURITY** VALUE
--------- ---------- ------ ----
---- -----------
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS--94.9%
$74,393,000 GNMA Certificates 6.50%
12/01/23 $64,605,149
74,329,000 GNMA Certificates 7.00
3/15/23 66,849,022
67,478,000 GNMA Certificates 7.50
11/15/22 62,732,554
24,407,000 GNMA Certificates 8.00
9/15/21 23,384,452
23,072,000 GNMA Certificates 8.50
11/15/19 22,718,843
63,286,000 GNMA Certificates 9.00
10/15/17 63,977,965
29,011,000 GNMA Certificates 9.50
11/15/17 29,990,348
5,133,000 GNMA Certificates 10.00
7/15/20 5,410,433
18,871,000 GNMA II Certificates 8.50
4/20/22 18,416,529
3,050,000 GNMA II Certificates 10.00
10/20/16 3,161,689
32,000,000 U.S. Treasury Note 7.25
11/30/96 31,756,480
TOTAL U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS (Cost--$408,524,206)
393,003,464
SHORT-TERM INVESTMENTS--5.1%
19,000,000 U.S. Treasury Bill 7.06*
12/14/95 17,758,350
3,155,000 Repurchase Agreement -- Chemical Securities
Inc., 5.75%
due 1/03/95 proceeds at maturity--$3,157,014
(Fully
collateralized by U.S. Treasury Notes 6.50%,
due
9/30/96; Market value--$3,218,303)
3,155,000
TOTAL SHORT-TERM INVESTMENTS (Cost--$20,942,621)
20,913,350
TOTAL INVESTMENTS--100% (Cost--$429,466,827+)
$413,916,814
</TABLE>
* Annualized yield on date of purchase for short-term securities.
** Date shown represents the last in the range of maturity dates
of mortgage
certificates owned.
+ Aggregate cost for Federal income tax purposes is substantially
the same.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney Funds, Inc.
Statements of Assets and Liabilities
December 31, 1994
<TABLE>
Monthly Payment
U.S. Government
Government
Securities
Portfolio
Portfolio
---------------
---------------
<S> <C>
<C>
ASSETS:
Investments, at value (Cost--$47,306,058
and $429,466,827, respectively) $45,336,304
$413,916,814
Cash --
435
Receivable for Fund shares sold 36,426
163,028
Interest receivable 291,295
2,694,995
Other assets 233
4,258
-----------
------------
Total Assets 45,664,258
416,779,530
===========
============
LIABILITIES:
Payable for Fund shares purchased 153,544
2,789,471
Management fees payable 33,157
303,489
Distribution costs payable 27,901
233,042
Accrued expenses and other liabilities 1,779,454
144,245
-----------
------------
Total Liabilities 1,994,056
3,470,247
===========
============
Total Net Assets $43,670,202
$413,309,283
===========
============
NET ASSETS:
Par value of capital shares $36,831
$330,653
Capital paid in excess of par value 47,638,513
459,752,198
Undistributed net investment income 67,512
27,604
Accumulated net realized loss on investments (2,102,900)
(31,251,159)
Net unrealized depreciation of investments (1,969,754)
(15,550,013)
-----------
------------
Total Net Assets $43,670,202
$413,309,283
===========
============
Shares Outstanding:
Class A 3,395,303
28,644,268
Class B 5,166
122,195
Class C 282,655
1,700,884
Class Y --
1,111,451
Class Z --
1,486,353
Net Asset Value:
Class A (and redemption price) $11.86
$12.50
Class B* $11.85
$12.51
Class C** $11.86
$12.50
Class Y (and redemption price) --
$12.51
Class Z (and redemption price) --
$12.50
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset
value per share) $12.42
$13.09
</TABLE>
* Redemption price is NAV of Class B shares reduced by 5.00% if
shares are
redeemed less than one year from initial purchase and declines
by 1.00% per
year until no CDSC is incurred.
** Redemption price is NAV of Class C shares reduced by 1.00% if
shares are
redeemed within the first year of purchase.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
SMITH BARNEY FUNDS, INC.
Statements of Operations For the year ended
December 31, 1994
<TABLE>
<CAPTION>
Monthly Payment
U.S.Government
Government
Securities
Portfolio
Portfolio
--------------
-------------
<S> <C>
<C>
INVESTMENT INCOME:
Interest $3,760,106
$33,941,357
EXPENSES:
Management fees (Note 2) 226,622
1,987,629
Distribution costs (Note 2) 50,511
410,802
Registration fees 31,390
46,001
Shareholder servicing fees 25,820
119,997
Shareholder communication fees 9,490
70,003
Audit and legal fees 4,380
18,604
Custodian fees 3,285
52,002
Directors' fees 1,460
9,001
Other 20,806
12,001
----------- -
-----------
Total Expenses 373,764
2,726,040
----------- -
-----------
Net Investment Income 3,386,342
31,215,317
===========
============
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales 33,638,072
240,175,422
Cost of securities sold 33,955,824
241,281,788
Net Realized Loss (317,752)
(1,106,366)
Change in Net Unrealized Depreciation of
Investments:
Beginning of year 2,037,230
22,554,814
End of year (1,969,754)
(15,550,013)
Increase in Net Unrealized Depreciation (4,006,984)
(38,104,827)
Net Loss On Investments (4,324,736)
(39,211,193)
Decrease in Net Assets Resulting From
Operations $ (938,394) $
(7,995,876)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
SMITH BARNEY FUNDS, INC.
Statements of Changes in Net Assets
For the years ended December 31,
<TABLE>
<CAPTION>
Monthly Payment
U.S. Government
Government
Securities
Portfolio
Portfolio
-----------------------------
-----------------------------
1994 1993
1994 1993
----------- ------------
------------ ------------
<S> <C> <C>
<C> <C>
OPERATIONS:
Net investment income $ 3,386,342 $ 3,610,754
$ 31,215,317 $ 35,096,724
Net realized gain (loss)
on security transactions (317,752) 281,187
(1,106,366) 7,477,067
Increase in net unrealized
depreciation of
investments (4,006,984) (566,091)
(38,104,827) (11,749,463)
----------- ------------
------------ ------------
Increase (Decrease) in Net
Assets From Operations (938,394) 3,325,850
(7,995,876) 30,824,328
=========== ============
============ ============
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (3,338,476) (3,641,688)
(31,643,231) (35,085,778)
Net realized gain on
security transactions (112,248) (234,030)
(1,490,047) (3,904,933)
----------- ------------
------------ ------------
Decrease in Net Assets
from Distributions
to Shareholders (3,450,724) (3,875,718)
(33,133,278) (38,990,711)
=========== ============
============ ============
FUND SHARE TRANSACTIONS:
Net proceeds from sales 5,006,752 18,564,513
56,175,610 116,428,965
Net value of shares issued
to shareholders for
reinvestment of
dividends 842,312 873,297
18,997,260 22,593,548
Cost of reacquired
shares (15,897,992) (10,607,078)
(123,068,611) (89,855,888)
----------- ------------
------------ ------------
Increase (Decrease) in Net
Assets From Fund Share
Transactions (10,048,928) 8,830,732
(47,895,741) 49,166,625
=========== ============
============ ============
Increase (Decrease)
in Net Assets (14,438,046) 8,280,864
(89,024,895) 41,000,242
NET ASSETS:
Beginning of year 58,108,248 49,827,384
502,334,178 461,333,936
----------- ------------
------------ ------------
End of year* $43,670,202 $58,108,248
$413,309,283 $502,334,178
=========== ============
============ ============
* Includes undistributed net
investment income of: $67,512 $19,646
$27,604 $ 455,518
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
SMITH BARNEY FUNDS, INC.
1. Significant Accounting Policies
The Monthly Payment Government Portfolio ("Monthly Payment") and
the U.S.
Government Securities Portfolio ("U.S. Government") are separate
investment
portfolios ("Portfolios") of the Smith Barney Funds, Inc.
("Fund"). The Fund,
a Maryland corporation, is registered under the Investment
Company Act of
1940, as amended, as a diversified, open-end management
investment company.
The Fund consists of these Portfolios and five other separate
investment
portfolios: Income and Growth, Income Return Account, Short-Term
U.S.
Treasury Securities, Capital Appreciation and Utility Portfolios.
The
financial statements and financial highlights for the other
portfolios are
presented in separate annual reports.
The significant accounting policies consistently followed by the
Fund are:
(a) securities transactions are accounted for on trade date; (b)
U.S.
Government and Government Agency obligations are valued at the
mean between
the bid and asked prices; short-term investments that have a
maturity of more
than 6o days are valued at prices based on market quotations for
securities
of similar type, yield and maturity; short-term investments that
have a
maturity of 60 days or less are valued at cost plus accreted
discount, or
minus amortized premium, as applicable; (c) interest income is
recorded on
the accrual basis; (d) gains or losses on the sale of securities
are
calculated by using the specific identification method and
include gains or
losses resulting from repayments of principal on mortgage-backed
securities;
(e) direct expenses are charged to each portfolio and each class;
management
fees and general fund expenses are allocated on the basis of
relative net
assets; (f) dividends and distributions to shareholders are
recorded by the
Fund on the ex-dividend date; (g) each Portfolio intends to
comply with the
requirements of the Internal Revenue Code pertaining to regulated
investment
companies and to make the required distributions to shareholders;
therefore,
no provision for Federal income taxes has been made.
2. Management Agreement and Transactions with Affiliated Persons
Smith Barney Mutual Funds Management, Inc. ("SBMFM"), formerly
known as Smith
Barney Advisers, Inc., a subsidiary of Smith Barney Holdings Inc.
("SBH"),
acts as investment manager to the Fund. Monthly Payment, U.S.
Government and
Income Return Account Portfolios pay SBMFM a management fee
calculated at the
annual rate of 0.50% on the first $200 million of the aggregate
average daily
net assets of the three Portfolios and 0.40% on the aggregate
average daily
net assets in excess of $200 million, allocated to each Portfolio
based on
their relative average daily net assets. All fees are calculated
daily and
paid monthly.
15
<PAGE>
SMITH BARNEY FUNDS, INC.
Notes to Financial Statements (continued)
Smith Barney Inc. ("SB"), another subsidiary of Smith Barney
Holdings Inc.,
acts as distributor of Fund shares. For the year ended December
31, 1994, SB
has advised the Portfolio that it was paid sales charges of
approximately
$150,000 and $644,000 by purchasers of Monthly Payment and U.S.
Government
shares, respectively.
Effective November 7, 1994, the Fund adopted a new class
structure, renaming
the existing Class B shares as Class C shares and the old Class C
shares were
renamed Class Y shares. A contingent deferred sales charge
("CDSC") was
imposed on new Class B shares which begins at 4.50% if redemption
occurs less
than one year from initial purchase and declines by 1.00% per
year until no
CDSC is incurred. A CDSC of 1.00% is imposed on Class C shares if
redemption
occurs within the first year from the date such investment was
made. For the
year ended December 31, 1994, there were approximately $34,390 in
such
charges.
Pursuant to Distribution Plans, the Monthly Payment and the U.S.
Government
Portfolios pay a service fee with respect to their class A, B and
C shares
calculated at the annual rate of 0.25% of the average daily net
assets of
each respective class' shares. Each Portfolio also pays a
distribution fee
with respect to class B and class C shares calculated at the
annual rate of
0.50% and 0.45% of their class's average daily net assets,
respectively. All
officers and two directors of the Fund are employees of SB.
3. Investments
During the year ended December 31, 1994, the aggregate cost of
purchases and
proceeds from sales (including maturities, but excluding short-
term
securities) of investments were, as follows:
<TABLE>
<CAPTION>
PORTFOLIO PURCHASES
SALES
-------------- -------------
------------
<S> <C>
<C>
Monthly Payment Government $ 27,536,952
$ 26,422,900
U.S. Government Securities 186,320,481
166,355,959
</TABLE>
At December 31, 1994, the net unrealized depreciation of
investments for
Federal income tax purposes by Portfolio consisted of the
following:
<TABLE>
Monthly
U.S.
Payment
Government
Government
Securities
------------ --
-----------
<S> <C>
<C>
Gross unrealized appreciation $ 526,208 $
7,896,901
Gross unrealized depreciation (2,495,962)
(23,446,914)
------------ --
-----------
Net unrealized depreciation $(1,969,754) $
(15,550,013)
============
=============
</TABLE>
16
<PAGE>
SMITH BARNEY FUNDS, INC.
Notes to Financial Statements (continued)
At December 31, 1994, the Monthly Payment and the U.S. Government
Portfolios
had net capital loss carryovers of $2,102,900 and $31,251,158,
respectively,
available to offset future capital gains. To the extent that
these carryover
losses are used to offset capital gains it is probable that any
gains so
offset will not be distributed. The amount and expiration of the
carryovers
are indicated below. Expiration occurs on December 31, of the
year indicated:
<TABLE>
Portfolio 1995 1996
1997 2002
------------- ------------ -------- ----
---- ----------
<S> <C> <C> <C>
<C>
Monthly Payment Government $ 1,672,900 $ -- $
-- $ 430,000
U.S. Government Securities 27,364,758 392,439
897,548 2,596,413
</TABLE>
4. Repurchase Agreements
The Portfolios purchase (and their custodian takes possession of)
U.S.
Government securities from banks and securities dealers subject
to agreements
to resell the securities to the sellers at a future date
(generally, the next
business day) at an agreed-upon higher repurchase price. The
Portfolios
require continual maintenance of the market value of the
collateral in
amounts at least equal to the repurchase price.
5. Securities Traded on a When-Issued or To-Be-Announced Basis
The Portfolios may trade portfolio securities on a "to-be-
announced" ("TBA")
basis. In a TBA transaction, the Portfolios commit to purchasing
or selling
securities for which all specific information is not yet known at
the time of
the trade, particularly the face amount and maturity date in GNMA
transactions. Securities purchased on a TBA basis are not settled
until they
are delivered to the fund, normally 15 to 45 days later. These
transactions
are subject to market fluctuations and their current value is
determined in
the same manner as for other portfolio securities. As of December
31, 1994
there were no TBA transactions.
17
<PAGE>
SMITH BARNEY FUNDS, INC.
Notes to Financial Statements (continued)
6. Capital Shares
At December 31, 1994, the Fund had two billion shares of $0.01
par value
capital stock authorized. Each Portfolio has the ability to issue
multiple
classes of shares. Each share of a class represents an identical
interest in
its respective Portfolio and has the same rights, except that
each class
bears certain expenses, including those specifically related to
the
distribution of its shares. At December 31, 1994, paid-in capital
amounted to
the following for each class and respective Portfolio.
<TABLE>
Monthly
Payment
U.S. Gov't.
Class Government
Securities
----- ----------- -
-----------
<S> <C>
<C>
A $43,940,148
$400,488,215
B 61,028
1,532,211
C 3,674,168
23,832,048
Y --
15,687,094
Z --
18,543,283
</TABLE>
Transactions in shares of each Portfolio were as follows:
<TABLE>
Year Ended
Year Ended
December 31, 1994
December 31, 1993
----------------------
---------------------
Monthly Payment Government Shares Amount
Shares Amount
-------------------------- ------ ------
------ ------
<S> <C> <C>
<C> <C>
Class A
Shares sold 320,608 $
3,949,827 1,165,152 $ 15,217,047
Shares issued on reinvestment 63,319
774,146 63,977 834,690
Shares redeemed (1,263,505)
(15,306,810) (791,989) (10,350,270)
---------- -------
----- --------- -------------
Net Increase (Decrease) (879,578)
$(10,582,837) 437,140 $ 5,701,467
==========
============ ========= =============
Class B*
Shares sold 5,165 $
61,023 -- --
Shares issued on reinvestment 1
6 -- --
Shares redeemed --
-- -- --
---------- -------
----- --------- -------------
Net Increase 5,166 $
61,029 -- --
==========
============ ========= =============
Class C+
Shares sold 79,705 $
995,902 256,792 $ 3,347,466
Shares issued on reinvestment 5,578
68,160 2,968 38,607
Shares redeemed (48,174)
(591,182) (19,758) (256,808)
---------- -------
----- --------- -------------
Net Increase 37,109 $
472,880 240,002 $ 3,129,265
==========
============ ========= =============
</TABLE>
* Sales of Class C shares commenced on November 10, 1994.
+ On November 7, 1994 the old Class B shares were renamed Class C
shares.
18
<PAGE>
SMITH BARNEY FUNDS, INC.
Notes to Financial Statements (continued)
<TABLE>
Year Ended
Year Ended
December 31, 1994
December 31, 1993
--------------------- --
---------------------
U.S. Government
Securities Shares Amount
Shares Amount
--------------- --------- ------------- --
------- ------------
<S> <C> <C>
<C> <C>
Class A
Shares sold 1,869,276 $ 24,593,957
5,479,533 $ 76,895,000
Shares issued on reinvestment 1,351,832 17,357,603
1,556,745 21,652,420
Shares redeemed (8,851,963) (114,384,462)
(5,890,140) (82,459,319)
---------- ------------- --
-------- ------------
Net Increase (Decrease) (5,630,855) $ (72,432,902)
1,146,138 $ 16,088,101
========== =============
========== ============
Class B*
Shares sold 149,288 $ 1,870,235
-- --
Shares issued on reinvestment 1,488 18,633
-- --
Shares redeemed (28,581) (356,657)
-- --
---------- ------------- --
-------- ------------
Net Increase 122,195 $ 1,532,211
-- --
========== =============
========== ============
Class C+
Shares sold 722,632 $ 9,602,624
1,386,800 $ 19,424,557
Shares issued on reinvestment 85,790 1,099,736
44,608 617,871
Shares redeemed (567,463) (7,323,683)
(112,421) (1,568,025)
---------- ------------- --
-------- ------------
Net Increase 240,959 $ 3,378,677
1,318,987 $ 18,474,403
========== =============
========== ============
Class Y++
Shares sold 103,206 $ 1,413,134
1,424,604 $ 20,109,408
Shares issued on reinvestment 13,895 178,365
23,153 323,257
Shares redeemed (38,511) (508,509)
(414,896) (5,828,544)
---------- ------------- --
-------- ------------
Net Increase 78,590 $ 1,082,990
1,032,861 $ 14,604,121
========== =============
========== ============
Class Z*
Shares sold 1,498,512 $ 18,695,660
-- --
Shares issued on reinvestment 27,412 342,923
-- --
Shares redeemed (39,571) (495,300)
-- --
---------- ------------- --
-------- ------------
Net Increase 1,486,353 $ 18,543,283
-- --
========== =============
========== ============
</TABLE>
*Sales of Class B and Z commenced on November 7, 1994.
+On November 7, 1994 the old Class B shares were renamed Class C
shares.
++On November 7, 1994 the old Class C shares were renamed Class Y
shares.
19
<PAGE>
SMITH BARNEY FUNDS, INC.
Notes to Financial Statements (continued)
7. Mortgage Dollar Rolls
The Portfolios may enter into mortgage dollar rolls in which the
Portfolios
sell mortgage securities for delivery in the current month and
simultaneously
contracts to repurchase similar, but not identical, securities at
the same
price on a fixed date. The Portfolios receive compensation as
consideration
for entering into the commitment to repurchase. The compensation
is recorded
as deferred income and amortized to interest income. The
counterparty
receives all principal and interest payments, including
prepayments, made
with regard to this security while it is the holder. Mortgage
dollar rolls
may be renewed with a new purchase and repurchase price fixed and
a cash
settlement made at each renewal without physical delivery of the
securities
subject to the contract.
At December 31, 1994, there were no open mortgage dollar roll
contracts.
20
<PAGE>
SMITH BARNEY FUNDS, INC.
Monthly Payment Government Portfolio
Financial Highlights
For a share of each class of capital stock outstanding throughout
each year:
<TABLE>
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 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 (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 0.67% 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%
====== ======
====== ====== ======
Class B Shares
Class C Shares(3)
-------------- -
-----------------------
1994(2)
1994 1993 1992(4)
----- --
---- ------ -----
<S> <C>
<C> <C> <C>
Net Asset Value, Beginning of Year $11.78
$12.85 $12.96 $12.89
------ --
---- ------ ------
Income 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)
Distribution from net realized gains
on security transactions(1) --
(0.03) (0.06) --
------ --
---- ------ ------
Total Distributions (0.12)
(0.73) (0.85) (0.08)
------ --
---- ------ ------
Net Asset Value, End of Year $11.85
$11.86 $12.85 $12.96
------ --
---- ------ ------
Total Return 1.64%++
(2.07)% 5.77% 1.15%++
------ --
---- ------ ------
Net Assets, End of Year (000s) $ 61
$3,351 $3,155 $ 72
------ --
---- ------ ------
Ratios to Average Net Assets:
Expenses 0.67%+
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) Represents distributions from paydown gains which are
reported as
ordinary income for tax purposes.
(2) For the period from November 10, 1994 (inception date) to
December 31,
1994.
(3) On November 7, 1994 the old Class B share were renamed Class
C shares.
(4) For the period from December 2, 1992 (inception date) to
December 31,
1992.
++ Not annualized as it may not be representative of the total
return for the
year.
+ Annualized.
21
<PAGE>
SMITH BARNEY FUNDS, INC.
U.S. GOVERNMENT SECURITIES PORTFOLIO
Financial Highlights (continued)
For a share of each class of capital stock outstanding throughout
each year:
<TABLE>
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)
Distribution 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 (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 0.56%
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%
======
====== ====== ====== ======
<CAPTION>
Class B
Shares Class C Shares(3)
-------
------- --------------------------
1994(2) 1994 1993 1992(4)
---
--- ------ ------ ------
<S> <C>
<C> <C> <C>
Net Asset Value, Beginning of Year
$12.47 $13.66 $13.86 $14.01
Income (Loss) From Investment Operations:
Net investment income
0.08 0.82 0.89 0.15
Net realized and unrealized
gain (loss) on investments
0.17 (1.11) (0.10) --
---
--- ------ ------ ------
Total Income (Loss) from Investment
Operations
0.25 (0.29) 0.79 0.15
---
--- ------ ------ ------
Less Distributions:
Dividends from net investment income
(0.21) (0.83) (0.88) (0.30)
Distribution from net realized gains
on security transactions(1)
-- (0.04) (0.11) --
---
--- ------ ------ ------
Total Distributions
(0.21) (0.87) (0.99) (0.30)
---
--- ------ ------ ------
Net Asset Value, End of Year
$12.51 $12.50 $13.66 $13.86
---
--- ------ ------ ------
Total Return
2.04%++ (2.11)% 5.74% 1.07%++
---
--- ------ ------ ------
Net Assets, End of Year (000s)
$1,529 $21,253 $19,938 $1,954
---
--- ------ ------ ------
Ratios to Average Net Assets:
Expenses
1.02%+ 1.21% 1.21% 1.14%+
Net investment income
6.94+ 6.27 6.23 6.56+
---
--- ------ ------ ------
Portfolio Turnover Rate
40.22% 40.22% 57.34% 26.18%
====== ====== ====== ======
</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.
(3) On November 7, 1994 the old Class B shares were renamed Class
C shares.
(4) For the period from December 2, 1992 (inception date) to
December 31,
1992.
++ Not annualized as it may not be representative of the total
return for
the year.
+ Annualized.
22
<PAGE>
SMITH BARNEY FUNDS, INC.
U.S. Government Securities Portfolio
Financial Highlights (continued)
For a share of each class of capital stock outstanding throughout
the year:
<TABLE>
Class Y Shares
1994 1993(1)
-------------- ----
--- -------
Net Asset Value, Beginning of Year $
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)
Distribution from net realized gains on
security transactions (2)
(0.04) (0.11)
----
--- -------
Total Distributions
(0.91) (1.06)
----
--- -------
Net Asset Value, End of Year $
12.51 $ 13.67
----
--- -------
Total Return
(1.53)% 5.55%++
----
--- -------
Net Assets, End of Year (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%
======= =======
<CAPTION>
Class Z Shares
1994(3)
--------------
-------
<S>
<C>
Net Asset Value, Beginning of Year
$ 12.47
-------
Income From Investment Operations:
Net investment income
0.14
Net realized and unrealized
gain on investments
0.13
-------
Total Gain from Investment
Operations
0.27
-------
Less Distributions:
Dividends from net investment income
(0.24)
-------
Total Distributions
(0.24)
-------
Net Asset Value, End of Year
$ 12.50
-------
Total Return
(2.15)%++
-------
Net Assets, End of Year (000s)
$18,580
-------
Ratios to Average Net Assets:
Expenses
0.34%+
Net investment income
7.55+
-------
Portfolio Turnover Rate
40.22%
=======
</TABLE>
(1) For the period from January 12, 1993 (inception date) to
December 31,
1993.
(2) Represents distributions from paydown gains which are
reported as
ordinary income for tax purposes.
(3) 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.
23
<PAGE>
SMITH BARNEY FUNDS, INC.
Independent Auditors' Report
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
SMITH BARNEY FUNDS, INC.:
We have audited the accompanying statements of assets and
liabilities
including the schedules of investments of the Monthly Payment
Government and
U.S. Government Securities Portfolios of Smith Barney Funds, Inc.
as of
December 31, 1994, and the related statements of operations for
the year then
ended, statements of changes in net assets for each of the years
in the
two-year period then ended, and the financial highlights for each
of the
years in the five-year period then ended. These financial
statements and
financial highlights are the responsibility of the Fund's
management. Our
responsibility is to express an opinion on these financial
statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally
accepted auditing
standards. Those standards require that we plan and perform the
audit to
obtain reasonable assurance about whether the financial
statements and
financial highlights are free of material misstatement. An audit
includes
examining, on a test basis, evidence supporting the amounts and
disclosures
in the financial statements. Our procedures included confirmation
of
securities owned as of December 31, 1994, by correspondence with
the
custodian. An audit also includes assessing the accounting
principles used and
significant estimates made by management, as well as evaluating
the overall
financial statement presentation. We believe that our audits
provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial
highlights
referred to above present fairly, in all material respects, the
financial
position of the Monthly Payment Government and U.S. Government
Securities
Portfolios of Smith Barney Funds, Inc. as of December 31, 1994,
and the
results of their operations for the year then ended, the changes
in their net
assets for each of the years in the two-year period then ended
and the
financial highlights for each of the years in the five-year
period then
ended, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT
MARWICK LLP
New York, New York
February 17, 1995
24
<PAGE>
SMITH BARNEY
FUNDS, INC.
Directors
Ralph D. Creasman
Joseph H. Fleiss
Donald R. Foley
Paul Hardin
Francis P.Martin, M.D.
Roderick C. Rasmussen
Bruce D. Sargent
John P. Toolan
Stephen Treadway, Chairman
C. Richard Youngdahl
Officers
Stephen Treadway
Chief Executive Officer
Heath B. McLendon
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Bruce D. Sargent
Vice President
Ayako Weissman
Vice President
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Smith Barney
A Member of TravelersGroup [LOGO]
Investment Manager
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
Shareholder
Servicing Agent
The Shareholder Services Group, Inc. P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the
shareholders of
Smith Barney Funds, Inc.'s U.S. Government Securities and Monthly
Payment
Government Portfolios. It is not authorized for distribution to
prospective
investors unless accompanied or preceded by a current Prospectus
for the
Portfolio, which contains information concerning the Portfolios'
investment
policies and expenses as well as other pertinent information.
SMITH BARNEY FUNDS, INC.
388 Greenwich Street
New York, New York 10013
FD 0856 B5
PART C
OTHER INFORMATION
Item 15. Indemnification
The response to this item is incorporated by
reference to "Liability of Directors" under the caption
"Comparative Information on Shareholder's Rights" in
Part A of this Registration Statement.
Item 16. Exhibits
All references are to Registrant's Registration
Statement on Form N-1A (the "Registration Statement")
as filed with the Securities and Exchange Commission on
April 28, 1995 (File Nos. 2-25890 and 811-1464)
(1) (a) Articles Supplementary dated November 16, 1992 are
incorporated by reference to Exhibit 1(a) to the Post-
Effective Amendment No. 49.
(1) (b) Articles Supplementary dated October 29, 1992 are
incorporated by reference to Exhibit 1(b) to Post-
Effective Amendment No. 49.
(1) (c) Articles of Amendment dated October 29, 1992 are
incorporated by reference to Exhibit 1(c) to Post-
Effective Amendment No. 49.
(1) (d) Articles Supplementary dated September 6, 1991 are
incorporated by reference to Exhibit 1(a) to Post-
Effective Amendment No. 46.
(1) (e) Articles Supplementary dated October 31, 1990 are
incorporated by reference to Exhibit 1(a) to Post-
Effective Amendment No.43.
(1) (f) Articles Supplementary dated March 27, 1986, May
15, 1985, December 28, 1984, August 2, 1984, June 8,
1984, February 26, 1972 and April 25, 1967 are
incorporated by reference to Exhibits 1(a) through (g)
to Post-Effective Amendment No. 39.
(1) (g) Articles of Incorporation dated December 1, 1966
are incorporated by reference to Exhibit 1(h) to Post-
Effective Amendment No. 39.
(1) (h) Articles Supplementary dated December 14, 1993 are
incorporated by reference to Exhibit 1(h) to Post-
Effective Amendment No. 54.
(2) By-Laws of the Fund are incorporated by reference
to Exhibit 2 to Post-Effective Amendment No. 39.
(3) Not Applicable
(4) Plan of Reorganization (included as Exhibit A to
Registrant's Prospectus/Proxy Statement contained in
Part A of this Registration Statement).*
(5) Not applicable.
(6) Management Agreement between Smith Barney, Inc.
and Monthly Payment Government Portfolio is
incorporated by reference to Exhibit 5(c) to Post-
Effective Amendment No. 43.
(7) Distribution Agreement between Smith Barney Funds
and Smith Barney, Harris Upham & Co. Incorporated is
incorporated by reference to Exhibit 6(b) to Post-
Effective Amendment No. 56.
(8) Distribution Agreement between Smith Barney Funds,
Inc. and Smith Barney Shearson Inc. is incorporated by
reference to Exhibit 6(b) to Post-Effective Amendment
No. 56 to the Registration Statement.
(9) (a) Custodian Agreement between Registrant and
Provident National Bank is incorporated by reference to
Exhibit 8 to Post-Effective Amendment No. 39 to the
Registration Statement.
(9) (b) Form of Transfer Agency Agreement between
Registrant and The Shareholder Services Group, Inc.*
(10) (a) Plan of Distribution pursuant to Rule 12b-1 on
behalf of Monthly Payment Government Portfolio is
incorporated by reference to Exhibit 15(c) to Post-
Effective Amendment No. 46 to the Registration
Statement.
(10) (b) Amended Plan of distribution pursuant to Rule 12b-
1 on behalf of Monthly Payment Government Portfolio is
incorporated by reference to Exhibit 15(l) to Post-
Effective Amendment 56 to Registration Statement.
(11) (a) Opinion of Sullivan & Cromwell as to validity of
shares.*
(11) (b) Opinion of Piper & Marbury L.L.P., special
Maryland counsel, as to validity of shares.*
(12) Opinion of Sullivan & Cromwell with respect to tax
matters.*
(13) Not Applicable
(14) Consent of KPMG Peat Marwick L.L.P.*
(15) Not Applicable.
(16) Not Applicable.
(17) (a) Form of Proxy Card.*
(17) (b) Registrant's Declaration pursuant to Rule 24f-2 is
incorporated by reference to its initial Registration
Statement.
* Is filed herewith.
Item 17. Undertakings
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is a part of this Registration Statement by any
person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) of the Securities Act of 1933, the
reoffering prospectus will contain the information called for by
the applicable registration form for reofferings by persons who
may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2)The undersigned Registrant agrees that every prospectus that
is filed under paragraph (1) above will be filed as a part of an
amendment to the Registration Statement and will not be used
until the amendment is effective, and that, in determining any
liability under the Securities Act of 1933, each post-effective
amendment shall be deemed to be a new registration statement for
the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona
fide offering of them.
SIGNATURES
As required by the Securities Act of 1933, this Pre-
Effective Amendment No. 1 to the Registration Statement has been
signed on behalf of the Registrant, in the City of New York and
State of New York on the 16 th day of June, 1995.
SMITH BARNEY FUNDS, INC.
on behalf of the U.S.
GOVERNMENT
SECURITIES PORTFOLIO
By: \s\ Heath B. McLendon
Chairman of the Board,
Chief Executive Officer
and President
As required by the Securities Act of 1933, this Registration
Statement has
been signed by the following persons in the capacities and on
the
dates indicated.
Signature Title Date
\s\ Heath B. McLendon Chairman of the Board, August
22, 1995
Heath B. McLendon Chief Executive Officer
\s\ Jessica Bibliowicz President August
22, 1995
Jessica Bibliowicz
\s\ Lewis E. Daidone Senior Vice President and August
22, 1995
Lewis E. Daidone Treasurer (Chief Financial
and Accounting Officer)
Ralph D. Creasman* Director August
22, 1995
Ralph D. Creasman
Joseph H. Fleiss* Director August
22, 1995
Joseph H. Fleiss
Donald R. Foley* Director August
22, 1995
Donald R. Foley
Paul Hardin* Director August
22, 1995
Paul Hardin
Francis P. Martin* Director August
22, 1995
Francis P. Martin
Roderick C. Rasmussen* Director August 22, 1995
Roderick C. Rasmussen
Bruce D. Sargent* Director August
22, 1995
Bruce D. Sargent
John P. Toolan* Director August
22, 1995
John P. Toolan
C. Richard Youngdahl* Director August
22, 1995
C. Richard Youngdahl
*By:\s\ Christina T. Sydor
Christina T. Sydor
Pursuant to Power of Attorney
FORM OF PROXY CARD
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
.................................................................
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SMITH BARNEY FUNDS, INC. - MONTHLY PAYMENT GOVERNMENT PORTFOLIO
PROXY SOLICITED BY THE BOARD OF DIRECTORS
The undersigned holder of shares of Smith Barney Funds, Inc. -
Monthly
Payment Government Portfolio (the "Monthly Payment
Government
Portfolio") , hereby appoints Heath B. McLendon, Lewis E. Daidone
and
Christina T. Sydor, attorneys and proxies for the undersigned
with
full powers of substitution and revocation, to represent
the
undersigned and to vote on behalf of the undersigned all shares of
the
Monthly Payment Government Portfolio that the undersigned is
entitled
to vote at the Special Meeting of Shareholders of the Monthly
Payment
Government Portfolio to be held at the offices of the Monthly
Payment
Government Portfolio, 388 Greenwich Street, New York, New York
on
September 28, 1995 at 1:00pm and any adjournment or
adjournments
thereof. The undersigned hereby acknowledges receipt of the Notice
of
Special Meeting and Prospectus /Proxy Statement dated August
,
1995 and hereby instructs said attorneys and proxies to vote
said
shares as indicated herein. In their discretion, the proxies
are
authorized to vote upon such other business as may properly
come
before the Special Meeting. A majority of the proxies present
and
acting at the Special Meeting in person or by substitute (or, if
only
one shall be so present, then that one) shall have and may
exercise
all of the power and authority of said proxies hereunder.
The
undersigned hereby revokes any proxy previously given.
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE
Note: Please sign exactly as your name appears on
this Proxy. If joint owners, EITHER may sign this
Proxy. When signing as attorney, executor,
administrator, trustee, guardian or corporate officer,
please give your full title.
Date:
Signature(s) (Title(s), if applicable)
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
.................................................................
..........
.................................................................
.....
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Please indicate your vote by an "X" in the appropriate box below.
This
proxy, if properly executed, will be voted in the manner directed
by
the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY
WILL
BE VOTED FOR THE PROPOSAL.
1. To approve the Plan of Reorganization FOR AGAINST
ABSTAIN
dated as of August , 1995 providing for:(i) the
acquisition of
all or substantially all of the assets of Smith Barney Funds, Inc.
-
Monthly Payment Government Portfolio (the "Monthly Payment
Government
Portfolio") by Smith Barney Funds, Inc. - U.S. Government
Securities
Portfolio (the "U.S. Government Securities Portfolio") in
exchange
for Class A, Class B, Class C and Class Y shares of the
U.S.
Government Securities Portfolio and the assumption by the
U.S.
Government Securities Portfolio of certain scheduled liabilities
of
the Monthly Payment Government Portfolio; (ii) the distribution
of
such shares of the U.S. Government Securities Portfolio
to
shareholders of the Monthly Payment Government Portfolio
in
liquidation of the Monthly Payment Government Portfolio; and
(iii)
the subsequent termination of the Monthly Payment
Government
Portfolio.
u:\osunkwo\trasagc.agr
FORM OF
TRANSFER AGENCY AND REGISTRAR AGREEMENT
AGREEMENT, dated as of _______________, between
______________ (the "Fund"), a ______________ having its
principal place of business at
________________________________, and THE SHAREHOLDER
SERVICES GROUP, INC. (MA) (the "Transfer Agent"), a
Massachusetts corporation having its principal place of
business at One Exchange Place, 53 State Street, Boston,
Massachusetts 02109.
W I T N E S S E T H
That for and in consideration of the mutual covenants
and promises hereinafter set forth, the Fund and the
Transfer Agent agree as follows:
1. Definitions. Whenever used in this Agreement,
the following words and phrases, unless the context
otherwise requires, shall have the following meanings:
(a) "Articles of Incorporation" shall mean the
Articles of Incorporation, Declaration of Trust, Partnership
Agreement, or similar organizational document as the case
may be, of the Fund as the same may be amended from time to
time.
(b) "Authorized Person" shall be deemed to
include any person, whether or not such person is an officer
or employee of the Fund, duly authorized to give Oral
Instructions or Written Instructions on behalf of the Fund
as indicated in a certificate furnished to the Transfer
Agent pursuant to Section 4(c) hereof as may be received by
the Transfer Agent from time to time.
(c) "Board of Directors" shall mean the Board of
Directors, Board of Trustees or, if the Fund is a limited
partnership, the General Partner(s) of the Fund, as the case
may be.
(d) "Commission" shall mean the Securities and
Exchange Commission.
(e) "Custodian" refers to any custodian or sub-
custodian of securities and other property which the Fund
may from time to time deposit, or cause to be deposited or
held under the name or account of such a custodian pursuant
to a Custody Agreement.
(f) "Fund" shall mean the entity executing this
Agreement, and if it is a series fund, as such term is used
in the 1940 Act, such term shall mean each series of the
Fund hereafter created, except that appropriate
documentation with respect to each series must be presented
to the Transfer Agent before this Agreement shall become
effective with respect to each such series.
(g) "1940 Act" shall mean the Investment Company
Act of 1940.
(h) "Oral Instructions" shall mean instructions,
other than Written Instructions, actually received by the
Transfer Agent from a person reasonably believed by the
Transfer Agent to be an Authorized Person.
(i) "Prospectus" shall mean the most recently
dated Fund Prospectus and Statement of Additional
Information, including any supplements thereto, which has
become effective under the Securities Act of 1933 and the
1940 Act.
(j) "Shares" refers collectively to such shares
of capital stock, beneficial interest or limited partnership
interests, as the case may be, of the Fund as may be issued
from time to time and, if the Fund is a closed-end or a
series fund, as such terms are used in the 1940 Act any
other classes or series of stock, shares of beneficial
interest or limited partnership interests that may be issued
from time to time.
(k) "Shareholder" shall mean a holder of shares
of capital stock, beneficial interest or any other class or
series, and also refers to partners of limited partnerships.
(l) "Written Instructions" shall mean a written
communication signed by a person reasonably believed by the
Transfer Agent to be an Authorized Person and actually
received by the Transfer Agent. Written Instructions shall
include manually executed originals and authorized
electronic transmissions, including telefacsimile of a
manually executed original or other process.
2. Appointment of the Transfer Agent. The Fund
hereby appoints and constitutes the Transfer Agent as
transfer agent, registrar and dividend disbursing agent for
Shares of the Fund and as shareholder servicing agent for
the Fund. The Transfer Agent accepts such appointments and
agrees to perform the duties hereinafter set forth.
3. Compensation.
(a) The Fund will compensate or cause the
Transfer Agent to be compensated for the performance of its
obligations hereunder in accordance with the fees set forth
in the written schedule of fees annexed hereto as Schedule A
and incorporated herein. The Transfer Agent will transmit
an invoice to the Fund as soon as practicable after the end
of each calendar month which will be detailed in accordance
with Schedule A, and the Fund will pay to the Transfer Agent
the amount of such invoice within thirty (30) days after the
Fund's receipt of the invoice.
In addition, the Fund agrees to pay, and will be
billed separately for, reasonable out-of-pocket expenses
incurred by the Transfer Agent in the performance of its
duties hereunder. Out-of-pocket expenses shall include, but
shall not be limited to, the items specified in the written
schedule of out-of-pocket charges annexed hereto as Schedule
B and incorporated herein. Unspecified out-of-pocket
expenses shall be limited to those out-of-pocket expenses
reasonably incurred by the Transfer Agent in the performance
of its obligations hereunder. Reimbursement by the Fund for
expenses incurred by the Transfer Agent in any month shall
be made as soon as practicable but no later than 15 days
after the receipt of an itemized bill from the Transfer
Agent.
(b) Any compensation agreed to hereunder may be
adjusted from time to time by attaching to Schedule A, a
revised fee schedule, executed and dated by the parties
hereto.
4. Documents. In connection with the appointment of
the Transfer Agent, the Fund shall deliver or caused to be
delivered to the Transfer Agent the following documents on
or before the date this Agreement goes into effect, but in
any case within a reasonable period of time for the Transfer
Agent to prepare to perform its duties hereunder:
(a) If applicable, specimens of the certificates
for Shares of the Fund;
(b) All account application forms and other
documents relating to Shareholder accounts or to any plan,
program or service offered by the Fund;
(c) A signature card bearing the signatures of
any officer of the Fund or other Authorized Person who will
sign Written Instructions or is authorized to give Oral
Instructions;
(d) A certified copy of the Articles of
Incorporation, as amended;
(e) A certified copy of the By-laws of the Fund,
as amended;
(f) A copy of the resolution of the Board of
Directors authorizing the execution and delivery of this
Agreement;
(g) A certified list of Shareholders of the Fund
with the name, address and taxpayer identification number of
each Shareholder, and the number of Shares of the Fund held
by each, certificate numbers and denominations (if any
certificates have been issued), lists of any accounts
against which stop transfer orders have been placed,
together with the reasons therefore, and the number of
Shares redeemed by the Fund; and
(h) An opinion of counsel for the Fund with
respect to the validity of the Shares and the status of such
Shares under the Securities Act of 1933, as amended.
5. Further Documentation. The Fund will also furnish
the Transfer Agent with copies of the following documents
promptly after the same shall become available:
(a) each resolution of the Board of Directors
authorizing the issuance of Shares;
(b) any registration statements filed on behalf
of the Fund and all pre-effective and post-effective
amendments thereto filed with the Commission;
(c) a certified copy of each amendment to the
Articles of Incorporation or the By-laws of the Fund;
(d) certified copies of each resolution of the
Board of Directors or other authorization designating
Authorized Persons; and
(e) such other certificates, documents or
opinions as the Transfer Agent may reasonably request in
connection with the performance of its duties hereunder.
6. Representations of the Fund. The Fund represents
to the Transfer Agent that all outstanding Shares are
validly issued, fully paid and non-assessable. When Shares
are hereafter issued in accordance with the terms of the
Fund's Articles of Incorporation and its Prospectus, such
Shares shall be validly issued, fully paid and non-
assessable.
7. Distributions Payable in Shares. In the event
that the Board of Directors of the Fund shall declare a
distribution payable in Shares, the Fund shall deliver or
cause to be delivered to the Transfer Agent written notice
of such declaration signed on behalf of the Fund by an
officer thereof, upon which the Transfer Agent shall be
entitled to rely for all purposes, certifying (i) the
identity of the Shares involved, (ii) the number of Shares
involved, and (iii) that all appropriate action has been
taken.
8. Duties of the Transfer Agent. The Transfer Agent
shall be responsible for administering and/or performing
those functions typically performed by a transfer agent; for
acting as service agent in connection with dividend and
distribution functions and for performing shareholder
account and administrative agent functions in connection
with the issuance, transfer and redemption or repurchase
(including coordination with the Custodian) of Shares in
accordance with the terms of the Prospectus and applicable
law. The operating standards and procedures to be followed
shall be determined from time to time by agreement between
the Fund and the Transfer Agent and shall initially be as
described in Schedule C attached hereto. In addition, the
Fund shall deliver to the Transfer Agent all notices issued
by the Fund with respect to the Shares in accordance with
and pursuant to the Articles of Incorporation or By-laws of
the Fund or as required by law and shall perform such other
specific duties as are set forth in the Articles of
Incorporation including the giving of notice of any special
or annual meetings of shareholders and any other notices
required thereby.
9. Record Keeping and Other Information. The
Transfer Agent shall create and maintain all records
required of it pursuant to its duties hereunder and as set
forth in Schedule C in accordance with all applicable laws,
rules and regulations, including records required by Section
31(a) of the 1940 Act. All records shall be available
during regular business hours for inspection and use by the
Fund. Where applicable, such records shall be maintained by
the Transfer Agent for the periods and in the places
required by Rule 31a-2 under the 1940 Act.
Upon reasonable notice by the Fund, the Transfer Agent
shall make available during regular business hours such of
its facilities and premises employed in connection with the
performance of its duties under this Agreement for
reasonable visitation by the Fund, or any person retained by
the Fund as may be necessary for the Fund to evaluate the
quality of the services performed by the Transfer Agent
pursuant hereto.
10. Other Duties. In addition to the duties set
forth in Schedule C, the Transfer Agent shall perform such
other duties and functions, and shall be paid such amounts
therefor, as may from time to time be agreed upon in writing
between the Fund and the Transfer Agent. The compensation
for such other duties and functions shall be reflected in a
written amendment to Schedule A or B and the duties and
functions shall be reflected in an amendment to Schedule C,
both dated and signed by authorized persons of the parties
hereto.
11. Reliance by Transfer Agent; Instructions.
(a) The Transfer Agent will have no liability
when acting upon Written or Oral Instructions believed to
have been executed or orally communicated by an Authorized
Person and will not be held to have any notice of any change
of authority of any person until receipt of a Written
Instruction thereof from the Fund pursuant to Section 4(c).
The Transfer Agent will also have no liability when
processing Share certificates which it reasonably believes
to bear the proper manual or facsimile signatures of the
officers of the Fund and the proper countersignature of the
Transfer Agent.
(b) At any time, the Transfer Agent may apply to
any Authorized Person of the Fund for Written Instructions
and may seek advice from legal counsel for the Fund, or its
own legal counsel, with respect to any matter arising in
connection with this Agreement, and it shall not be liable
for any action taken or not taken or suffered by it in good
faith in accordance with such Written Instructions or in
accordance with the opinion of counsel for the Fund or for
the Transfer Agent. Written Instructions requested by the
Transfer Agent will be provided by the Fund within a
reasonable period of time. In addition, the Transfer Agent,
its officers, agents or employees, shall accept Oral
Instructions or Written Instructions given to them by any
person representing or acting on behalf of the Fund only if
said representative is an Authorized Person. The Fund
agrees that all Oral Instructions shall be followed within
one business day by confirming Written Instructions, and
that the Fund's failure to so confirm shall not impair in
any respect the Transfer Agent's right to rely on Oral
Instructions. The Transfer Agent shall have no duty or
obligation to inquire into, nor shall the Transfer Agent be
responsible for, the legality of any act done by it upon the
request or direction of a person reasonably believed by the
Transfer Agent to be an Authorized Person.
(c) Notwithstanding any of the foregoing provisions of
this Agreement, the Transfer Agent shall be under no duty or
obligation to inquire into, and shall not be liable for:
(i) the legality of the issuance or sale of any shares or
the sufficiency of the amount to be received therefor; (ii)
the legality of the redemption of any Shares, or the
propriety of the amount to be paid therefor; (iii) the
legality of the declaration of any dividend by the Board of
Directors, or the legality of the issuance of any Shares in
payment of any dividend; or (iv) the legality of any
recapitalization or readjustment of the Shares.
12. Acts of God, etc. The Transfer Agent will not be
liable or responsible for delays or errors by acts of God or
by reason of circumstances beyond its control, including
acts of civil or military authority, national emergencies,
labor difficulties, mechanical breakdown, insurrection, war,
riots, or failure or unavailability of transportation,
communication or power supply, fire, flood, or other
catastrophe.
13. Duty of Care and Indemnification. Each party
hereto (the "Indemnifying Party") will indemnify the other
party (the "Indemnified Party") against and hold it harmless
from any and all losses, claims, damages, liabilities or
expenses of any sort or kind (including reasonable counsel
fees and expenses) resulting from any claim, demand, action
or suit or other proceeding (a "Claim") unless such Claim
resulted from a negligent failure to act or omission to act
or bad faith of the Indemnified Party in the performance of
its duties hereunder. In addition, the Fund will indemnify
the Transfer Agent against and hold it harmless from any
Claim, damages, liabilities or expenses (including
reasonable counsel fees) that is a result of: (i) any
action taken in accordance with Written or Oral
Instructions, or any other instructions, or share
certificates reasonably believed by the Transfer Agent to be
genuine and to be signed, countersigned or executed, or
orally communicated by an Authorized Person; (ii) any action
taken in accordance with written or oral advice reasonably
believed by the Transfer Agent to have been given by counsel
for the Fund or its own counsel; or (iii) any action taken
as a result of any error or omission in any record
(including but not limited to magnetic tapes, computer
printouts, hard copies and microfilm copies) delivered, or
caused to be delivered by the Fund to the Transfer Agent in
connection with this Agreement.
In any case in which the Indemnifying Party may be
asked to indemnify or hold the Indemnified Party harmless,
the Indemnifying Party shall be advised of all pertinent
facts concerning the situation in question. The Indemnified
Party will notify the Indemnifying Party promptly after
identifying any situation which it believes presents or
appears likely to present a claim for indemnification
against the Indemnifying Party although the failure to do so
shall not prevent recovery by the Indemnified Party. The
Indemnifying Party shall have the option to defend the
Indemnified Party against any Claim which may be the subject
of this indemnification, and, in the event that the
Indemnifying Party so elects, such defense shall be
conducted by counsel chosen by the Indemnifying Party and
satisfactory to the Indemnified Party, and thereupon the
Indemnifying Party shall take over complete defense of the
Claim and the Indemnified Party shall sustain no further
legal or other expenses in respect of such Claim. The
Indemnified Party will not confess any Claim or make any
compromise in any case in which the Indemnifying Party will
be asked to provide indemnification, except with the
Indemnifying Party's prior written consent. The obligations
of the parties hereto under this Section shall survive the
termination of this Agreement.
14. Consequential Damages. In no event and under no
circumstances shall either party under this Agreement be
liable to the other party for indirect loss of profits,
reputation or business or any other special damages under
any provision of this Agreement or for any act or failure to
act hereunder.
15. Term and Termination.
(a) This Agreement shall be effective on the date
first written above and shall continue until ___________,
and thereafter shall automatically continue for successive
annual periods ending on the anniversary of the date first
written above, provided that it may be terminated by either
party upon written notice given at least 60 days prior to
termination.
(b) In the event a termination notice is given by
the Fund, it shall be accompanied by a resolution of the
Board of Directors, certified by the Secretary of the Fund,
designating a successor transfer agent or transfer agents.
Upon such termination and at the expense of the Fund, the
Transfer Agent will deliver to such successor a certified
list of shareholders of the Fund (with names and addresses),
and all other relevant books, records, correspondence and
other Fund records or data in the possession of the Transfer
Agent, and the Transfer Agent will cooperate with the Fund
and any successor transfer agent or agents in the
substitution process.
16. Confidentiality. Both parties hereto agree that
any non public information obtained hereunder concerning the
other party is confidential and may not be disclosed to any
other person without the consent of the other party, except
as may be required by applicable law or at the request of
the Commission or other governmental agency. The parties
further agree that a breach of this provision would
irreparably damage the other party and accordingly agree
that each of them is entitled, without bond or other
security, to an injunction or injunctions to prevent
breaches of this provision.
17. Amendment. This Agreement may only be
amended or modified by a written instrument executed by both
parties.
18. Subcontracting. The Fund agrees that the
Transfer Agent may, in its discretion, subcontract for
certain of the services described under this Agreement or
the Schedules hereto; provided, that the appointment of any
such Transfer Agent shall not relieve the Transfer Agent of
its responsibilities hereunder.
19. Miscellaneous.
(a) Notices. Any notice or other instrument
authorized or required by this Agreement to be given in
writing to the Fund or the Transfer Agent, shall be
sufficiently given if addressed to that party and received
by it at its office set forth below or at such other place
as it may from time to time designate in writing.
To the Fund:
________________________________
________________________________
________________________________
________________________________
Attention: ________________________
To the Transfer Agent:
The Shareholder Services Group
One Exchange Place
53 State Street
Boston, Massachusetts 02109
Attention: Robert F. Radin, President
with a copy to TSSG Counsel.
(b) Successors. This Agreement shall extend to
and shall be binding upon the parties hereto, and their
respective successors and assigns, provided, however, that
this Agreement shall not be assigned to any person other
than a person controlling, controlled by or under common
control with the assignor without the written consent of the
other party, which consent shall not be unreasonably
withheld.
(c) Governing Law. This Agreement shall be governed
exclusively by the laws of the State of New York without
reference to the choice of law provisions thereof. Each
party hereto hereby agrees that (i) the Supreme Court of New
York sitting in New York County shall have exclusive
jurisdiction over any and all disputes arising hereunder;
(ii) hereby consents to the personal jurisdiction of such
court over the parties hereto, hereby waiving any defense of
lack of personal jurisdiction; and (iii) appoints the person
to whom notices hereunder are to be sent as agent for
service of process.
(d) Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to
be an original; but such counterparts shall, together,
constitute only one instrument.
(e) Captions. The captions of this Agreement are
included for convenience of reference only and in no way
define or delimit any of the provisions hereof or otherwise
affect their construction or effect.
(f) Use of Transfer Agent's Name. The Fund shall not
use the name of the Transfer Agent in any Prospectus,
shareholders' report, sales literature or other material
relating to the Fund in a manner not approved prior thereto
in writing; provided, that the Transfer Agent need only
receive notice of all reasonable uses of its name which
merely refer in accurate terms to its appointment hereunder
or which are required by any government agency or applicable
law or rule. Notwithstanding the foregoing, any reference
to the Transfer Agent shall include a statement to the
effect that it is a wholly owned subsidiary of First Data
Corporation.
(g) Use of Fund's Name. The Transfer Agent shall
not use the name of the Fund or material relating to the
Fund on any documents or forms for other than internal use
in a manner not approved prior thereto in writing; provided,
that the Fund need only receive notice of all reasonable
uses of its name which merely refer in accurate terms to the
appointment of the Transfer Agent or which are required by
any government agency or applicable law or rule.
(h) Independent Contractors. The parties agree that
they are independent contractors and not partners or co-
venturers.
(i) Entire Agreement; Severability. This Agreement
and the Schedules attached hereto constitute the entire
agreement of the parties hereto relating to the matters
covered hereby and supersede any previous agreements. If
any provision is held to be illegal, unenforceable or
invalid for any reason, the remaining provisions shall not
be affected or impaired thereby.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers,
as of the day and year first above written.
[FUND]
By: _____________________
Title: ____________________
THE SHAREHOLDER SERVICES
GROUP, INC.
By: _____________________
Title: ____________________
A-1
Transfer Agent Fee
Schedule A
Class A shares
The Fund shall pay the Transfer Agent an annualized fee of
$11.00 per shareholder account that is open during any
monthly period. Such fee shall be billed by the Transfer
Agent monthly in arrears on a prorated basis of 1/12 of the
annualized fee for all accounts that are open during such a
month.
The Fund shall pay the Transfer Agent an additional fee of
$.125 per closed account per month applicable to those
shareholder accounts which close in a given month and remain
closed through the following month-end billing cycle. Such
fee shall be billed by the Transfer Agent monthly in
arrears.
Class B shares
The Fund shall pay the Transfer Agent an annualized fee of
$12.50 per shareholder account that is open during any
monthly period. Such fee shall be billed by the Transfer
Agent monthly in arrears on a prorated basis of 1/12 of the
annualized fee for all accounts that are open during such a
month.
The Fund shall pay the Transfer Agent an additional fee of
$.125 per closed account per month applicable to those
shareholder accounts which close in a given month and remain
closed through the following month-end billing cycle. Such
fee shall be billed by the Transfer Agent in arrears.
Class C shares
The Fund shall pay the Transfer Agent an annualized fee of
$8.50 per shareholder account that is open during any
monthly period. Such fee shall be billed by the Transfer
Agent monthly in arrears on a prorated basis of 1/12 of the
annualized fee for all accounts that are open during such a
month.
The Fund shall pay the Transfer Agent an additional fee of
$.125 per closed account per month applicable to those
shareholder accounts which close in a given month and remain
closed through the following month-end billing cycle. Such
fee shall be billed by the Transfer Agent monthly in
arrears.
Class D shares
The Fund shall pay the Transfer Agent an annualized fee of
$9.50 per shareholder account that is open during any
monthly period. Such fee shall be billed by the Transfer
Agent monthly in arrears on a prorated basis of 1/12 of the
annualized fee for all accounts that are open during such a
month.
The Fund shall pay the Transfer Agent an additional fee of
$.125 per closed account per month applicable to those
shareholder accounts which close in a given month and remain
closed through the following month-end billing cycle. Such
fee shall be billed by the Transfer Agent monthly in
arrears.
B-1
Schedule B
OUT-OF-POCKET EXPENSES
The Fund shall reimburse the Transfer Agent monthly for
applicable out-of-pocket expenses, including, but not
limited to the following items:
- Microfiche/microfilm production
- Magnetic media tapes and freight
- Printing costs, including certificates,
envelopes,
checks and stationery
- Postage (bulk, pre-sort, ZIP + 4,
barcoding, first class) direct
pass through to the Fund
- Due diligence mailings
- Telephone and telecommunication costs,
including
all lease, maintenance and line costs.
-Proxy solicitations, mailings and
tabulations
-Daily & Distribution advice mailings
-Shipping, Certified and Overnight mail and
insurance
-Year-end form production and mailings
-Terminals, communication lines, printers and
other
equipment and any expenses incurred in
connection
with such terminals and lines
- Duplicating services
- Courier services
- Incoming and outgoing wire charges
- Federal Reserve charges for check clearance
- Record retention, retrieval and destruction
costs, including,
but not limited to exit fees charged by
third party
record keeping vendors.
- Third party audit reviews
- Insurance
- Such other miscellaneous expenses
reasonably incurred
by the Transfer Agent in performing its
duties and
responsibilities under this Agreement.
B-2
The Fund agrees that postage and mailing expenses will
be paid on the day of or prior to mailing as agreed with the
Transfer Agent. In addition, the Fund will promptly
reimburse the Transfer Agent for any other unscheduled
expenses incurred by the Transfer Agent whenever the Fund
and the Transfer Agent mutually agree that such expenses are
not otherwise properly borne by the Transfer Agent as part
of its duties and obligations under the Agreement.
C-1
Schedule C
DUTIES OF THE TRANSFER AGENT
1. Shareholder Information. The Transfer Agent or its
agent shall maintain a record of the number of Shares held
by each holder of record which shall include name, address,
taxpayer identification and which shall indicate whether
such Shares are held in certificates or uncertificated form.
2. Shareholder Services. The Transfer Agent
or its agent will investigate all inquiries from
Shareholders of the Fund relating to Shareholder accounts
and will respond to all communications from Shareholders and
others relating to its duties hereunder and such other
correspondence as may from time to time be mutually agreed
upon between the Transfer Agent and the Fund. The Transfer
Agent shall provide the Fund with reports concerning
shareholder inquiries and the responses thereto by the
Transfer Agent, in such form and at such time as are agreed
to by the Fund and the Transfer Agent.
3. Share Certificates.
(a) At the expense of the Fund, it shall supply
the Transfer Agent or its agent with an adequate supply of
blank share certificates to meet the Transfer Agent's or its
agent's requirements therefor. Such Share certificates
shall be properly signed by facsimile. The Fund agrees
that, notwithstanding the death, resignation, or removal of
any officer of the Fund whose signature appears on such
certificates, the Transfer Agent or its agent may continue
to countersign certificates which bear such signatures until
otherwise directed by Written Instructions.
(b) The Transfer Agent or its agent shall issue
replacement Share certificates in lieu of certificates which
have been lost, stolen or destroyed, upon receipt by the
Transfer Agent or its agent of properly executed affidavits
and lost certificate bonds, in form satisfactory to the
Transfer Agent or its agent, with the Fund and the Transfer
Agent or its agent as obligees under the bond.
(c) The Transfer Agent or its agent shall also
maintain a record of each certificate issued, the number of
Shares represented thereby and the holder of record. With
respect to Shares held in open accounts or uncertificated
form, i.e., no certificate being issued with respect
thereto, the Transfer Agent or its agent shall maintain
comparable records of the record holders thereof, including
their names, addresses and taxpayer identification. The
Transfer Agent or it agent shall further maintain a stop
transfer record on lost and/or replaced certificates.
C-2
4. Mailing Communications to Shareholders; Proxy
Materials. The Transfer Agent or its agent will address and
mail to Shareholders of the Fund, all reports to
Shareholders, dividend and distribution notices and proxy
material for the Fund's meetings of Shareholders. In
connection with meetings of Shareholders, the Transfer Agent
or its Agent will prepare Shareholder lists, mail and
certify as to the mailing of proxy materials, process and
tabulate returned proxy cards, report on proxies voted prior
to meetings, act as inspector of election at meetings and
certify Shares voted at meetings.
5. Sales of Shares
(a) Suspension of Sale of Shares. The Transfer
Agent or its agent shall not be required to issue any Shares
of the Fund where it has received a Written Instruction from
the Fund or official notice from any appropriate Federal or
state authority that the sale of the Shares of the Fund has
been suspended or discontinued. The existence of such
Written Instructions or such official notice shall be
conclusive evidence of the right of the Transfer Agent or
its agent to rely on such Written Instructions or official
notice.
(b) Returned Checks. In the event that any
check or other order for the payment of money is returned
unpaid for any reason, the Transfer Agent or its agent will:
(i) give prompt notice of such return to the Fund or its
designee; (ii) place a stop transfer order against all
Shares issued as a result of such check or order; and (iii)
take such actions as the Transfer Agent may from time to
time deem appropriate.
6. Transfer and Repurchase
(a) Requirements for Transfer or Repurchase of
Shares.
The Transfer Agent or its agent shall process all requests
to transfer or redeem Shares in accordance with the transfer
or repurchase procedures determined by the Fund.
The Transfer Agent or its agent will transfer or
repurchase Shares upon receipt of Oral or Written
Instructions or otherwise pursuant to the Prospectus and
Share certificates, if any, properly endorsed for transfer
or redemption, accompanied by such documents as the Transfer
Agent or its agent reasonably may deem necessary.
The Transfer Agent or its agent reserves the right
to refuse to transfer or repurchase Shares until it is
satisfied that the endorsement on the instructions is valid
and genuine. The Transfer Agent or its agent also reserves
the right to refuse to transfer or repurchase Shares until
it is satisfied that the requested transfer or
C-3
repurchase is legally authorized, and it shall incur no
liability for the refusal, in good faith, to make transfers
or repurchases which the Transfer Agent or its agent, in its
good judgment, deems improper or unauthorized, or until it
is reasonably satisfied that there is no basis to any claims
adverse to such transfer or repurchase.
(b) Notice to Custodian and Fund. When Shares are
redeemed, the Transfer Agent or its agent shall, upon
receipt of the instructions and documents in proper form,
deliver to the Custodian and the Fund or its designee a
notification setting forth the number of Shares to be
repurchased. Such repurchased Shares shall be reflected on
appropriate accounts maintained by the Transfer Agent or its
agent reflecting outstanding Shares of the Fund and Shares
attributed to individual accounts.
(c) Payment of Repurchase Proceeds. The Transfer
Agent or its agent shall, upon receipt of the moneys paid to
it by the Custodian for the repurchase of Shares, pay such
moneys as are received from the Custodian, all in accordance
with the procedures described in the Written Instruction
received by the Transfer Agent or its agent from the Fund.
The Transfer Agent or its agent shall not process
or effect any repurchase with respect to Shares of the Fund
after receipt by the Transfer Agent or its agent of
notification of the suspension of the determination of net
asset value of the Fund.
7. Dividends
(a) Notice to Agent and Custodian. Upon the
declaration of each dividend and each capital gains
distribution by the Board of Directors of the Fund with
respect to Shares of the Fund, the Fund shall furnish or
cause to be furnished to the Transfer Agent or its agent a
copy of a resolution of the Fund's Board of Directors
certified by the Secretary of the Fund setting forth the
date of the declaration of such dividend or distribution,
the ex-dividend date, the date of payment thereof, the
record date as of which shareholders entitled to payment
shall be determined, the amount payable per Share to the
shareholders of record as of that date, the total amount
payable to the Transfer Agent or its agent on the payment
date and whether such dividend or distribution is to be paid
in Shares of such class at net asset value.
On or before the payment date specified in such
resolution of the Board of Directors, the Custodian of the
Fund will pay to the Transfer Agent sufficient cash to make
payment to the shareholders of record as of such payment
date.
C-4
(b) Insufficient Funds for Payments. If the
Transfer Agent or its agent does not receive sufficient cash
from the Custodian to make total dividend and/or
distribution payments to all shareholders of the Fund as of
the record date, the Transfer Agent or its agent will, upon
notifying the Fund, withhold payment to all Shareholders of
record as of the record date until sufficient cash is
provided to the Transfer Agent or its agent.
C-5
Exhibit 1
to
Schedule C
Summary of Services
The services to be performed by the Transfer Agent or
its agent shall be as follows:
A. DAILY RECORDS
Maintain daily the following information with
respect to each Shareholder account as received:
Name and Address (Zip Code)
Class of Shares
Taxpayer Identification Number
Balance of Shares held by Agent
Beneficial owner code: i.e., male, female, joint tenant,
etc.
Dividend code (reinvestment)
Number of Shares held in certificate form
B. OTHER DAILY ACTIVITY
Answer written inquiries relating to Shareholder accounts
(matters relating to portfolio management, distribution
of Shares and other management policy questions will be
referred to the Fund).
Process additional payments into established Shareholder
accounts in accordance with Written Instruction from the
Fund.
Upon receipt of proper instructions and all required
documentation, process requests for repurchase of Shares.
Identify redemption requests made with respect to
accounts in which Shares have been purchased within an
agreed-upon period of time for determining whether good
funds have been collected with respect to such purchase
and process as agreed by the Transfer Agent in accordance
with Written Instructions set forth by the Fund.
Examine and process all transfers of Shares, ensuring
that all transfer requirements and legal documents have
been supplied.
Issue and mail replacement checks.
Open new accounts and maintain records of exchanges
between accounts.
C. DIVIDEND ACTIVITY
Calculate and process Share dividends and distributions
as instructed by the Fund.
Compute, prepare and mail all necessary reports to
Shareholders or various authorities as requested by the
Fund. Report to the Fund reinvestment plan share
purchases and determination of the reinvestment price.
D. MEETINGS OF SHAREHOLDERS
Cause to be mailed proxy and related material for all
meetings of Shareholders. Tabulate returned proxies
(proxies must be adaptable to mechanical equipment of the
Transfer Agent or its agents) and supply daily reports
when sufficient proxies have been received.
Prepare and submit to the Fund an Affidavit of Mailing.
At the time of the meeting, furnish a certified list of
Shareholders, hard copy, microfilm or microfiche and, if
requested by the Fund, Inspection of Election.
E. PERIODIC ACTIVITIES
Cause to be mailed reports, Prospectuses, and any other
enclosures requested by the Fund (material must be
adaptable to mechanical equipment of the Transfer Agent
or its agents).
Receive all notices issued by the Fund with respect to
the Preferred Shares in accordance with and pursuant to
the Articles of Incorporation and the Indenture and
perform such other specific duties as are set forth in
the Articles of Incorporation including a giving of
notice of a special meeting and notice of redemption in
the circumstances and otherwise in accordance with all
relevant provisions of the Articles of Incorporation.
/DOMESTIC/FORMS/
Independent Auditors' Consent
The Board of Directors of
Smith Barney Funds, Inc.:
We consent to the use of our report dated February 17, 1995
with respect to the Portfolios listed below of Smith Barney
Funds, Inc. incorporated herein by reference in the
Prospectus/Proxy Statement and included in this Registration
Statement on Form N-14 and to the references to our firm
under the headings "Financial Statements and Experts" and
"Representations and Warranties" in the Prospectus/Proxy
Statement and "Financial Highlights" in the Prospectus and
"Independent Auditors" in the Statement of Additional
Information incorporated herein by reference.
Portfolio
U.S. Government Securities Portfolio
Monthly Payment Government Portfolio
KPMG PEAT MARWICK LLP
August 18, 1995
New York, New York
The Monthly Payment Government Portfolio
The U.S. Government Securities Portfolio -11-
August 29, 1995
Monthly Payment Government Portfolio,
Smith Barney Funds, Inc.,
388 Greenwich Street,
New York, New York 10013.
U.S. Government Securities Portfolio,
Smith Barney Funds, Inc.,
388 Greenwich Street,
New York, New York 10013.
Ladies and Gentlemen:
We have acted as counsel to Smith Barney Funds,
Inc., a Maryland corporation (the "Fund"), in connection
with the Plan of Reorganization (the "Agreement"), included
as Exhibit A to the Fund's Registration Statement on Form
N-14, between the Monthly Payment Government Portfolio
("Target") and the U.S. Government Securities Portfolio
("Acquiror"), each a series of the Fund, and we render this
opinion to you pursuant to Section 3.4 of the Agreement.
Capitalized terms not defined herein have the meanings
specified in the Agreement.
For purposes of the opinion set forth below, we
have relied, with your consent, upon the accuracy and
completeness of the statements and representations contained
in the Agreement and in the Prospectus/Proxy Statement which
will be distributed to the shareholders of Target in
connection with the Reorganization. With your consent, we
have not attempted to verify independently the accuracy of
any information in these documents and have assumed that the
statements and representations contained therein will be
true on the Closing Date.
In addition, in connection with this opinion, we
have assumed, with your consent, that the Reorganization
will be effected in accordance with the Agreement and that,
as of the Closing Date:
1. The fair market value of Acquiror shares when
received by each Target shareholder will be approximately
equal to the fair market value of Target shares surrendered
in the exchange therefor.
2. Each of the managements of Acquiror and Target
(a) is unaware of any plan or intention of Target
shareholders to redeem or otherwise dispose of any portion
of Acquiror shares to be received in the Reorganization and
(b) does not anticipate dispositions of those Acquiror
shares at the time of or soon after the Reorganization to
exceed the usual rate and frequency of dispositions of
Target shares as an open-end investment company.
Consequently, each management expects that the percentage of
Target shareholder interests, if any, that will be disposed
of as a result of or at the time of the Reorganization will
be de minimis. Nor does either management anticipate that
there will be extraordinary redemptions of Acquiror shares
immediately following the Reorganization. As of the Closing
Date, there will be no Target shareholder that owns 5
percent or more of Target shares.
3. Pursuant to the Reorganization, Acquiror will
acquire at least 90% of the fair market value of the net
assets, and at least 70% of the fair market value of the
gross assets, held by Target immediately before the
Reorganization. For purposes of this representation, any
amounts used by Target to pay its Reorganization expenses
and redemptions and distributions made by it immediately
before the Reorganization (except for (a) distributions made
to conform to its policy of distributing all or
substantially all of its income and gains to avoid the
obligation to pay federal income tax and/or the excise tax
under Section 4982 of the Code and (b) redemptions arising
in the ordinary course of its business as a series of an
open-end investment company) will be included as assets held
by Target immediately before the Reorganization.
4. Acquiror has no plan or intention to issue
additional shares following the Reorganization except in the
ordinary course of its business as a series of an open-end
investment company; nor does Acquiror have any plan or
intention to redeem or otherwise reacquire any shares issued
to Target shareholders pursuant to the Reorganization, other
than through redemptions arising in the ordinary course of
that business.
5. There is no plan or intention for Acquiror to
be dissolved or merged with another corporation or business
trust or any "fund" thereof (within the meaning of Section
851(h)(2) of the Code) following the Reorganization.
6. Immediately following consummation of the
Reorganization, Acquiror will hold substantially the same
assets and be subject to substantially the same liabilities
that Target held or was subject to immediately prior
thereto, plus any liabilities and expenses of the parties
incurred in connection with the Reorganization.
7. Target will distribute Acquiror shares it
receives in the Reorganization in pursuance of the plan of
reorganization.
8. Target will be liquidated as soon as
reasonably practicable after the Reorganization, but in all
events within six months after the Closing Date.
9. Target liabilities assumed by Acquiror plus
the liabilities, if any, to which the transferred assets are
subject were incurred by Target in the ordinary course of
its business.
10. Acquiror (a) will actively continue Target's
business in substantially the same manner that Target
conducted that business immediately before the
Reorganization, (b) has no plan or intention to sell or
otherwise dispose of any Target assets, except for
dispositions made in the ordinary course of that business
and dispositions necessary to maintain its status as a
regulated investment company under Subchapter M of the Code,
and (c) expects to retain substantially all Target assets in
the same form as it receives them in the Reorganization,
unless and until subsequent investment circumstances suggest
the desirability of change or it becomes necessary to make
dispositions thereof to maintain such status.
11. Acquiror and Target will each pay their
proportionate share of expenses incurred in connection with
the Reorganization, and Target shareholders will pay their
own expenses, if any, incurred in connection with the
Reorganization.
12. There is no intercompany indebtedness between
Acquiror and Target that was issued or acquired, or will be
settled, at a discount.
13. Acquiror does not own, directly or
indirectly, nor has it owned during the past five years,
directly or indirectly, any Target shares nor will it
acquire any Target shares prior to the Reorganization.
14. The fair market value of Target assets on a
going concern basis will equal or exceed the liabilities to
be assumed by Acquiror and those to which Target assets are
subject.
15. Target is not under the jurisdiction of a
court in a Title 11 or similar case within the meaning of
Section 368(a)(3)(A) of the Code.
16. Each of Acquiror and Target is a fund as
defined in Section 851(h)(2) of the Code and qualified for
treatment as a regulated investment company under Subchapter
M of the Code for each past taxable year since it commenced
operations and will continue to meet all the requirements
for such qualification for its current taxable year;
Acquiror intends to continue to meet all such requirements
for the next taxable year; and neither Acquiror nor Target
has earnings and profits accumulated in any taxable year in
which the provisions of Subchapter M did not apply to it.
17. Target shareholders will not own, immediately
after the Reorganization, shares constituting "control" of
Acquiror within the meaning of Section 304(c) of the Code.
18. None of the compensation received by any
Target shareholder who is an employee of Target will be
separate consideration for, or allocable to, any Target
shares held by such shareholder-employee; no Acquiror shares
received by any such shareholder-employee will be separate
consideration for, or allocable to, any employment
agreement; and the consideration paid to any such
shareholder-employee will be for services actually rendered
and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services.
On the basis of the foregoing, and our
consideration of such other matters as we have considered
necessary, we advise you that, in our opinion:
1. The Reorganization will constitute a
reorganization within the meaning of Section 368(a)(1)(C) of
the Code, and each of Target and Acquiror will be a "party
to a reorganization" within the meaning of Section 368(b) of
the Code.
2. Acquiror will not recognize gain or loss upon
the receipt of Target assets in exchange solely for Acquiror
shares and the assumption of certain Target liabilities.
3. Target will not recognize gain or loss upon
the transfer of Target assets in exchange solely for
Acquiror shares and the assumption of certain Target
liabilities, or upon the distribution (whether actual or
constructive) of Acquiror shares to Target shareholders.
4. Target shareholders will not recognize gain or
loss upon the exchange, pursuant to the Reorganization, of
their Target shares for Acquiror shares or upon the
assumption by Acquiror of certain Target liabilities.
5. The basis of Acquiror shares to be received by
Target shareholders pursuant to the Reorganization will be
the same as the basis of Target shares surrendered in
exchange therefor, and the holding period of Acquiror shares
to be received by Target shareholders will include the
holding period of Target shares surrendered in exchange
therefor (provided that Target shares are capital assets in
the hands of such shareholders on the Closing Date).
6. The basis of Target assets to be acquired by
Acquiror will be the same as the basis of such assets to
Target immediately prior to the Reorganization, and the
holding period of Target assets to be acquired by Acquiror
will include Target's holding period therefor.
We express no opinion as to the effect of the
Reorganization on Acquiror, Target or Target shareholders in
respect of any asset as to which unrealized gain or loss is
required to be recognized for U.S. federal income tax
purposes at the end of each year under a mark-to-market
system of accounting.
The tax consequences described above may not apply
to Target shareholders that acquired shares upon the
exercise of employee stock options or otherwise as
compensation, that hold their shares as part of a "straddle"
or "conversion transaction" or that are insurance companies,
securities dealers, financial institutions or foreign
persons.
We hereby consent to the reference to us under the
heading "Information About the Reorganization -- Federal
Income Tax Consequences" in the Prospectus/Proxy Statement
pertaining to the Agreement and to the filing of this
opinion as an exhibit to the Fund's Registration Statement
on Form N-14 filed with the Securities and Exchange
Commission. In giving this consent, we do not hereby admit
that we are within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
~BALT01A:61134:1:|08/28/95
5265-25
August 18, 1995
Smith Barney Funds, Inc.,
388 Greenwich Street,
New York, New York 10013.
Dear Sirs:
In connection with the Pre-Effective Amendment No. 1 to
the Registration Statement on Form N-14 (File No. 33-60385) of
Smith Barney Funds, Inc., a Maryland corporation (the "Company"),
which you expect to file under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to shares of Common
Stock, par value $.01 per share designated as shares of the U.S.
Government Securities Portfolio (the "Shares"), we, as your
counsel, have examined such corporate records, certificates and
other documents, and such questions of law, as we have considered
necessary or appropriate for the purposes of this opinion.
Upon the basis of such examination, we advise you that,
in our opinion, the Shares of each of Class A, Class B, Class C
and Class Y have been duly authorized to the extent of the lesser
of (x) 400,000,000 shares or (y) the number of shares that could
be issued by issuing all of the Shares less the total number of
Shares of all other Classes of Shares then issued and outstanding
and, when the Registration Statement referred to above has become
effective under the Securities Act and the Shares of each such
Class have been issued and sold (a) for at least the par value
thereof pursuant to the Plan of Reorganization (referred to in
the Registration Statement) between the Company on behalf of the
U.S. Government Securities Portfolio and the Company on behalf of
the Monthly Payment Government Portfolio, (b) so as not to exceed
the number of Shares of each such Class then authorized and (c)
in accordance with the authorization of the Board of Directors,
the Shares of each such Class will be validly issued, fully paid
and nonassessable.
The foregoing opinion is limited to the Federal laws of
the United States and the General Corporation of Law of the State
of Maryland, and we are expressing no opinion as to the effect of
the laws of any other jurisdiction.
Also, we have relied as to certain matters on
information obtained from public officials, officers of the
Company and other sources believed by us to be responsible.
We hereby consent to the filing of this opinion as an
exhibit to the Pre-Effective Amendment referred to above. In
giving such consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of
the Securities Act of 1933.
Very truly yours,
PIPER & MARBURY
L.L.P.
CHARLES CENTER SOUTH
36 SOUTH CHARLES STREET
Baltimore, Maryland 21201-
3018
WASHINGTON
410-539-2530 NEW
YORK
FAX: 410-539-0489
PHILADELPHIA
LONDON
EASTON, MD
August 29, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Smith Barney Funds, Inc. - U.S. Government
Securities Portfolio
Dear Sirs:
We have acted as Maryland counsel to Smith Barney
Funds, Inc., a Maryland corporation (the "Company"), in
connection with the Company's Registration Statement on Form
N-14, including all amendments or supplements thereto, filed
with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Act"), and the
issuance of shares of Class A, Class B, Class C and Class Y
of the U.S. Government Securities Portfolio of Common Stock
(the "Shares"), pursuant to such Registration Statement.
The Registration Statement relates to a reorganization
involving the Smith Barney Monthly Payment Government
Portfolio of the Company.
In this capacity, we have examined the Company's
charter and by-laws, an undated draft of a Plan of
Reorganization by Smith Barney Funds, Inc. on behalf of the
U.S. Government Securities Portfolio, an investment
portfolio of Smith Barney Funds and the Smith Barney Monthly
Payment Government Portfolio, an investment portfolio of the
Smith Barney Funds pursuant to which the Shares will be
issued, the proceedings of the Board of Directors of the
Company relating to the issuance of the Shares and such
other statutes, certificates, instruments and documents
relating to the Company and matters of law as we have deemed
necessary to the issuance of this opinion. In such
examination, we have assumed the genuineness of all
signatures, the conformity of final documents in all
material respects to the versions thereof submitted to us in
draft form, the authenticity of all documents submitted to
us as originals, and the conformity with originals of all
documents submitted to us as copies.
Based upon the foregoing, and limited in all respects
to applicable Maryland law, we are of the opinion and advise
you that:
1. The Company has been duly incorporated and is
validly existing as a corporation under the laws of the
State of Maryland.
2. The Shares to be issued by the Company pursuant to
the Registration Statement have been duly authorized and,
when issued as contemplated in the Registration Statement,
will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement and to the reference
to our firm under the heading "Legal Matters" in the
Prospectus included in the Registration Statement. In
giving our consent, we do not thereby admit that we are in
the category of persons whose consent is required under
Section 7 of the Act or the Rules and Regulations of the
Commission thereunder.
Sullivan & Cromwell is authorized to rely on this
opinion in rendering their opinions to be included in the
Registration Statement.
Very truly yours,
Piper & Marbury L.L.P.
