SMITH BARNEY FUNDAMENTAL VALUE FUND INC.
SMITH BARNEY WORLD FUNDS, INC.- INTERNATIONAL
EQUITY PORTFOLIO
SMITH BARNEY FUNDS, INC. - INCOME RETURN
ACCOUNT PORTFOLIO
Supplement dated June 22, 1995 to
Prospectuses*
Effective June 22, 1995 purchases of Class A
shares of the above-mentioned Portfolios by
Section 403(b) or Section 401(a) or (k)
accounts associated with Copeland Retirement
Programs may be made at net asset value
without a sales charge.
- --------------
* Prospectuses dated:
SMITH BARNEY FUNDAMENTAL VALUE FUND INC.
2/1/95
SMITH BARNEY WORLD FUNDS, INC.-
INTERNATIONAL EQUITY PORTFOLIO
2/28/95
SMITH BARNEY FUNDS, INC. -
INCOME RETURN ACCOUNT PORTFOLIO
4/28/95
FD 0962 F5
<PAGE>
SMITH BARNEY FUNDS, INC.
U.S. Government
Securities Portfolio
Monthly Payment
Government Portfolio
Income Return
Account Portfolio
APRIL 28, 1995
PROSPECTUS BEGINS ON PAGE ONE
[LOGO OF SMITH BARNEY MUTUAL FUNDS
APPEARS HERE]
P R O S P E C T U S
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS
APRIL 28, 1995
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Funds, Inc. (the "Fund") is an
investment company currently
offering a choice of six different Portfolios.
Each Portfolio is separately
managed to achieve its own investment
objective and a shareholder's interest is
in the assets and earnings of the Portfolio in
which he or she holds shares.
This Prospectus contains disclosure regarding
the following Portfolios:
The U.S. Government Securities Portfolio and
the Monthly Payment Government
Portfolio each seek high current income,
liquidity and security of principal
from a portfolio of U.S. Government
Obligations.
The Income Return Account Portfolio seeks
high current income from a portfolio
of high quality debt obligations and employs
an immunization strategy to mini-
mize the risk of loss of account value.
This Prospectus sets forth concisely certain
information about the Fund and
the Portfolios, including sales charges,
distribution and service fees and
expenses, that prospective investors will find
helpful in making an investment
decision. Investors are encouraged to read
this Prospectus carefully and retain
it for future reference.
Additional information about the Portfolio is
contained in a Statement of
Additional Information dated April 28, 1995,
as amended or supplemented from
time to time, that is available upon request
and without charge by calling or
writing the Fund at the telephone number or
address set forth above or by con-
tacting a Smith Barney Financial Consultant.
The Statement of Additional Infor-
mation has been filed with the Securities and
Exchange Commission (the "SEC")
and is incorporated by reference into this
Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
Smith Barney Funds, Inc.
TABLE OF CONTENTS
<TABLE>
<S>
<C>
PROSPECTUS SUMMARY
3
- ---------------------------------------------
- -----
FINANCIAL HIGHLIGHTS
12
- ---------------------------------------------
- -----
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
19
- ---------------------------------------------
- -----
VALUATION OF SHARES
21
- ---------------------------------------------
- -----
DIVIDENDS, DISTRIBUTIONS AND TAXES
21
- ---------------------------------------------
- -----
PURCHASE OF SHARES
23
- ---------------------------------------------
- -----
EXCHANGE PRIVILEGE
34
- ---------------------------------------------
- -----
REDEMPTION OF SHARES
38
- ---------------------------------------------
- -----
MINIMUM ACCOUNT SIZE
40
- ---------------------------------------------
- -----
PERFORMANCE
40
- ---------------------------------------------
- -----
MANAGEMENT OF THE FUND
42
- ---------------------------------------------
- -----
DISTRIBUTOR
43
- ---------------------------------------------
- -----
ADDITIONAL INFORMATION
44
- ---------------------------------------------
- -----
APPENDIX
A-1
- ---------------------------------------------
- -----
</TABLE>
- ---------------------------------------------
- -----------------------------------
No person has been authorized to give any
information or to make any
representations in connection with this
offering other than those contained in
this Prospectus and, if given or made, such
other information and
representations must not be relied upon as
having been authorized by the Fund
or the Distributor. This Prospectus does not
constitute an offer by the Fund or
the Distributor to sell or a solicitation of
an offer to buy any of the
securities offered hereby in any jurisdiction
to any person to whom it is
unlawful to make such offer or solicitation in
such jurisdiction.
- ---------------------------------------------
- -----------------------------------
2
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY
The following summary is qualified in its
entirety by detailed information
appearing elsewhere in this Prospectus and in
the Statement of Additional
Information. Cross references in this summary
are to headings in the Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVES The Fund is an open-end,
management investment company.
The U.S. Government Securities Portfolio and
the Monthly Payment Government
Portfolio each seek high current income,
liquidity and security of principal
from a portfolio of U.S. Government
Obligations. The Income Return Account
Portfolio seeks high current income from a
portfolio of high quality debt
obligations and employs an immunization
strategy to minimize the risk of loss
of account value. See "Investment Objectives
and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS Each
Portfolio offers several classes of
shares ("Classes") to investors designed to
provide them with the flexibility
of selecting an investment best suited to
their needs. The general public is
offered three Classes of shares: Class A
shares, Class B shares and Class C
shares, which differ principally in terms of
sales charges and rate of
expenses to which they are subject. A fourth
Class of shares, Class Y shares,
is offered only to investors meeting an
initial investment minimum of
$5,000,000. In addition, a fifth Class, Class
Z shares, which is offered pur-
suant to a separate prospectus, is offered
exclusively to tax-exempt employee
benefit and retirement plans of Smith Barney
Inc. ("Smith Barney") and its
affiliates and is available for the U.S.
Government Securities Portfolio and
the Income Return Account Portfolio. See
"Purchase of Shares" and "Redemption
of Shares."
Class A Shares. Class A shares of the U.S.
Government Securities Portfolio
and the Monthly Payment Government Portfolio
are sold at net asset value plus
an initial sales charge of up to 4.50% and are
subject to an annual service
fee of 0.25% of the average daily net assets
of the Class. Class A shares of
the Income Return Account Portfolio are sold
at net asset value plus an ini-
tial sales charge of up to 2.00% and are not
subject to an annual service fee.
The initial sales charges may be reduced or
waived for certain purchases. Pur-
chases of Class A shares, which when combined
with current holdings of Class A
shares offered with a sales charge equal or
exceed $500,000 in the aggregate,
will be made at net asset value with no
initial sales charge, but will be sub-
ject to a contingent deferred sales charge
("CDSC") of 1.00% on redemptions
made within 12 months of purchase. See
"Prospectus Summary--Reduced or No Ini-
tial Sales Charge."
3
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
Class B Shares. Class B shares, which are
only available in the U.S. Govern-
ment Securities Portfolio and the Monthly
Payment Government Portfolio, are
offered at net asset value subject to a
maximum CDSC of 4.50% of redemption
proceeds, declining by 0.50% the first year
after purchase and by 1.00% each
year thereafter to zero. This CDSC may be
waived for certain redemptions. Class
B shares are subject to an annual service fee
of 0.25% and an annual distribu-
tion fee of 0.50% of the average daily net
assets of the Class. The Class B
shares' distribution fee may cause that Class
to have higher expenses and pay
lower dividends than Class A shares. Class B
shares are not available for pur-
chase in the Income Return Account Portfolio.
Class B Shares Conversion Feature. Class B
shares will convert automatically
to Class A shares, based on relative net asset
value, eight years after the
date of the original purchase. Upon
conversion, these shares will no longer be
subject to an annual distribution fee. In
addition, a certain portion of Class
B shares that have been acquired through the
reinvestment of dividends and dis-
tributions ("Class B Dividend Shares") will be
converted at that time. See
"Purchase of Shares--Deferred Sales Charge
Alternatives."
Class C Shares. Class C shares are sold at
net asset value with no initial
sales charge at the time of purchase. Class C
shares of the U.S. Government
Securities Portfolio and the Monthly Payment
Government Portfolio are subject
to an annual service fee of 0.25% and an
annual distribution fee of 0.45% of
the average daily net assets of the Class C
shares. Class C shares of the
Income Return Account Portfolio are subject to
an annual service fee of 0.15%
and an annual distribution fee of 0.20% of the
average daily net assets of the
Class C shares. All Class C investors pay a
CDSC of 1.00% if they redeem Class
C shares within 12 months of purchase. The
CDSC may be waived for certain
redemptions. The Class C shares' distribution
fee may cause that Class to have
higher expenses and pay lower dividends than
Class A shares. Purchases of Class
C shares, which when combined with current
holdings of Class C shares of a
Portfolio equal or exceed $500,000 in the
aggregate, should be made in Class A
shares at net asset value with no sales
charge, and will be subject to a CDSC
of 1.00% on redemptions made within 12 months
of purchase.
Class Y Shares. Class Y shares are available
only to investors meeting an
initial investment minimum of $5,000,000.
Class Y shares are sold at net asset
value with no initial sales charge or CDSC.
They are not subject to any service
or distribution fees.
4
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
In deciding which Class of Portfolio shares
to purchase, investors should
consider the following factors, as well as any
other relevant facts and
circumstances:
Intended Holding Period. The decision as to
which Class of shares is more
beneficial to an investor depends on the
amount and intended length of his or
her investment. Shareholders who are planning
to establish a program of regular
investment may wish to consider Class A
shares; as the investment accumulates
shareholders may qualify for reduced sales
charges and the shares are subject
to lower ongoing expenses over the term of the
investment. As an alternative,
Class B and Class C shares are sold without
any initial sales charge so the
entire purchase price is immediately invested
in a Portfolio. Any investment
return on these additional invested amounts
may partially or wholly offset the
higher annual expenses of these Classes.
Because a Portfolio's future return
cannot be predicted, however, there can be no
assurance that this would be the
case.
Finally, investors should consider the
effect of the CDSC period and any con-
version rights of the Classes in the context
of their own investment time
frame. For example, while Class C shares have
a shorter CDSC period than Class
B shares, they do not have a conversion
feature, and therefore, are subject to
an ongoing distribution fee. Thus, Class B
shares may be more attractive than
Class C shares to investors with longer term
investment outlooks.
Investors investing a minimum of $5,000,000
must purchase Class Y shares,
which are not subject to an initial sales
charge, CDSC or service or distribu-
tion fees. The maximum purchase amount for
Class A shares is $4,999,999, Class
B shares is $249,999 and Class C shares is
$499,999. There is no maximum pur-
chase amount for Class Y shares.
Reduced or No Initial Sales Charge. The
initial sales charge on Class A
shares may be waived for certain eligible
purchasers, and the entire purchase
price will be immediately invested in the
Portfolio. In addition, Class A share
purchases, which when combined with current
holdings of Class A shares offered
with a sales charge equal or exceed $500,000
in the aggregate, will be made at
net asset value with no initial sales charge,
but will be subject to a CDSC of
1.00% on redemptions made within 12 months of
purchase. The $500,000 aggregate
investment may be met by adding the purchase
to the net asset value of all
Class A shares offered with a sales charge
held in funds sponsored by Smith
Barney listed under "Exchange Privilege."
Class A share pur-
5
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
chases also may be eligible for a reduced
initial sales charge. See "Purchase
of Shares." Because the ongoing expenses of
Class A shares may be lower than
those for Class B and Class C shares,
purchasers eligible to purchase Class A
shares at net asset value or at a reduced
sales charge should consider doing
so.
Smith Barney Financial Consultants may
receive different compensation for
selling each Class of shares. Investors should
understand that the purpose of
the CDSC on the Class B and Class C shares is
the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of
the Fund" for a complete descrip-
tion of the sales charges and service and
distribution fees for each Class of
shares and "Valuation of Shares," "Dividends,
Distributions and Taxes" and "Ex-
change Privilege" for other differences
between the Classes of shares.
SMITH BARNEY 401(K) PROGRAM Investors may be
eligible to participate in the
Smith Barney 401(k) Program, which is
generally designed to assist plan spon-
sors in the creation and operation of
retirement plans under Section 401(a) of
the Internal Revenue Code of 1986, as amended
(the "Code"), as well as other
types of participant directed, tax-qualified
employee benefit plans
(collectively,"Participating Plans"). Class A,
Class B, Class C and Class Y
shares are available as investment
alternatives for Participating Plans. See
"Purchase of Shares -- Smith Barney 401(k)
Program."
PURCHASE OF SHARES Shares may be purchased
through a brokerage account main-
tained with Smith Barney. Shares may also be
purchased through a broker that
clears securities transactions through Smith
Barney on a fully disclosed basis
(an "Introducing Broker") or an investment
dealer in the selling group. In
addition, certain investors, including
qualified retirement plans and certain
other institutional investors, may purchase
shares directly from the Fund
through the Fund's transfer agent, The
Shareholder Services Group, Inc.
("TSSG"), a subsidiary of First Data
Corporation. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A,
Class B and Class C shares may open
an account by making an initial investment of
at least $1,000 for each account,
or $250 for an individual retirement account
("IRA") or a Self-Employed Retire-
ment Plan. Investors in Class Y shares may
open an account for an initial
investment of $5,000,000. Subsequent
investments of at least $50 may be made
for all Classes. For participants in
retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code, the
minimum initial investment
requirement for Class A, Class B and Class C
shares and the subsequent invest-
ment requirement for all Classes is $25. The
minimum initial invest-
6
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
ment requirement for Class A, Class B and
Class C shares and the subsequent
investment requirement for all Classes through
the Systematic Investment Plan
described below is $50. See "Purchase of
Shares."
SYSTEMATIC INVESTMENT PLAN The Portfolio
offers shareholders a Systematic
Investment Plan under which they may authorize
the automatic placement of a
purchase order each month or quarter for
Portfolio shares in an amount of at
least $50. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on
each day the New York Stock
Exchange, Inc. ("NYSE") is open for business.
See "Purchase of Shares" and "Re-
demption of Shares."
MANAGEMENT OF THE PORTFOLIOS Smith Barney
Mutual Funds Management Inc. (former-
ly, Smith, Barney Advisers, Inc.) ("the
"Manager") serves as the Portfolios'
investment manager. The Manager is a wholly
owned subsidiary of Smith Barney
Holdings Inc. ("Holdings"). Holdings is a
wholly owned subsidiary of The Trav-
elers Inc. ("Travelers"), a diversified
financial services holding company
engaged, through its subsidiaries, principally
in four business segments:
Investment Services, Consumer Finance
Services, Life Insurance Services and
Property & Casualty Insurance Services. See
"Management of the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be
exchanged for shares of the same
Class of certain other funds of the Smith
Barney Mutual Funds at the respective
net asset values next determined, plus any
applicable sales charge differen-
tial. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the
Portfolio for the prior day gener-
ally is quoted daily in the financial section
of most newspapers and is also
available from a Smith Barney Financial
Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net
investment income are paid quar-
terly on shares of the U.S. Government
Securities Portfolio and monthly on
shares of each of the Monthly Payment
Government Portfolio and the Income
Return Account Portfolio. Distributions of net
realized capital gains, if any,
are paid annually. See "Dividends,
Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and
distributions paid on shares of a Class
will be reinvested automatically, unless
otherwise specified by an investor, in
additional shares of the same Class at current
net asset value. Shares acquired
by dividend and distribution reinvestments
will not be subject to any
7
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
sales charge or CDSC. Class B shares acquired
through dividend and distribution
reinvestments will become eligible for
conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and
Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There
can be no assurance that each
Portfolio's investment objective will be
achieved. The value of each Portfo-
lio's investments, and thus the net asset
value of each Portfolio's shares,
will fluctuate in response to changes in
market and economic conditions, as
well as the financial condition and prospects
of issuers in which the Portfolio
invests. See "Investment Objectives and
Management Policies."
THE PORTFOLIOS' EXPENSES The following expense
table lists the costs and
expenses an investor will incur either
directly or indirectly as a shareholder
of the Portfolios, based on the maximum sales
charge or maximum CDSC that may
be incurred at the time of purchase or
redemption and each Portfolio's operat-
ing expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
APPLICABLE TO THE
U.S. GOVERNMENT
SECURITIES
PORTFOLIO AND THE
MONTHLY PAYMENT
GOVERNMENT PORTFOLIO:
CLASS A CLASS B
CLASS C CLASS Y
- ---------------------------------------------
- ---------------------
<S> <C> <C>
<C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum sales charge
imposed on
purchases
(as a percentage of
offering price) 4.50% None
None None
Maximum CDSC
(as a percentage of None* 4.50%
1.00% None
original cost or
redemption
proceeds, whichever
is lower)
</TABLE>
<TABLE>
<CAPTION>
APPLICABLE TO INCOME
RETURN ACCOUNT
PORTFOLIO
CLASS
A CLASS C CLASS Y
- ---------------------------------------------
- -------------------
<S> <C>
<C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on
purchases
(as a percentage of offering price)
2.00% None None
Maximum CDSC (as a percentage of
original cost or redemption
None* 1.00% None
proceeds, whichever is lower)
</TABLE>
8
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
<TABLE>
<CAPTION>
APPLICABLE TO
U.S. GOVERNMENT
SECURITIES
PORTFOLIO
CLASS A CLASS B
CLASS C CLASS Y
- ---------------------------------------------
- -----------------
<S> <C> <C>
<C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Management fees 0.44% 0.44%
0.44% 0.44%
12b-1 fees** 0.25 0.75
0.70 --
Other expenses 0.07 0.02
0.07 0.17
- ---------------------------------------------
- -----------------
TOTAL PORTFOLIO OPERATING
EXPENSES 0.76% 1.21%
1.21% 0.61%
- ---------------------------------------------
- -----------------
<CAPTION>
APPLICABLE TO
MONTHLY PAYMENT
GOVERNMENT
PORTFOLIO
<S> <C> <C>
<C> <C>
Management fees 0.44% 0.44%
0.44% 0.44%
12b-1 fees** 0.25 0.75
0.70 --
Other expenses*** 0.18 0.01
0.18 0.11
- ---------------------------------------------
- -----------------
TOTAL PORTFOLIO OPERATING
EXPENSES 0.87% 1.20%
1.32% 0.55%
- ---------------------------------------------
- -----------------
<CAPTION>
APPLICABLE TO
INCOME RETURN
ACCOUNT
PORTFOLIO
<S> <C> <C>
<C> <C>
Management fees 0.44%
0.44% 0.44%
12b-1 fees** --
0.35 --
Other expenses 0.12
0.15 0.25
- ---------------------------------------------
- -----------------
TOTAL PORTFOLIO OPERATING
EXPENSES 0.56%
0.94% 0.69%
- ---------------------------------------------
- -----------------
</TABLE>
* Purchases of Class A shares, which when
combined with current holdings of
Class A shares offered with a sales charge
equal or exceed $500,000 in the
aggregate, will be made at net asset value
with no sales charge, but will
be subject to a CDSC of 1.00% on
redemptions made within 12 months.
** Upon conversion of Class B shares to Class
A shares, such shares will no
longer be subject to a distribution fee.
Class C shares do not have a
conversion feature and, therefore, are
subject to an ongoing distribution
fee. As a result, long-term shareholders
of Class C shares may pay more
than the economic equivalent of the
maximum front-end sales charge
permitted by the National Association of
Securities Dealers, Inc.
*** "Other expenses" for Class Y shares have
been estimated because no Class Y
shares were outstanding during the fiscal
year ended December 31, 1994.
The sales charge and CDSC set forth in the
above table are the maximum
charges imposed on purchases or redemptions of
Portfolio shares and investors
may actually pay lower or no charges,
depending on the amount purchased and,
in the case of Class B, Class C and certain
Class A shares, the length of time
the shares are held and whether the shares are
held through the Smith Barney
401(k) Program. See "Purchase of Shares" and
"Redemption of Shares."
9
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
With respect to the U. S. Government
Securities Portfolio and the Monthly
Payment Government Portfolio, Smith Barney
receives an annual 12b-1 service fee
of 0.25% of the value of average daily net
assets of Class A shares. Smith Bar-
ney also receives with respect to Class B
shares an annual 12b-1 fee of 0.75%
of the value of average daily net assets of
that Class, consisting of a 0.50%
distribution fee and a 0.25% service fee. For
Class C shares, Smith Barney also
receives an annual 12b-1 fee of 0.70% of the
value of average daily net assets
of this Class, consisting of a 0.45%
distribution fee and a 0.25% service fee.
With respect to the Income Return Account
Portfolio, Smith Barney receives an
annual 12b-1 fee of 0.35% of the value of
average daily net assets of Class C
shares, consisting of a 0.20% distribution fee
and a 0.15% service fee. "Other
expenses" in the above table include fees for
shareholder services, custodial
fees, legal and accounting fees, printing
costs and registration fees.
EXAMPLE
The following example is intended to assist
an investor in understanding the
various costs that an investor in each
Portfolio will bear directly or indi-
rectly. The example assumes payment by each
Portfolio of operating expenses at
the levels set forth in the table above. See
"Purchase of Shares," "Redemption
of Shares" and "Management of the Fund."
<TABLE>
<CAPTION>
1 YEAR 3
YEARS 5 YEARS 10 YEARS*
- ---------------------------------------------
- ----------------
<S> <C> <C>
<C> <C>
An investor would pay the
following expenses on a
$1,000 investment,
assuming (1) 5.00% annual
return and (2) redemption
at the end of each time
period:
U.S. Government
Securities Portfolio
Class A $52 $68
$85 $135
Class B 57 68
76 134
Class C 22 38
66 147
Class Y 6 20
34 76
Monthly Payment
Government Portfolio
Class A $53 $72
$91 $147
Class B 57 68
76 136
Class C 23 42
72 159
Class Y 6 18
31 69
</TABLE>
10
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3
YEARS 5 YEARS 10 YEARS*
- ---------------------------------------------
- ------------------
<S> <C> <C>
<C> <C>
Income Return Account
Portfolio
Class A $26
$38 $51 $ 89
Class C 20
30 52 115
Class Y 7
22 38 86
An investor would pay the following expenses
on the same
investment, assuming the same annual return
and no
redemption:
U.S. Government Securities
Portfolio
Class A $52
$68 $85 $135
Class B 12
38 66 134
Class C 12
38 66 147
Class Y 6
20 34 76
Monthly Payment Government
Portfolio
Class A $53
$72 $91 $147
Class B 12
38 66 136
Class C 13
42 72 159
Class Y 6
18 31 69
Income Return Account
Portfolio
Class A $26
$38 $51 $ 89
Class C 10
30 52 115
Class Y 7
22 38 86
- ---------------------------------------------
- ------------------
</TABLE>
* Ten-year figures assume conversion of Class
B shares to Class A shares at the
end of the eighth year following the date of
purchase.
The example also provides a means for the
investor to compare expense levels
of funds with different fee structures over
varying investment periods. To
facilitate such comparison, all funds are
required to utilize a 5.00% annual
return assumption. However, each Portfolio's
actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
11
<PAGE>
Smith Barney Funds, Inc.
FINANCIAL HIGHLIGHTS
The following schedule for the periods ended
December 31st has been audited in
conjunction with the annual audits of the
financial statements of Smith Barney
Funds, Inc. by KPMG Peat Marwick LLP,
independent auditors. The 1994 financial
statements and the independent auditors'
report thereon appear in the December
31, 1994 Annual Report of Shareholders. No
information is presented for Class Y
shares for the Monthly Payment Government
Portfolio because no Class Y shares
were outstanding for the periods shown.
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK
OUTSTANDING THROUGHOUT EACH PERIOD:
U.S. GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
CLASS A SHARES 1994
1993 1992 1991 1990
- ---------------------------------------------
- -----------------------------------
<S> <C> <C>
<C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR $13.66
$13.87 $14.10 $13.22 $13.17
- ---------------------------------------------
- -----------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.91
0.98 1.06 1.26 1.15
Net realized and unrealized
gain
(loss) on investments (1.11)
(0.10) (0.13) 0.80 0.08
- ---------------------------------------------
- -----------------------------------
Total Income (Loss) from
Investment Operations (0.20)
0.88 0.93 2.06 1.23
- ---------------------------------------------
- -----------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.91)
(0.98) (1.08) (1.13) (1.18)
Distributions from net
realized gains on security
transactions (1) (0.05)
(0.11) (0.08) (0.05) --
- ---------------------------------------------
- -----------------------------------
Total Distributions (0.96)
(1.09) (1.16) (1.18) (1.18)
- ---------------------------------------------
- -----------------------------------
NET ASSET VALUE, END OF YEAR $12.50
$13.66 $13.87 $14.10 $13.22
- ---------------------------------------------
- -----------------------------------
TOTAL RETURN (P) (1.48)%
6.40% 6.85% 16.29% 9.95%
- ---------------------------------------------
- -----------------------------------
NET ASSETS, END OF YEAR
(000S) $358,045
$468,278 $459,380 $394,412 $335,447
- ---------------------------------------------
- -----------------------------------
RATIOS TO AVERAGE NET
ASSETS:
EXPENSES 0.76%*
0.49% 0.50% 0.44% 0.41%
Net investment income 6.83
7.00 7.65 8.31 8.87
- ---------------------------------------------
- -----------------------------------
PORTFOLIO TURNOVER RATE 40.22%
57.34% 26.18% 9.29% 5.62%
- ---------------------------------------------
- -----------------------------------
</TABLE>
(1) Represents distributions from paydown
gains which are reported as ordinary
income for tax purposes.
(P) Total Returns do not reflect sales charges.
* Amount has been restated from the December
31, 1994 Annual Report.
12
<PAGE>
Smith Barney Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
U.S. GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
CLASS A SHARES (CONTINUED) 1989 1988
1987 1986 1985
- ---------------------------------------------
- ------------------------------------
<S> <C> <C>
<C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR $12.56
$12.68 $13.89 $13.95 $12.76
- ---------------------------------------------
- ------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 1.19
1.20 1.23 1.37 1.52
Net realized and
unrealized gain
(loss) on investments 0.63
(0.12) (0.89) 0.05 0.89
- ---------------------------------------------
- ------------------------------------
Total Income (Loss) from
Investment Operations 1.82
1.08 0.34 1.42 2.41
- ---------------------------------------------
- ------------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (1.21)
(1.20) (1.31) (1.44) (1.22)
Distributions from net
realized gains on
security transactions (1) --
- -- (0.24) (0.04)
- ---------------------------------------------
- ------------------------------------
Total Distributions (1.21)
(1.20) (1.55) (1.48) (1.22)
- ---------------------------------------------
- ------------------------------------
NET ASSET VALUE, END OF
YEAR $13.17
$12.56 $12.68 $13.89 $13.95
- ---------------------------------------------
- ------------------------------------
TOTAL RETURN (P) 15.11%
8.72% 2.67% 10.76% 19.59%
- ---------------------------------------------
- ------------------------------------
NET ASSETS, END OF YEAR
(000S) $329,186
$328,446 $370,783 $507,243 $281,019
- ---------------------------------------------
- ------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
EXPENSES 0.41%
0.42% 0.36% 0.35% 0.27%
Net investment income 9.19
9.25 9.43 9.95 11.45
- ---------------------------------------------
- ------------------------------------
PORTFOLIO TURNOVER RATE 22.88%
1.53% 108.19% 130.92% 67.13%
- ---------------------------------------------
- ------------------------------------
<CAPTION>
CLASS B SHARES 1994(2)
- ---------------------------------------------
- ------------------------------------
<S> <C> <C>
<C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $12.47
- ---------------------------------------------
- ------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.08
Net realized and
unrealized gain
on investments 0.17
- ---------------------------------------------
- ------------------------------------
Total Income from
Investment Operations 0.25
- ---------------------------------------------
- ------------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.21)
Distributions from net
realized gains on
security transactions
(1) --
- ---------------------------------------------
- ------------------------------------
Total Distributions (0.21)
- ---------------------------------------------
- ------------------------------------
NET ASSET VALUE, END OF
PERIOD $12.51
- ---------------------------------------------
- ------------------------------------
TOTAL RETURN (P) 2.04%++
- ---------------------------------------------
- ------------------------------------
NET ASSETS, END OF YEAR
(000S) $1,529
- ---------------------------------------------
- ------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
EXPENSES 1.21%+*
Net investment income 6.94+
- ---------------------------------------------
- ------------------------------------
PORTFOLIO TURNOVER RATE 40.22%
- ---------------------------------------------
- ------------------------------------
</TABLE>
(1) Represents distributions from paydown
gains which are reported as ordinary
income for tax purposes.
(2) For the period from November 7, 1994
(inception date) to December 31, 1994.
++ Not annualized as it may not be
representative of the total return for the
year.
+ Annualized.
(P) Total Returns do not reflect sales
charges.
* Amount has been restated from the December
31, 1994 Annual Report.
13
<PAGE>
Smith Barney Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
U.S. GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
CLASS C SHARES
1994(1) 1993 1992(2)
- ---------------------------------------------
- ---------------------------
<S> <C>
<C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD
$13.66 $13.86 $14.01
- ---------------------------------------------
- ---------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income
0.82 0.89 0.15
Net realized and unrealized loss
on investments
(1.11) (0.10) --
- ---------------------------------------------
- ---------------------------
Total Income (Loss) from Investment
Operations
(0.29) 0.79 0.15
- ---------------------------------------------
- ---------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income
(0.83) (0.88) (0.30)
Distributions from net realized gains
on security transactions (3)
(0.04) (0.11) --
- ---------------------------------------------
- ---------------------------
Total Distributions
(0.87) (0.99) (0.30)
- ---------------------------------------------
- ---------------------------
NET ASSET VALUE, END OF PERIOD
$12.50 $13.66 $13.86
- ---------------------------------------------
- ---------------------------
TOTAL RETURN (P)
(2.11)% 5.74% 1.07%++
- ---------------------------------------------
- ---------------------------
NET ASSETS, END OF PERIOD (000S)
$21,253 $19,938 $1,954
- ---------------------------------------------
- ---------------------------
RATIOS TO AVERAGE NET ASSETS:
EXPENSES
1.21% 1.21% 1.14%+
Net investment income
6.27 6.23 6.56+
- ---------------------------------------------
- ---------------------------
PORTFOLIO TURNOVER RATE
40.22% 57.34% 26.18%
- ---------------------------------------------
- ---------------------------
<CAPTION>
CLASS Y SHARES
1994(4) 1993(5)
- ---------------------------------------------
- ---------------------------
<S> <C>
<C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD
$13.67 $13.97
- ---------------------------------------------
- ---------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income
0.89 0.86
Net realized and unrealized loss on
investments
(1.10) (0.10)
- ---------------------------------------------
- ---------------------------
Total Income (Loss) from Investment
Operations
(0.21) 0.76
- ---------------------------------------------
- ---------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income
(0.91) (0.95)
Distributions from net realized gains
on security transactions (3)
(0.04) (0.11)
- ---------------------------------------------
- ---------------------------
Total Distributions
(0.91) (1.06)
- ---------------------------------------------
- ---------------------------
NET ASSET VALUE, END OF PERIOD
$12.51 $13.67
- ---------------------------------------------
- ---------------------------
TOTAL RETURN (P)
(1.53)% 5.55%++
- ---------------------------------------------
- ---------------------------
NET ASSETS, END OF PERIOD (000S)
$13,903 $14,118
- ---------------------------------------------
- ---------------------------
RATIOS TO AVERAGE NET ASSETS:
EXPENSES
0.61% 0.69%+
Net investment income
6.82 7.29+
- ---------------------------------------------
- ---------------------------
PORTFOLIO TURNOVER RATE
40.22% 57.34%
- ---------------------------------------------
- ---------------------------
</TABLE>
(1) On November 7, 1994 the former Class B
shares were renamed Class C shares.
(2) For the period from December 2, 1992
(inception date) to December 31, 1992.
(3) Represents distributions from paydown
gains which are reported as ordinary
income for tax purposes.
(4) On November 7, 1994, the former Class C
shares were renamed Class Y shares.
(5) For the period from January 12, 1993
(inception date) to December 31, 1993.
++ Not annualized as it may not be
representative of the total return for the
year.
+ Annualized.
(P) Total Returns do not reflect sales
charges.
14
<PAGE>
Smith Barney Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
MONTHLY PAYMENT GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
CLASS A SHARES 1994 1993
1992 1991 1990
- ---------------------------------------------
- ---------------------------
<S> <C> <C>
<C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $12.85 $12.96
$13.12 $12.41 $12.37
- ---------------------------------------------
- ---------------------------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income 0.79 0.87
0.92 1.02 1.14
Net realized and
unrealized gain
(loss) on investments (0.97) (0.04)
(0.07) 0.83 0.01
- ---------------------------------------------
- ---------------------------
Total Income (Loss)
from Investment
Operations (0.18) 0.83
0.85 1.85 1.15
- ---------------------------------------------
- ---------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.78) (0.88)
(0.96) (1.11) (1.11)
Distribution from net
realized gains
on security
transactions (1) (0.03) (0.06)
(0.05) (0.03) --
- ---------------------------------------------
- ---------------------------
Total Distributions (0.81) (0.94)
(1.01) (1.14) (1.11)
- ---------------------------------------------
- ---------------------------
NET ASSET VALUE, END OF
YEAR $11.86 $12.85
$12.96 $13.12 $12.41
- ---------------------------------------------
- ---------------------------
TOTAL RETURN (P) (1.36)% 6.51%
6.83% 15.66% 9.89%
- ---------------------------------------------
- ---------------------------
NET ASSETS, END OF YEAR
(000S) $40,258 $54,953
$49,755 $33,327 $22,527
- ---------------------------------------------
- ---------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.87%* 0.56%
0.51% 0.51% 0.44%
Net investment income 6.54 6.66
7.39 8.18 8.91
- ---------------------------------------------
- ---------------------------
PORTFOLIO TURNOVER RATE 58.00% 97.66%
36.11% 10.62% 4.64%
- ---------------------------------------------
- ---------------------------
<CAPTION>
CLASS A SHARES
(CONTINUED) 1989 1988
1987 1986(2)
- ---------------------------------------------
- ---------------------------
<S> <C> <C>
<C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $11.74 $11.83
$12.59 $12.50
- ---------------------------------------------
- ---------------------------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income 1.10 1.09
1.10 0.88
Net realized and
unrealized gain
(loss) on investments 0.64 (0.09)
(0.86) (0.02)
- ---------------------------------------------
- ---------------------------
Total Income (Loss)
from Investment
Operations 1.74 1.00
0.24 0.86
- ---------------------------------------------
- ---------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (1.11) (1.09)
(0.99) (0.81)
Distribution from net
realized gains
on security
transactions (1) -- --
(0.01) --
- ---------------------------------------------
- ---------------------------
Total Distributions (1.11) (1.09)
(1.00) (0.81)
- ---------------------------------------------
- ---------------------------
NET ASSET VALUE, END OF
PERIOD $12.37 $11.74
$11.83 $12.59
- ---------------------------------------------
- ---------------------------
TOTAL RETURN (P) 15.45% 8.75%
2.09% 7.44%++
- ---------------------------------------------
- ---------------------------
NET ASSETS, END OF
PERIOD (000S) $17,832 $17,877
$21,011 $15,498
- ---------------------------------------------
- ---------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.46% 0.50%
0.41% 0.26%+
Net investment income 9.10 9.03
9.22 8.85+
- ---------------------------------------------
- ---------------------------
PORTFOLIO TURNOVER RATE 11.35% 5.31%
113.46% 107.44%
- ---------------------------------------------
- ---------------------------
</TABLE>
(1) Represents distributions from paydown
gains which are reported as ordinary
income for tax purposes.
(2) For the period from April 16, 1986
(commencement of operations) to December
31, 1986.
++ Not annualized as it may not be
representative of the total return for the
year.
+ Annualized.
(P) Total returns do not reflect sales
charges.
* Amount has been restated from the December
31, 1994 Annual Report.
15
<PAGE>
Smith Barney Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
MONTHLY PAYMENT GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
CLASS B SHARES
CLASS C SHARES
--------------
- -------------------------
1994(1)
1994(2) 1993 1992(3)
- ---------------------------------------------
- ------------------------
<S> <C> <C>
<C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $11.78
$12.85 $12.96 $12.89
- ---------------------------------------------
- ------------------------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income 0.18
0.72 0.78 0.05
Net realized and
unrealized gain
(loss) on investments 0.01
(0.98) (0.04) 0.10
- ---------------------------------------------
- ------------------------
Total Income (Loss) from
Investment Operations 0.19
(0.26) 0.74 0.15
- ---------------------------------------------
- ------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.12)
(0.70) (0.79) (0.08)
Distributions from net
realized gains
on security
transactions (4) --
(0.03) (0.06) --
- ---------------------------------------------
- ------------------------
Total Distributions (0.12)
(0.73) (0.85) (0.08)
- ---------------------------------------------
- ------------------------
NET ASSET VALUE, END OF
PERIOD $11.85
$11.86 $12.85 $12.96
- ---------------------------------------------
- ------------------------
TOTAL RETURN (P) 1.64%++
(2.07)% 5.77% 1.15%++
- ---------------------------------------------
- ------------------------
NET ASSETS, END OF PERIOD
(000S) $61
$3,351 $3,155 $72
- ---------------------------------------------
- ------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.20%+*
1.32% 1.27% 1.21%+
Net investment income 7.18+
5.92 5.88 6.21+
- ---------------------------------------------
- ------------------------
PORTFOLIO TURNOVER RATE 58.00%
58.00% 97.66% 36.11%
- ---------------------------------------------
- ------------------------
</TABLE>
(1) For the period from November 10, 1994
(inception date) to December 31,
1994.
(2) On November 7, 1994 the former Class B
shares were renamed Class C shares.
(3) For the period from December 2, 1992
(inception date) to December 31, 1992.
(4) Represents distributions from paydown
gains which are reported as ordinary
income for tax purposes.
++ Not annualized as it may not be
representative of the total return for the
year.
+ Annualized.
(P) Total returns do not reflect sales
charges.
* Amount has been restated from the December
31, 1994 Annual Report.
16
<PAGE>
Smith Barney Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
INCOME RETURN ACCOUNT PORTFOLIO
<TABLE>
<CAPTION>
CLASS A SHARES 1994 1993
1992 1991 1990
- ---------------------------------------------
- -------------------------
<S> <C> <C> <C>
<C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $ 9.59 $ 9.68 $
9.65 $ 9.38 $ 9.31
- ---------------------------------------------
- -------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.46 0.45
0.52 0.67 0.73
Net realized and
unrealized gain
(loss) on
investments (0.26) (0.07)
0.03 0.33 0.08
- ---------------------------------------------
- -------------------------
Total Income from
Investment Operations 0.20 0.38
0.55 1.00 0.81
- ---------------------------------------------
- -------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.45) (0.47)
(0.52) (0.73) (0.74)
- ---------------------------------------------
- -------------------------
Total Distributions (0.45) (0.47)
(0.52) (0.73) (0.74)
- ---------------------------------------------
- -------------------------
NET ASSET VALUE, END
OF YEAR $ 9.34 $ 9.59 $
9.68 $ 9.65 $ 9.38
- ---------------------------------------------
- -------------------------
TOTAL RETURN (P) 2.14% 4.00%
5.85% 11.06% 9.10%
- ---------------------------------------------
- -------------------------
NET ASSETS, END OF
YEAR (000S) $18,918 $50,874
$48,538 $33,682 $24,058
- ---------------------------------------------
- -------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.56% 0.53%
0.50% 0.49% 0.43%
Net investment income 4.60 4.67
5.33 6.98 7.92
- ---------------------------------------------
- -------------------------
PORTFOLIO TURNOVER
RATE 126.64% 152.04%
84.15% 30.44% 27.90%
- ---------------------------------------------
- -------------------------
<CAPTION>
CLASS A SHARES
(CONTINUED) 1989 1988
1987 1986 1985*(1)
- ---------------------------------------------
- -------------------------
<S> <C> <C> <C>
<C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.12 $ 9.26 $
9.43 $ 9.51 $ 9.17
- ---------------------------------------------
- -------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.75 0.71
0.68 0.72 0.68
Net realized and
unrealized gain
(loss) on
investments 0.19 (0.13)
(0.19) 0.08 0.16
- ---------------------------------------------
- -------------------------
Total Income from
Investment Operations 0.94 0.58
0.49 0.80 0.84
- ---------------------------------------------
- -------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.75) (0.72)
(0.60) (0.87) (0.50)
Distributions from
net realized gains -- --
(0.06) (0.01) --
- ---------------------------------------------
- -------------------------
Total Distributions (0.75) (0.72)
(0.66) (0.88) (0.50)
- ---------------------------------------------
- -------------------------
NET ASSET VALUE, END
OF PERIOD $ 9.31 $ 9.12 $
9.26 $ 9.43 $ 9.51
- ---------------------------------------------
- -------------------------
TOTAL RETURN (P) 10.67% 6.48%
5.36% 8.78% 9.34%++
- ---------------------------------------------
- -------------------------
NET ASSETS, END OF
PERIOD (000S) $27,604 $53,950
$55,494 $54,074 $24,855
- ---------------------------------------------
- -------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.43% 0.44%
0.35% 0.28% 0.21%+
Net investment income 8.13 7.78
7.37 7.58 8.63+
- ---------------------------------------------
- -------------------------
PORTFOLIO TURNOVER
RATE 33.17% 124.33%
68.21% 304.38% 182.61%
- ---------------------------------------------
- -------------------------
</TABLE>
(1) For the period from March 4, 1985
(commencement of operations) to December
31, 1985.
++ Not annualized as it may not be
representative of the total return for the
year.
+ Annualized.
(P) Total returns do not reflect sales charges.
* Adjusted for 200% stock dividend to
shareholders of record on July 17, 1985.
17
<PAGE>
Smith Barney Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
INCOME RETURN ACCOUNT PORTFOLIO
<TABLE>
<CAPTION>
CLASS C SHARES(1)
CLASS Y SHARES(3)
-----------------------
----------------------
1994 1993 1992(2)
1994 1993(4)
- ---------------------------------------------
- --------------------------
<S> <C> <C> <C>
<C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $ 9.58 $ 9.68 $ 9.69
$ 9.59 $ 9.72
- ---------------------------------------------
- --------------------------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income 0.42 0.45 0.03
0.44 0.42
Net realized and
unrealized loss
on investments (0.24) (0.12) --
(0.25) (0.13)
- ---------------------------------------------
- --------------------------
Total Income from
Investment
Operations 0.18 0.33 0.03
0.19 0.29
- ---------------------------------------------
- --------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.42) (0.43) (0.04)
(0.44) (0.42)
- ---------------------------------------------
- --------------------------
Total Distributions (0.42) (0.43) (0.04)
(0.44) (0.42)
- ---------------------------------------------
- --------------------------
NET ASSET VALUE,
END OF YEAR $ 9.34 $ 9.58 $ 9.68
$ 9.34 $ 9.59
- ---------------------------------------------
- --------------------------
TOTAL RETURN (P) 1.86% 3.53% 0.31%++
2.01%++ 3.01%++
- ---------------------------------------------
- --------------------------
NET ASSETS, END OF
YEAR (000S) $3,055 $3,993 $10
$3,235 $ 5,412
- ---------------------------------------------
- --------------------------
RATIOS TO AVERAGE
NET ASSETS:
Expenses 0.94% 0.90% 0.86%+
0.69% 0.75%+
Net investment
income 4.40 4.25 5.71+
4.65 4.78+
- ---------------------------------------------
- --------------------------
PORTFOLIO TURNOVER
RATE 126.64% 152.04% 84.15%
126.64% 152.04%
- ---------------------------------------------
- --------------------------
</TABLE>
(1) On November 7, 1994 former Class B shares
were renamed Class C shares.
(2) For the period from December 16, 1992
(inception date) to December 31,
1992.
(3) On November 7, 1994, former Class C shares
were renamed Class Y shares.
(4) For the period from February 1, 1993
(inception date) to December 31, 1993.
++ Not annualized as it may not be
representative of the total return for the
year.
+ Annualized.
(P) Total returns do not reflect sales
charges.
18
<PAGE>
Smith Barney Funds, Inc.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The U.S. Government Securities Portfolio and
the Monthly Payment Government
Portfolio each seek high current income,
liquidity and security of principal
by investing in obligations of the U.S.
Government, its agencies or its
instrumentalities and related repurchase and
reverse repurchase agreements.
The Income Return Account Portfolio seeks high
current income from a portfolio
of high quality debt obligations and employs
an "immunization strategy" (see
below) to minimize the risk of loss of account
value. Of course, no assurance
can be given that a Portfolio's objective will
be achieved.
The U.S. Government Securities Portfolio and
the Monthly Payment Government
Portfolio invest primarily in Government
National Mortgage Association
("GNMA") Certificates of the modified
pass-through type and will also normally
include other "U.S. Government Obligations,"
i.e., obligations issued or guar-
anteed by the United States, its agencies or
its instrumentalities and related
repurchase and reverse repurchase agreements
(reverse repurchase agreement
transactions are limited to no more than 5% of
each Portfolio's net assets).
Under normal market conditions, each Portfolio
will seek to invest substan-
tially all of its assets -- and a Portfolio
will invest not less than 65% of
its assets -- in such securities. GNMA
Certificates are debt securities issued
by a mortgage banker or other mortgagee
representing an interest in a pool of
mortgages insured by the Federal Housing
Administration or the Farmers Home
Administration or guaranteed by the Veterans
Administration. The National
Housing Act provides that the full faith and
credit of the United States is
pledged to the timely payment of principal and
interest by GNMA of amounts due
on these GNMA Certificates. Securities of the
type to be purchased for these
Portfolios have historically involved no
credit risk; however, due to fluctua-
tions in interest rates, the market value of
such securities will vary during
the period of a shareholder's investment in
the Portfolio. The average life of
GNMA Certificates varies with the maturities
of the underlying mortgages (with
maximum maturities of 30 years) but is likely
to be substantially less than
the original maturity of the mortgage pools
underlying the securities as the
result of prepayments, refinancing of such
mortgages or foreclosure.
Unscheduled prepayments of mortgages are
passed through to the holders of GNMA
Certificates at par and will increase or
decrease the yield realized by the
Portfolio, depending on the cost of the
underlying Certificate and its market
value at the time of prepayment. As a hedge
against changes in interest rates,
the U.S. Government Securities Portfolio and
the Monthly Payment Government
Portfolio may enter into agreements with
dealers in GNMA Certificates to pur-
chase or sell an agreed-upon principal amount
of GNMA Certificates at a speci-
fied price on a certain date; provided,
19
<PAGE>
Smith Barney Funds, Inc.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
(CONTINUED)
however, that settlement occurs within 120
days of the trade date. For a
detailed explanation, see "Appendix."
The Income Return Account Portfolio invests
in U.S. Government Obligations
(see "Appendix"), bankers' acceptances,
certificates of deposit, securities
backed by letters of credit, commercial paper
rated A-1 by Standard & Poor's
Corporation ("S&P") or Prime-1 by Moody's
Investors Service, Inc. ("Moody's")
and notes and bonds, including floating rate
issues, rated A or better by S&P
or Moody's or, if not rated, of comparable
quality as determined by the Manag-
er. The Portfolio's investments in U.S.
Government Obligations will be in obli-
gations with remaining maturities of five
years or less, and its investments in
corporate debt obligations will be in
obligations with remaining maturities of
three years or less. Normally, approximately
one-third of the Portfolio will
consist of obligations that have remaining
maturities of less than one year;
however, it is expected there may be occasions
when up to 100% of the Portfolio
will be invested in securities maturing within
one year. This portfolio compo-
sition is intended to achieve a higher level
of income than would otherwise be
available from an exclusively short-term
portfolio with substantially less risk
than that of a conventional bond or note
portfolio. While minor day-to-day
price fluctuations are unavoidable, it is
believed that the Portfolio's immuni-
zation strategy will produce sufficient income
accrual during adverse market
conditions to offset any potential loss in the
Portfolio security value mea-
sured over a three month period.
The U.S. Government Securities Portfolio and
the Monthly Payment Government
Portfolio each may seek to increase its net
investment income by lending its
securities to unaffiliated brokers, dealers
and other financial institutions,
provided such loans are callable at any time
and are continuously secured by
cash or U.S. Government Obligations equal to
no less than the market value,
determined daily, of the securities loaned.
Management will limit such lending
to not more than one-third of the value of
each Portfolio's total assets. The
risks in lending portfolio securities consist
of possible delay in recovery of
the securities or possible loss of rights in
the collateral should the borrower
fail financially. The Statement of Additional
Information contains more
detailed information.
The Board of Directors of the Fund may
modify the investment objective and
policies of each Portfolio (other than the
Income Return Account Portfolio
whose objective and policies may be changed
only by the "vote of a majority of
the outstanding voting securities", as defined
in the Investment Company Act of
1940 (the "1940 Act") provided such
modification is not prohibited by the
20
<PAGE>
Smith Barney Funds, Inc.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
(CONTINUED)
investment restrictions (which are set forth
in the Statement of Additional
Information) or applicable laws, and any such
change will first be disclosed in
the then current prospectus.
PORTFOLIO TURNOVER
None of the Portfolios will engage in the
trading of securities for the pur-
pose of realizing short-term profits; however,
each Portfolio will adjust its
portfolio as considered advisable in view of
prevailing or anticipated market
conditions and the Portfolio's investment
objective. As the portfolio turnover
rate increases, so will the Portfolio's dealer
mark-ups and other transaction
related expenses. Investors should realize
that risk of loss is inherent in the
ownership of any securities and that shares of
a Portfolio will fluctuate with
the market value of its securities.
VALUATION OF SHARES
Each Portfolio's net asset value per share
is determined as of the close of
regular trading on the NYSE, on each day that
the NYSE is open, by dividing the
value of the Portfolio's net assets
attributable to each Class by the total
number of shares of the Class outstanding.
Obligations are valued at the mean between
the bid and asked quotations for
such securities or if no quotations are
available, then for securities of simi-
lar type, yield and maturity. Short-term
investments that have a maturity of
more than 60 days are valued at prices based
on market quotations for securi-
ties of similar type, yield and maturity.
Short-term investments that have a
maturity of 60 days or less are valued at
amortized cost when the Board of
Directors has determined that amortized cost
equals fair value, unless market
conditions dictate otherwise. Other
investments of a Portfolio, including
restricted securities, if any, are valued at a
fair value determined by the
Board of Directors in good faith.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund declares quarterly income dividends
on shares of the U.S. Government
Securities Portfolio and monthly income
dividends on shares of the
21
<PAGE>
Smith Barney Funds, Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Monthly Payment Government Portfolio and the
Income Return Account Portfolio
and makes annual distributions of capital
gains, if any, on such shares.
If a shareholder does not otherwise
instruct, dividends and capital gain dis-
tributions will be reinvested automatically in
additional shares of the same
Class at net asset value, subject to no sales
charge or CDSC.
Income dividends and capital gain
distributions that are invested are cred-
ited to shareholders' accounts in additional
shares at the net asset value as
of the close of business on the payment date.
A shareholder may change the
option at any time by notifying his or her
Smith Barney Financial Consultant.
Accounts held directly by TSSG should notify
TSSG in writing at least five
business days prior to the payment date to
permit the change to be entered in
the shareholder's account.
The per share dividends on Class B and Class
C shares of each Portfolio may
be lower than the per share dividends on Class
A and Class Y shares principally
as a result of the distribution fee applicable
with respect to Class B and
Class C shares. The per share dividends on
Class A shares of each Portfolio may
be lower than the per share dividends on Class
Y shares principally as a result
of the service fee applicable to Class A
shares. Distributions of capital
gains, if any, will be in the same amount for
Class A, Class B, Class C and
Class Y shares.
TAXES
Each Portfolio intends to qualify as a
regulated investment company under
Subchapter M of the Code to be relieved of
federal income tax on that part of
its net investment income and realized capital
gains which it pays out to its
shareholders. To qualify, each Portfolio must
meet certain tests, including
distributing at least 90% of its investment
company taxable income, and deriv-
ing less than 30% of its gross income from the
sale or other disposition of
certain investments held for less than three
months.
Dividends from net investment income and
distributions of realized short-term
capital gains on the sale of securities,
whether paid in cash or automatically
invested in additional shares of a Portfolio,
are taxable to shareholders as
ordinary income. Each Portfolio's dividends
will not qualify for the dividends
received deduction for corporations. Dividends
and distributions declared by
each Portfolio may also be subject to state
and local taxes. Distributions out
of net long-term capital gains (i.e., net
long-term capital gains in excess of
net
22
<PAGE>
Smith Barney Funds, Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
short-term capital losses) are taxable to
shareholders as long-term capital
gains. Information as to the tax status of
dividends paid or deemed paid in
each calendar year will be mailed to
shareholders as early in the succeeding
year as practical but not later than January
31.
It is the policy of the Fund to comply with
requirements of the Internal Rev-
enue Code applicable to regulated investment
companies and to distribute all of
the taxable income and net taxable gains of
each Portfolio to its shareholders.
Dividends derived from net investment income
and capital gains on the sale of
securities, whether paid in cash or
automatically invested in additional shares
of the same Portfolio, are taxable to
shareholders of each Portfolio. Informa-
tion as to the tax status of dividends deemed
paid in each calendar year will
be mailed to shareholders as early in the
succeeding year as practical but no
later than January 31. The foregoing relates
to Federal income taxation. Divi-
dends may also be subject to state and local
taxes; investors should consult
with their tax advisors regarding state and
local taxes.
PURCHASE OF SHARES
GENERAL
Each Portfolio offers several Classes of
shares. Class A shares are sold to
investors with an initial sales charge and
Class B and Class C shares are sold
without an initial sales charge but are
subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without
an initial sales charge or CDSC
and are available only to investors investing
a minimum of $5,000,000. A fifth
class, Class Z shares, are also offered with
respect to each of the U.S. Gov-
ernment Securities Portfolio and the Income
Return Account Portfolio. Class Z
shares are offered without a sales charge,
CDSC, service fee or distribution
fee exclusively to tax-exempt employee benefit
and retirement plans of Smith
Barney and its affiliates. Investors meeting
these criteria who are interested
in acquiring Class Z shares should contact a
Smith Barney Financial Consultant
for a Class Z Prospectus. See "Prospectus
Summary -- Alternative Purchase
Arrangements" for a discussion of factors to
consider in selecting which Class
of shares to purchase.
Shares may be purchased through a brokerage
account maintained with Smith
Barney. Shares may also be purchased through
an Introducing Broker or an
investment dealer in the selling group. In
addition, certain investors, includ-
ing qualified retirement plans and certain
other institutional investors, may
pur-
23
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
chase shares directly from the Fund through
TSSG. When purchasing shares of a
Portfolio, investors must specify whether the
purchase is for Class A, Class B,
Class C or Class Y shares. No maintenance fee
will be charged by the Fund in
connection with a brokerage account through
which an investor purchases or
holds shares.
Investors in Class A, Class B and Class C
shares may open an account by mak-
ing an initial investment of at least $1,000
for each account, or $250 for an
IRA or a Self-Employed Retirement Plan in each
Portfolio. Investors in Class Y
shares may open an account by making an
initial investment of $5,000,000. Sub-
sequent investments of at least $50 may be
made for all Classes. For partici-
pants in retirement plans qualified under
Section 403(b)(7) or Section 401(a)
of the Code, the minimum initial investment
requirement for Class A, Class B
and Class C shares and the subsequent
investment requirement for all Classes in
each Portfolio is $25. For each Portfolio's
Systematic Investment Plan, the
minimum initial investment requirement for
Class A, Class B and Class C shares
and the subsequent investment requirement for
all Classes is $50. There are no
minimum investment requirements in Class A
shares for employees of Travelers
and its subsidiaries, including Smith Barney,
Directors of the Fund, and their
spouses and children. The Fund reserves the
right to waive or change minimums,
to decline any order to purchase its shares
and to suspend the offering of
shares from time to time. Shares purchased
will be held in the shareholder's
account by the Fund's transfer agent, TSSG.
Share certificates are issued only
upon a shareholder's written request to TSSG.
Purchase orders for a Portfolio that are
received by the Fund or Smith Barney
prior to the close of regular trading on the
NYSE, on any day the Portfolio
calculates its net asset value, are priced
according to the net asset value
determined on that day (the "trade date").
Orders received by dealers or Intro-
ducing Brokers prior to the close of regular
trading on the NYSE on any day a
Portfolio calculates its net asset value, are
priced according to the net asset
value determined on that day, provided the
order is received by the Fund or
Smith Barney prior to Smith Barney's close of
business. Currently, payment for
Portfolio shares is due on the fifth business
day (the "settlement date") after
the trade date. Each Portfolio anticipates
that, in accordance with regulatory
changes, beginning on or about June 1, 1995,
the settlement date will be the
third business day after the trade date.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their
accounts at any time by purchasing
shares through a service known as the
Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or
TSSG is authorized through
24
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
preauthorized transfers of $50 or more to
charge the regular bank account or
other financial institution indicated by the
shareholder on a monthly or quar-
terly basis to provide systematic additions to
the shareholder's Portfolio
account. A shareholder who has insufficient
funds to complete the transfer
will be charged a fee of up to $25 by Smith
Barney or TSSG. The Systematic
Investment Plan also authorizes Smith Barney
to apply cash held in the share-
holder's Smith Barney brokerage account or
redeem the shareholder's shares of
a Smith Barney money market fund to make
additions to the account. Additional
information is available from the Fund or a
Smith Barney Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A
SHARES
The sales charges applicable to purchases of
Class A shares of each of the
U.S. Government Securities Portfolio and the
Monthly Payment Government Port-
folio are as follows:
<TABLE>
<CAPTION>
SALES CHARGE
- ------------------------------ DEALERS'
% OF %
OF REALLOWANCE AS % OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT
INVESTED OFFERING PRICE
- ---------------------------------------------
- ------------------------------
<S> <C> <C>
<C>
Less than $ 25,000 4.50%
4.71% 4.00%
$ 25,000 - 49,999 4.00
4.17 3.60
50,000 - 99,999 3.50
3.63 3.15
100,000 -249,999 2.50
2.56 2.25
250,000 -499,999 1.50
1.52 1.35
500,000 and over *
* *
- ---------------------------------------------
- ------------------------------
</TABLE>
The sales charge applicable to purchases of
Class A shares of the Income
Return Portfolio are as follows:
<TABLE>
<CAPTION>
SALES
CHARGE
- ------------------------------ DEALERS'
% OF
% OF REALLOWANCE AS % OF
AMOUNT OF TRANSACTION OFFERING PRICE
AMOUNT INVESTED OFFERING PRICE
- ---------------------------------------------
- -------------------------------
<S> <C> <C>
<C>
Less than $500,000 2.00%
2.04% 1.80%
$500,000 and
over *
* *
- ---------------------------------------------
- -------------------------------
</TABLE>
* Purchases of Class A shares, which when
combined with current holdings of
Class A shares offered with a sales charge
equal or exceed $500,000 in the
aggregate, will be made at net asset value
without any initial sales charge,
but will be subject to a CDSC of 1.00% on
redemptions made within 12 months
of purchase. The CDSC on Class A shares is
payable to Smith Barney, which
compensates Smith Barney Financial
Consultants and other dealers whose
clients make purchases of $500,000 or more.
The CDSC is waived in the same
circumstances in which the CDSC applicable
to Class B and Class C shares is
waived. See "Deferred Sales Charge
Alternatives" and "Waivers of CDSC."
25
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
Members of the selling group may receive up
to 90% of the sales charge and
may be deemed to be underwriters of the Fund
as defined in the Securities Act
of 1933, as amended.
The reduced sales charges shown above apply
to the aggregate of purchases of
Class A shares of each Portfolio made at one
time by "any person," which
includes an individual, his or her spouse and
children, or a trustee or other
fiduciary of a single trust estate or single
fiduciary account. The reduced
sales charge minimums may also be met by
aggregating the purchase with the net
asset value of all Class A shares offered with
a sales charge held in funds
sponsored by Smith Barney listed under
"Exchange Privilege."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at
net asset value without a sales
charge in the following circumstances: (a)
sales of Class A shares to Direc-
tors of the Fund and employees of Travelers
and its subsidiaries, or to the
spouse and children of such persons (including
the surviving spouse of a
deceased Director or employee, and retired
Directors or employees), or sales
to any trust, pension, profit-sharing or other
benefit plan for such persons
provided such sales are made upon the
assurance of the purchaser that the pur-
chase is made for investment purposes and that
the securities will not be
resold except through redemption or
repurchase; (b) offers of Class A shares
to any other investment company in connection
with the combination of such
company with a Portfolio by merger,
acquisition of assets or otherwise; (c)
purchases of Class A shares by any client of a
newly employed Smith Barney
Financial Consultant (for a period up to 90
days from the commencement of the
Financial Consultant's employment with Smith
Barney), on the condition the
purchase of Class A shares is made with the
proceeds of the redemption of
shares of a mutual fund which (i) was
sponsored by the Financial Consultant's
prior employer, (ii) was sold to the client by
the Financial Consultant and
(iii) was subject to a sales charge; (d)
shareholders who have redeemed Class
A shares in a Portfolio (or Class A shares of
another fund of the Smith Barney
Mutual Funds that are offered with a sales
charge equal to or greater than the
maximum sales charge of a Portfolio) and who
wish to reinvest their redemption
proceeds in a Portfolio, provided the
reinvestment is made within 60 calendar
days of the redemption; and (e) accounts
managed by registered investment
advisory subsidiaries of Travelers. In order
to obtain such discounts, the
purchaser must provide sufficient information
at the time of purchase to per-
mit verification that the purchase would
qualify for the elimination of the
sales charge.
26
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
RIGHT OF ACCUMULATION
Class A shares of a Portfolio may be
purchased by "any person" (as defined
above) at a reduced sales charge or at net
asset value determined by aggregat-
ing the dollar amount of the new purchase and
the total net asset value of all
Class A shares of a Portfolio and of funds
sponsored by Smith Barney that are
offered with a sales charge listed under
"Exchange Privilege" then held by
such person and applying the sales charge
applicable to such aggregate. In
order to obtain such discount, the purchaser
must provide sufficient informa-
tion at the time of purchase to permit
verification that the purchase quali-
fies for the reduced sales charge. The right
of accumulation is subject to
modification or discontinuance at any time
with respect to all shares pur-
chased thereafter.
GROUP PURCHASES
Upon completion of certain automated
systems, a reduced sales charge or pur-
chase at net asset value will also be
available to employees (and partners) of
the same employer purchasing as a group,
provided each participant makes the
minimum initial investment required. The sales
charge applicable to purchases
by each member of such a group will be
determined by the table set forth above
under "Initial Sales Charge Alternative --
Class A Shares" and will be based
upon the aggregate sales of Class A shares of
Smith Barney Mutual Funds
offered with a sales charge to, and share
holdings of, all members of the
group. To be eligible for such reduced sales
charges or to purchase at net
asset value, all purchases must be pursuant to
an employer- or partnership-
sanctioned plan meeting certain requirements.
One such requirement is that the
plan must be open to specified partners or
employees of the employer and its
subsidiaries, if any. Such plan may, but is
not required to, provide for pay-
roll deductions, IRAs or investments pursuant
to retirement plans under Sec-
tions 401 or 408 of the Code. Smith Barney may
also offer a reduced sales
charge or net asset value purchase for
aggregating related fiduciary accounts
under such conditions that Smith Barney will
realize economies of sales
efforts and sales related expenses. An
individual who is a member of a quali-
fied group may also purchase Class A shares at
the reduced sales charge appli-
cable to the group as a whole. The sales
charge is based upon the aggregate
dollar value of Class A shares offered with a
sales charge that have been pre-
viously purchased and are still owned by the
group, plus the amount of the
current purchase. A "qualified group" is one
which (a) has been in existence
for more than six months, (b) has a purpose
other than acquiring Portfolio
shares at a discount and (c) satisfies uniform
criteria which enables Smith
Barney to realize economies of scale in its
costs of distributing shares. A
qualified group must have more than 10
members, must be
27
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
available to arrange for group meetings
between representatives of the Portfo-
lio and the members, and must agree to include
sales and other materials
related to the Portfolio in its publications
and mailings to members at no
cost to Smith Barney. In order to obtain such
reduced sales charge or to pur-
chase at net asset value, the purchaser must
provide sufficient information at
the time of purchase to permit verification
that the purchase qualifies for
the reduced sales charge. Approval of group
purchase reduced sales charge
plans is subject to the discretion of Smith
Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for
amounts of $50,000 or more provides
an opportunity for an investor to obtain a
reduced sales charge by aggregating
investments over a 13 month period, provided
that the investor refers to such
Letter when placing orders. For purposes of a
Letter of Intent, the "Amount of
Investment" as referred to in the preceding
sales charge table includes pur-
chases of all Class A shares of each Portfolio
and other funds of the Smith
Barney Mutual Funds offered with a sales
charge over a 13 month period based
on the total amount of intended purchases plus
the value of all Class A shares
previously purchased and still owned. An
alternative is to compute the 13
month period starting up to 90 days before the
date of execution of a Letter
of Intent. Each investment made during the
period receives the reduced sales
charge applicable to the total amount of the
investment goal. If the goal is
not achieved within the period, the investor
must pay the difference between
the sales charges applicable to the purchases
made and the charges previously
paid, or an appropriate number of escrowed
shares will be redeemed. Please
contact a Smith Barney Financial Consultant or
TSSG to obtain a Letter of
Intent application.
Class Y Shares. A Letter of Intent may also
be used as a way for investors
to meet the minimum investment requirement for
Class Y shares. Such investors
must make an initial minimum purchase of
$1,000,000 in Class Y shares of a
Portfolio and agree to purchase a total of
$5,000,000 of Class Y shares of the
same Portfolio within six months from the date
of the Letter. If a total
investment of $5,000,000 is not made within
the six-month period, all Class Y
shares purchased to date will be transferred
to Class A shares, where they
will be subject to all fees (including a
service fee of 0.25%) (except the
Income Return Account Portfolio's Class A
shares will not be subject to a
service fee) and expenses applicable to the
Portfolio's Class A shares, which
may include a CDSC of 1.00%. Please contact a
Smith Barney Financial Consul-
tant or TSSG for further information.
28
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
DEFERRED SALES CHARGE ALTERNATIVES
Class B shares are only available in the
U.S. Government Securities Portfo-
lio and the Monthly Payment Government
Portfolio. Class C shares are available
in each Portfolio.
CDSC Shares are sold at net asset value next
determined without an initial
sales charge so that the full amount of an
investor's purchase payment may be
immediately invested in a Portfolio. A CDSC,
however, may be imposed on cer-
tain redemptions of these shares. "CDSC
Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares which
when combined with Class A shares
offered with a sales charge currently held by
an investor equal or exceed
$500,000 in the aggregate.
Any applicable CDSC will be assessed on an
amount equal to the lesser of the
original cost of the shares being redeemed or
their net asset value at the
time of redemption. CDSC Shares that are
redeemed will not be subject to a
CDSC to the extent that the value of such
shares represents: (a) capital
appreciation of Portfolio assets; (b)
reinvestment of dividends or capital
gain distributions; (c) with respect to Class
B shares, shares redeemed more
than five years after their purchase; or (d)
with respect to Class C shares
and Class A shares that are CDSC Shares,
shares redeemed more than 12 months
after their purchase.
Class C shares and Class A shares that are
CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of
purchase. In circumstances in which
the CDSC is imposed on Class B shares, the
amount of the charge will depend on
the number of years since the shareholder made
the purchase payment from which
the amount is being redeemed. Solely for
purposes of determining the number of
years since a purchase payment, all purchase
payments made during a month will
be aggregated and deemed to have been made on
the last day of the preceding
Smith Barney statement month. The following
table sets forth the rates of the
charge for redemptions of Class B shares by
shareholders, except in the case
of purchases by Participating Plans, as
described below. See "Purchase of
Shares -- Smith Barney 401(k) Program."
29
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- --------------------------------
<S> <C>
First 4.50%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth 0.00
Seventh 0.00
Eighth 0.00
- --------------------------------
</TABLE>
Class B shares will convert automatically to
Class A shares eight years after
the date on which they were purchased and
thereafter will no longer be subject
to any distribution fees. There will also be
converted at that time such pro-
portion of Class B Dividend Shares owned by
the shareholder as the total number
of his or her Class B shares converting at the
time bears to the total number
of outstanding Class B shares (other than
Class B Dividend Shares) owned by
the shareholder. Shareholders who held Class B
shares of Smith Barney Shearson
Short-Term World Income Fund (the "Short-Term
World Income Fund") on July 15,
1994 and who subsequently exchange those
shares for Class B shares of a Portfo-
lio will be offered the opportunity to
exchange all such Class B shares for
Class A shares of the Portfolio four years
after the date on which those shares
were deemed to have been purchased. Holders of
such Class B shares will be
notified of the pending exchange in writing
approximately 30 days before the
fourth anniversary of the purchase date and,
unless the exchange has been
rejected in writing, the exchange will occur
on or about the fourth anniversary
date. See "Prospectus Summary -- Alternative
Purchase Arrangements -- Class B
Shares Conversion Feature."
In determining the applicability of any
CDSC, it will be assumed that a
redemption is made first of shares
representing capital appreciation, next of
shares representing the reinvestment of
dividends and capital gain distribu-
tions and finally of other shares held by the
shareholder for the longest
period of time. The length of time that CDSC
Shares acquired through an
exchange have been held will be calculated
from the date that the shares
exchanged were initially acquired in one of
the other Smith Barney Mutual
Funds, and Portfolio shares being redeemed
will be considered to represent, as
applicable, capital appreciation or dividend
and capital gain distribution
reinvestments in such other funds. For Federal
income tax purposes, the amount
of the CDSC will reduce the gain or increase
the loss, as the case may be, on
the amount realized on redemption. The amount
of any CDSC will be paid to Smith
Barney.
30
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
To provide an example, assume an investor
purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently,
the investor acquired 5 addi-
tional shares through dividend reinvestment.
During the fifteenth month after
the purchase, the investor decided to redeem
$500 of his or her investment.
Assuming at the time of the redemption the net
asset value had appreciated to
$12 per share, the value of the investor's
shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be
applied to the amount which represents
appreciation ($200) and the value of the
reinvested dividend shares ($60).
Therefore, $240 of the $500 redemption
proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable
rate for Class B shares) for a total
deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges
(see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to
or less than 1.00% per month of
the value of the shareholder's shares at the
time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan")
(provided, however, that automatic cash
withdrawals in amounts equal to or less than
2.00% per month of the value of
the shareholder's shares will be permitted for
withdrawal plans that were
established prior to November 7, 1994); (c)
redemptions of shares within twelve
months following the death or disability of
the shareholder; (d) redemption of
shares made in connection with qualified
distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (e)
involuntary redemptions; and (f)
redemptions of shares in connection with a
combination of a Portfolio with any
investment company by merger, acquisition of
assets or otherwise. In addition,
a shareholder who has redeemed shares from
other funds of the Smith Barney
Mutual Funds may, under certain circumstances,
reinvest all or part of the
redemption proceeds within 60 days and receive
pro rata credit for any CDSC
imposed on the prior redemption.
CDSC waivers will be granted subject to
confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney
clients or by TSSG in the case
of all other shareholders) of the
shareholder's status or holdings, as the case
may be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in
the Smith Barney 401(k) Program,
which is generally designed to assist plan
sponsors in the creation and opera-
tion
31
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
of retirement plans under Section 401(a) of
the Code. To the extent applicable,
the same terms and conditions are offered to
all Participating Plans in the
Smith Barney 401(k) Program.
Each of the U.S. Government Securities
Portfolio and the Monthly Payment Gov-
ernment Portfolio offers to Participating
Plans Class A, Class B, Class C and
Class Y shares as investment alternatives
under the Smith Barney 401(k) Pro-
gram; the Income Return Account Portfolio
offers Class A, Class C and Class Y
shares. Class A, Class B and Class C shares
acquired through the Smith Barney
401(k) Program are subject to the same service
and/or distribution fees as, but
different sales charge and CDSC schedules
than, the Class A, Class B and Class
C shares acquired by other investors. Similar
to those shares available to
other investors, Class Y shares acquired
through the Smith Barney 401(k) Pro-
gram are not subject to any service or
distribution fees or any initial sales
charge or CDSC. Once a Participating Plan has
made an initial investment in a
Portfolio, all of its subsequent investments
in the Portfolio must be in the
same Class of shares, except as otherwise
described below.
Class A Shares. Class A shares of each
Portfolio are offered without any ini-
tial sales charge to any Participating Plan
that purchases from $500,000 to
$4,999,999 of Class A shares of one or more
funds of the Smith Barney Mutual
Funds. Class A shares acquired through the
Smith Barney 401(k) Program after
November 7, 1994 are subject to a CDSC of
1.00% of redemption proceeds, if the
Participating Plan terminates within four
years of the date the Participating
Plan first enrolled in the Smith Barney 401(k)
Program.
Class B Shares. Class B shares of each
applicable Portfolio are offered to
any Participating Plan that purchases less
than $250,000 of one or more funds
of the Smith Barney Mutual Funds. Class B
shares acquired through the Smith
Barney 401(k) Program are subject to a CDSC of
3.00% of redemption proceeds, if
the Participating Plan terminates within eight
years of the date the Partici-
pating Plan first enrolled in the Smith Barney
401(k) Program.
Eight years after the date the Participating
Plan enrolled in the Smith Bar-
ney 401(k) Program, it will be offered the
opportunity to exchange all of its
Class B shares for Class A shares of a
Portfolio. Such Plans will be notified
of the pending exchange in writing
approximately 60 days before the eighth
anniversary of the enrollment date and, unless
the exchange has been rejected
in writing, the exchange will occur on or
about the eighth anniversary date.
Once the exchange has occurred, a
Participating Plan will not be eligible to
acquire addi-
32
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
tional Class B shares of the Portfolio but
instead may acquire Class A shares
of the Portfolio. If the Participating Plan
elects not to exchange all of its
Class B shares at that time, each Class B
share held by the Participating Plan
will have the same conversion feature as Class
B shares held by other invest-
ors. See "Purchase of Shares -- Deferred Sales
Charge Alternatives."
Class C Shares. Class C shares of each
Portfolio are offered to any Partici-
pating Plan that purchases from $250,000 to
$499,999 of one or more funds of the
Smith Barney Mutual Funds. Class C shares
acquired through the Smith Barney
401(k) Program after November 7, 1994 are
subject to a CDSC of 1.00% of
redemption proceeds, if the Participating Plan
terminates within four years of
the date the Participating Plan first enrolled
in the Smith Barney 401(k)
Program. Each year after the date a
Participating Plan enrolled in the Smith
Barney 401(k) Program, if its total Class C
holdings equal at least $500,000 as
of the calendar year-end, the Participating
Plan will be offered the opportunity
to exchange all of its Class C shares for
Class A shares of a Portfolio. Such
Plans will be notified in writing within 30
days after the last business day of
the calendar year, and unless the exchange
offer has been rejected in writing,
the exchange will occur on or about the last
business day of the following
March. Once the exchange has occurred, a
Participating Plan will not be eligible
to acquire Class C shares of a Portfolio but
instead may acquire Class A shares
of the Portfolio. Any Class C shares not
converted will continue to be subject
to the distribution fee.
Class Y Shares. Class Y shares of each
Portfolio are offered without any
service or distribution fees, sales charge or
CDSC to any Participating Plan
that purchases $5,000,000 or more of Class Y
shares of one or more funds of the
Smith Barney Mutual Funds.
No CDSC is imposed on redemptions of CDSC
Shares to the extent that the net
asset value of the shares redeemed does not
exceed the current net asset value
of the shares purchased through reinvestment
of dividends or capital gain dis-
tributions, plus (a) with respect to Class A
and Class C shares, the current
net asset value of such shares purchased more
than one year prior to redemp-
tion and, with respect to Class B shares, the
current net asset value of Class
B shares purchased more than eight years prior
to the redemption, plus (b)
with respect to Class A and Class C shares,
increases in the net asset value
of the shareholder's Class A or Class C shares
above the purchase payments
made during the preceding year and, with
respect to Class B shares, increases
in the net
33
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
asset value of the shareholder's Class B
shares above the purchase payments
made during the preceding eight years. Whether
or not the CDSC applies to a
Participating Plan depends on the number of
years since the Participating Plan
first became enrolled in the Smith Barney
401(k) Program, unlike the applica-
bility of the CDSC to other shareholders,
which depends on the number of years
since those shareholders made the purchase
payment from which the amount is
being redeemed.
The CDSC will be waived on redemptions of
Class A, Class B and Class C shares
in connection with lump-sum or other
distributions made by a Participating Plan
as a result of: (a) the retirement of an
employee in the Participating Plan;
(b) the termination of employment of an
employee in the Participating Plan; (c)
the death or disability of an employee in the
Participating Plan; (d) the
attainment of age 59 1/2 by an employee in the
Participating Plan; (e) hardship
of an employee in the Participating Plan to
the extent permitted under Section
401(k) of the Code; or (f) redemptions of
shares in connection with a loan made
by the Participating Plan to an employee.
Participating Plans wishing to acquire
shares of a Portfolio through the
Smith Barney 401(k) Program must purchase such
shares directly from TSSG. For
further information regarding the Smith Barney
401(k) Program, investors should
contact a Smith Barney Financial Consultant.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of
each Class may be exchanged for
shares of the same Class in the following
funds of the Smith Barney Mutual
Funds, to the extent shares are offered for
sale in the shareholder's state of
residence. Exchanges of Class A, Class B and
Class C shares are subject to min-
imum investment requirements and all shares
are subject to the other require-
ments of the fund into which exchanges are
made and a sales charge differential
may apply.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
34
<PAGE>
Smith Barney Funds, Inc.
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Income and
Growth Portfolio
Smith Barney Funds, Inc. -- Utility
Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
**Smith Barney Adjustable Rate Government
Income Fund
Smith Barney Diversified Strategic Income
Fund
*Smith Barney Funds, Inc. -- Income Return
Account Portfolio
Smith Barney Funds, Inc. -- Monthly Payment
Government Portfolio
+++Smith Barney Funds, Inc. -- Short-Term U.S.
Treasury Securities Portfolio
Smith Barney Funds, Inc. -- U.S. Government
Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund
Inc.
Smith Barney Florida Municipals Fund
*Smith Barney Intermediate Maturity
California Municipals Fund
*Smith Barney Intermediate Maturity New York
Municipals Fund
*Smith Barney Limited Maturity Municipals
Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- California
Portfolio
*Smith Barney Muni Funds -- Florida Limited
Term Portfolio
Smith Barney Muni Funds -- Florida
Portfolio
Smith Barney Muni Funds -- Georgia
Portfolio
*Smith Barney Muni Funds -- Limited Term
Portfolio
Smith Barney Muni Funds -- National
Portfolio
35
<PAGE>
Smith Barney Funds, Inc.
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Muni Funds -- New Jersey
Portfolio
Smith Barney Muni Funds -- New York
Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania
Portfolio
Smith Barney New Jersey Municipals Fund
Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney Precious Metals and Minerals
Fund Inc.
Smith Barney World Funds, Inc. -- Emerging
Markets Portfolio
Smith Barney World Funds, Inc. -- European
Portfolio
Smith Barney World Funds, Inc. -- Global
Government Bond Portfolio
Smith Barney World Funds, Inc. --
International Balanced Portfolio
Smith Barney World Funds, Inc. --
International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific
Portfolio
Money Market Funds
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc. -- Cash
Portfolio
++Smith Barney Money Funds, Inc. --
Government Portfolio
***Smith Barney Money Funds, Inc. --
Retirement Portfolio
+++Smith Barney Municipal Money Market Fund,
Inc.
+++Smith Barney Muni Funds -- California Money
Market Portfolio
+++Smith Barney Muni Funds -- New York Money
Market Portfolio
- ---------------------------------------------
- ----------------------------------
* Available for exchange with Class A, Class
C and Class Y shares of each
Portfolio.
** Available for exchange with Class A, Class
B and Class Y shares of each
Portfolio. In addition, shareholders who
own Class C shares of a Portfolio
through the Smith Barney 401(k) Program
may exchange those shares for
Class C shares of this fund.
*** Available for exchange with Class A shares
of each Portfolio.
+ Available for exchange with Class B and
Class C shares of each Portfolio.
++ Available for exchange with Class A and
Class Y shares of each Portfolio.
In addition, shareholders who own Class C
shares of a Portfolio through
the Smith Barney 401(k) Program may
exchange those shares for Class C
shares of this fund.
+++Available for exchange with Class A and
Class Y shares of each Portfolio.
36
<PAGE>
Smith Barney Funds, Inc.
EXCHANGE PRIVILEGE (CONTINUED)
Class A Exchanges. Class A shares of Smith
Barney Mutual Funds sold without
a sales charge or with a maximum sales charge
of less than the maximum charged
by other Smith Barney Mutual Funds will be
subject to the appropriate "sales
charge differential" upon the exchange of such
shares for Class A shares of a
fund sold with a higher sales charge. The
"sales charge differential" is lim-
ited to a percentage rate no greater than the
excess of the sales charge rate
applicable to purchases of shares of the
mutual fund being acquired in the
exchange over the sales charge rate(s)
actually paid on the mutual fund shares
relinquished in the exchange and on any
predecessor of those shares. For pur-
poses of the exchange privilege, shares
obtained through automatic reinvest-
ment of dividends and capital gain
distributions are treated as having paid
the same sales charges applicable to the
shares on which the dividends or dis-
tributions were paid; however, except in the
case of the Smith Barney 401(k)
Program, if no sales charge was imposed upon
the initial purchase of the
shares, any shares obtained through automatic
reinvestment will be subject to
a sales charge differential upon exchange.
Class A shares held in a Portfolio
prior to November 7, 1994 that are
subsequently exchanged for shares of other
funds of the Smith Barney Mutual Funds will
not be subject to a sales charge
differential.
Class B Exchanges. In the event a Class B
shareholder (unless such share-
holder was a Class B shareholder of the
Short-Term World Income Fund on July
15, 1994) wishes to exchange all or a portion
of his or her shares in any of
the funds imposing a higher CDSC than that
imposed by a Portfolio, the
exchanged Class B shares will be subject to
the higher applicable CDSC. Upon
an exchange, the new Class B shares will be
deemed to have been purchased on
the same date as the Class B shares of the
Portfolio that have been exchanged.
Class C Exchanges. Upon an exchange, the new
Class C shares will be deemed
to have been purchased on the same date as the
Class C shares of a Portfolio
that have been exchanged.
Class Y Exchanges. Class Y shareholders of
each Portfolio who wish to
exchange all or a portion of their Class Y
shares for Class Y shares in any of
the funds identified above may do so without
imposition of any charge.
Additional Information Regarding the
Exchange Privilege. Although the
exchange privilege is an important benefit,
excessive exchange transactions
can be detrimental to each Portfolio's
performance and its shareholders. The
Manager may determine that a pattern of
frequent exchanges is excessive
37
<PAGE>
Smith Barney Funds, Inc.
EXCHANGE PRIVILEGE (CONTINUED)
and contrary to the best interests of each
Portfolio's other shareholders. In
this event, the Manager will notify Smith
Barney and Smith Barney may, at its
discretion, decide to limit additional
purchases and/or exchanges by the share-
holder. Upon such a determination, Smith
Barney will provide notice in writing
or by telephone to the shareholder at least 15
days prior to suspending the
exchange privilege and during the 15 day
period the shareholder will be
required to (a) redeem his or her shares in
the Portfolio or (b) remain
invested in the Portfolio or exchange into any
of the funds of the Smith Barney
Mutual Funds ordinarily available, which
position the shareholder would be
expected to maintain for a significant period
of time. All relevant factors
will be considered in determining what
constitutes an abusive pattern of
exchanges.
Exchanges will be processed at the net asset
value next determined, plus any
applicable sales charge differential.
Redemption procedures discussed below are
also applicable for exchanging shares, and
exchanges will be made upon receipt
of all supporting documents in proper form. If
the account registration of the
shares of the fund being acquired is identical
to the registration of the
shares of the fund exchanged, no signature
guarantee is required. A capital
gain or loss for tax purposes will be realized
upon the exchange, depending
upon the cost or other basis of shares
redeemed. Before exchanging shares,
investors should read the current prospectus
describing the shares to be
acquired. Each Portfolio reserves the right to
modify or discontinue exchange
privileges upon 60 days' prior notice to
shareholders.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of
each Portfolio tendered to it,
as described below, at a redemption price
equal to their net asset value per
share next determined after receipt of a
written request in proper form at no
charge other than any applicable CDSC.
Redemption requests received after the
close of regular trading on the NYSE are
priced at the net asset value next
determined. If a shareholder holds shares in
more than one Class, any request
for redemption must specify the Class being
redeemed. In the event of a failure
to specify which Class, or if the investor
owns fewer shares of the Class than
specified, the redemption request will be
delayed until the Fund's transfer
agent receives further instructions from Smith
Barney, or if the shareholder's
account is not with Smith Barney, from the
shareholder directly. The redemption
proceeds will be remitted on or before the
seventh day following receipt of
proper
38
<PAGE>
Smith Barney Funds, Inc.
REDEMPTION OF SHARES (CONTINUED)
tender, except on any days on which the NYSE
is closed or as permitted under
the 1940 Act in extraordinary circumstances.
The Fund anticipates that, in
accordance with regulatory changes, beginning
on or about June 1, 1995, pay-
ment will be made on the third business day
after receipt of proper tender.
Generally, if the redemption proceeds are
remitted to a Smith Barney brokerage
account, these funds will not be invested for
the shareholder's benefit with-
out specific instruction and Smith Barney will
benefit from the use of tempo-
rarily uninvested funds. Redemption proceeds
for shares purchased by check,
other than a certified or official bank check,
will be remitted upon clearance
of the check, which may take up to ten days or
more.
Shares held by Smith Barney as custodian
must be redeemed by submitting a
written request to a Smith Barney Financial
Consultant. Shares other than
those held by Smith Barney as custodian may be
redeemed through an investor's
Financial Consultant, Introducing Broker or
dealer in the selling group or by
submitting a written request for redemption
to:
Smith Barney Funds, Inc./[Name of Portfolio
(please specify)]
Class A,B,C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state
the Portfolio, the Class and
number or dollar amount of shares to be
redeemed, (b) identify the sharehold-
er's account number and (c) be signed by each
registered owner exactly as the
shares are registered. If the shares to be
redeemed were issued in certificate
form, the certificates must be endorsed for
transfer (or be accompanied by an
endorsed stock power) and must be submitted to
TSSG together with the redemp-
tion request. Any signature appearing on a
redemption request, share certifi-
cate or stock power must be guaranteed by an
eligible guarantor institution,
such as a domestic bank, savings and loan
institution, domestic credit union,
member bank of the Federal Reserve System or
member firm of a national securi-
ties exchange. TSSG may require additional
supporting documents for redemp-
tions made by corporations, executors,
administrators, trustees or guardians.
A redemption request will not be deemed
properly received until TSSG receives
all required documents in proper form.
39
<PAGE>
Smith Barney Funds, Inc.
REDEMPTION OF SHARES (CONTINUED)
AUTOMATIC CASH WITHDRAWAL PLAN
Each Portfolio offers shareholders an
automatic cash withdrawal plan, under
which shareholders who own shares with a value
of at least $10,000 may elect to
receive cash payments of at least $50 monthly
or quarterly. Retirement plan
accounts are eligible for automatic cash
withdrawal plans only where the share-
holder is eligible to receive qualified
distributions and has an account value
of at least $5,000. The withdrawal plan will
be carried over on exchanges
between funds or Classes of a Portfolio. Any
applicable CDSC will not be waived
on amounts withdrawn by a shareholder that
exceed 1.00% per month of the value
of the shareholder's shares subject to the
CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans
in effect prior to November 7,
1994, any applicable CDSC will be waived on
amounts withdrawn that do not
exceed 2.00% per month of the value of the
shareholder's shares subject to the
CDSC.) For further information regarding the
automatic cash withdrawal plan,
shareholders should contact a Smith Barney
Financial Consultant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to redeem
involuntarily any shareholder's account
in a Portfolio if the aggregate net asset
value of the shares held in that
Portfolio account is less than $500. (If a
shareholder has more than one
account in any Portfolio, each account must
satisfy the minimum account size.)
The Fund, however, will not redeem shares
based solely on market reductions in
net asset value. Before the Fund exercises
such right, shareholders will
receive written notice and will be permitted
60 days to bring accounts up to
the minimum to avoid involuntary liquidation.
PERFORMANCE
From time to time a Portfolio may include
its total return, average annual
total return, yield and current dividend
return in advertisements and/or other
types of sales literature. These figures are
computed separately for Class A,
Class B, Class C and Class Y shares of each
Portfolio. These figures are based
on historical earnings and are not intended to
indicate future performance.
Total return is computed for a specified
period of time assuming deduction of
40
<PAGE>
Smith Barney Funds, Inc.
PERFORMANCE (CONTINUED)
the maximum sales charge, if any, from the
initial amount invested and rein-
vestment of all income dividends and capital
gain distributions on the rein-
vestment dates at prices calculated as stated
in this Prospectus, then divid-
ing the value of the investment at the end of
the period so calculated by the
initial amount invested and subtracting 100%.
The standard average annual
total return, as prescribed by the SEC is
derived from this total return,
which provides the ending redeemable value.
Such standard total return infor-
mation also may be accompanied with
nonstandard total return information for
differing periods computed in the same manner
but without annualizing the
total return or taking sales charges into
account. The yield of a Portfolio
Class refers to the net investment income
earned by investments in the class
over a thirty-day period. This net investment
income is then annualized, i.e.,
the amount of income earned by the investment
during that thirty-day period is
assumed to be earned each 30-day period for
twelve periods and is expressed as
a percentage of the investments. The yield
quotation is calculated according
to a formula prescribed by the SEC to
facilitate comparison with yields quoted
by other investment companies. The U.S.
Government Securities Portfolio calcu-
lates current dividend return for each Class
by annualizing the most recent
quarterly distribution from investment income,
including net equalization
credits or debits, and dividing by the net
asset value or the maximum public
offering price (including sales charge) on the
last day of the period for
which current dividend return is presented.
Each of the Monthly Payment Gov-
ernment Portfolio and the Income Return
Account Portfolio calculates current
dividend return for each Class by annualizing
the most recent monthly distri-
bution, including net equalization credits or
debits, and dividing by the net
asset value or the maximum public offering
price (including sales charge) on
the last day of the period for which current
dividend return is presented. The
current dividend return for each Class may
vary from time to time depending on
market conditions, the composition of its
investment portfolio and operating
expenses. These factors and possible
differences in the methods used in calcu-
lating current dividend return should be
considered when comparing a Class'
current return to yields published for other
investment companies and other
investment vehicles. Each Portfolio may also
include comparative performance
information in advertising or marketing its
shares. Such performance informa-
tion may include data from Lipper Analytical
Services, Inc. and other finan-
cial publications. Each Portfolio will include
performance data for Class A,
Class B, Class C and Class Y shares in any
advertisement or information
including performance data of that Portfolio.
41
<PAGE>
Smith Barney Funds, Inc.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and
supervision of the Fund rests with
the Fund's Board of Directors. The Directors
approve all significant agreements
between the Fund and the companies that
furnish services to the Fund, including
agreements with the Fund's distributor,
investment manager, custodian and
transfer agent. The day-to-day operations of
the Portfolios are delegated to
the Manager. The Statement of Additional
Information contains background infor-
mation regarding each Director and executive
officer of the Fund.
MANAGER
Smith Barney Mutual Funds Management, Inc.
(the "Manager") manages the day-
to-day operations of each Portfolio pursuant
to a management agreement entered
into by the Fund on behalf of each Portfolio
under which the Manager offers
each Portfolio advice and assistance with
respect to the acquisition, holding
or disposal of securities and recommendations
with respect to other aspects and
affairs of each Portfolio and furnishes each
Portfolio with bookkeeping,
accounting and administrative services, office
space and equipment, and the
services of the officers and employees of the
Fund. By written agreement the
research and other departments and staff of
Smith Barney will furnish the Man-
ager with information, advice and assistance
and will be available for consul-
tation on the Fund's Portfolios, thus Smith
Barney may also be considered an
investment adviser to the Fund. Smith Barney's
services are paid for by the
Manager on the basis of direct and indirect
costs to Smith Barney of performing
such services; there is no charge to the Fund
for such services.
For the Portfolios' last fiscal year the
management fee was 0.44% of each of
the Portfolio's average net assets. Payment
under each Portfolio's management
agreement is made as promptly as possible
after the last day of each month and
is computed on the aggregate net assets of all
Portfolios during the month.
Total expenses for the U.S. Government
Securities Portfolio's average net
assets for the last fiscal year were: 0.76%,
1.21%, 1.21% and 0.61% for Class
A, Class B, Class C and Class Y shares,
respectively. Total expenses for the
Monthly Payment Government Portfolio's average
net assets for the last fiscal
year were: 0.87%, 1.20% and 1.32% for Class A,
Class B and Class C shares,
respectively. Total expenses for the Income
Return Account Portfolio's average
net assets for the last fiscal year were:
0.56%, 0.94% and 0.69% for Class A,
Class C and Class Y shares, respectively.
42
<PAGE>
Smith Barney Funds, Inc.
MANAGEMENT OF THE FUND (CONTINUED)
The Manager was incorporated on March 12,
1968 under the laws of Delaware. As
of March 31, 1995 the Manager had aggregate
assets under management of approxi-
mately $54 billion. The Manager, Smith Barney
and Holdings are each located at
388 Greenwich Street, New York, New York
10013. The term "Smith Barney" in the
title of the Fund has been adopted by
permission of Smith Barney and is subject
to the right of Smith Barney to elect that the
Fund stop using the term in any
form or combination of its name.
PORTFOLIO MANAGEMENT
Patrick Sheehan is a Managing Director of
Smith Barney, a Vice President of
Smith Barney Funds, Inc. and Portfolio Manager
of U.S. Government Securities
Portfolio, Monthly Payment Government
Portfolio and Income Return Account Port-
folio. Mr. Sheehan manages the day to day
operations of each of these Portfo-
lios, including making all investment
decisions. Mr. Sheehan also manages Smith
Barney Funds, Inc.'s Short-Term U.S. Treasury
Securities Portfolio. Prior to
January 1992, Mr. Sheehan was a Portfolio
Manager at Value Line Inc., Senior
Vice President of Seaman's Bank for Savings,
Assistant Vice President of Capi-
tal Markets of Federal Home Loan Board of New
York and Vice President and Trea-
surer of Poughkeepsie Savings Bank.
Management's discussion and analysis, and
additional performance information
regarding each Portfolio during the fiscal
year ended December 31, 1994 is
included in the Annual Report dated December
31, 1994. A copy of the Annual
Report may be obtained upon request and
without charge from a Smith Barney
Financial Consultant or by writing or calling
the Fund at the address or phone
number listed on page one of this Prospectus.
DISTRIBUTOR
Smith Barney distributes shares of each
Portfolio as principal underwriter
and as such conducts a continuous offering
pursuant to a "best efforts"
arrangement requiring Smith Barney to take and
pay for only such securities as
may be sold to the public. Pursuant to a plan
of distribution under Rule 12b-1
under the 1940 Act (the "Plan") adopted by
each of the U.S. Government Securi-
ties Portfolio and the Monthly Payment
Government Portfolio, Smith Barney is
paid a service fee with respect to Class A,
Class B and Class C shares of each
such Portfolio at the annual rate of 0.25% of
the average daily net assets
attributable to these Classes. Smith Barney is
also paid a distribution fee
with respect to Class B and Class C shares of
each such Portfolio at the annual
rate of 0.50% and 0.45%, respectively, of the
average daily net assets attrib-
utable to
43
<PAGE>
Smith Barney Funds, Inc.
DISTRIBUTOR (CONTINUED)
these Classes. Class B shares that
automatically convert to Class A shares
eight years after the date of original
purchase will no longer be subject to a
distribution fee. Pursuant to the Plan adopted
by the Income Return Account
Portfolio, Smith Barney is paid a service fee
with respect to such Portfolio's
Class C shares at the annual rate of 0.15% of
the average daily net assets
attributable that Class. Smith Barney is also
paid a distribution fee with
respect to Class C shares of the Income Return
Account Portfolio at the annual
rate of 0.20% of the average daily net assets
attributable to that Class.
The fees are used by Smith Barney to pay its
Financial Consultants for ser-
vicing shareholder accounts and, in the case
of Class B and Class C shares, to
cover expenses primarily intended to result in
the sale of those shares. These
expenses include: advertising expenses; the
cost of printing and mailing pro-
spectuses to potential investors; payments to
and expenses of Smith Barney
Financial Consultants and other persons who
provide support services in con-
nection with the distribution of shares;
interest and/or carrying charges; and
indirect and overhead costs of Smith Barney
associated with the sale of Port-
folio shares, including lease, utility,
communications and sales promotion
expenses.
The payments to Smith Barney Financial
Consultants for selling shares of a
Class include a commission or fee paid by the
investor or Smith Barney at the
time of sale and, with respect to the Class A,
Class B and Class C shares of
each of the U.S. Government Securities
Portfolio and the Monthly Payment Gov-
ernment Portfolio, and to the Class C shares
of the Income Return Account
Portfolio, a continuing fee for servicing
shareholder accounts for as long as
a shareholder remains a holder of that Class.
Smith Barney Financial Consul-
tants may receive different levels of
compensation for selling different Clas-
ses of shares.
Actual distribution expenses for Class B and
Class C shares of a Portfolio
for any given year may exceed the fees
received pursuant to the Plan and will
be carried forward and paid by a Portfolio in
future years so long as the Plan
is in effect. Interest is accrued monthly on
such carryforward amounts at a
rate comparable to that paid by Smith Barney
for bank borrowings.
ADDITIONAL INFORMATION
The Fund, an open-end, diversified
investment company, was incorporated in
Maryland on December 2, 1966. The Fund has an
authorized capital of
2,000,000,000 shares with a par value of $.01
per share. The Board of Direc-
tors has authorized the issuance of fifteen
series of shares, each represent-
ing
44
<PAGE>
Smith Barney Funds, Inc.
ADDITIONAL INFORMATION (CONTINUED)
shares in one of fifteen separate Portfolios
and may authorize the issuance of
additional series of shares in the future. The
assets of each Portfolio are
segregated and separately managed and a
shareholder's interest is in the
assets of the Portfolio in which he or she
holds shares. Class A, Class B,
Class C, Class Y and Class Z (where available)
shares of each Portfolio repre-
sent interests in the assets of that Portfolio
and have identical voting, div-
idend, liquidation and other rights on the
same terms and conditions except
that expenses related to the distribution of
each Class of shares are borne
solely by each Class and each Class of shares
has exclusive voting rights with
respect to provisions of the Fund's Rule 12b-1
distribution plan which pertain
to a particular Class. As described under
"Voting" in the Statement of Addi-
tional Information, the Fund ordinarily will
not hold shareholder meetings;
however, shareholders have the right to call a
meeting upon a vote of 10% of
the Fund's outstanding shares for the purpose
of voting to remove directors
and, as required by the 1940 Act, the Fund
will assist shareholders in calling
such a meeting. Shares do not have cumulative
voting rights or preemptive
rights and are fully paid, transferable and
nonassessable when issued for pay-
ment as described in this Prospectus.
PNC Bank, National Association, located at
17th and Chestnut Streets, Phila-
delphia, Pennsylvania 19103, serves as
custodian of each Portfolio's invest-
ments.
TSSG, located at Exchange Place, Boston,
Massachusetts 02109, serves as the
Fund's transfer agent.
The Fund sends its shareholders a
semi-annual report and an audited annual
report, which include listings of the
investment securities held by the Fund
at the end of the period covered. In an effort
to reduce the Fund's printing
and mailing costs, the Fund plans to
consolidate the mailing of its semi-
annual and annual reports by household. This
consolidation means that a house-
hold having multiple accounts with the
identical address of record will
receive a single copy of each report. In
addition, the Fund also plans to con-
solidate the mailing of its Prospectus so that
a shareholder having multiple
accounts (that is, individual, IRA and/or
Self-Employed Retirement Plan
accounts) will receive a single Prospectus
annually. Shareholders who do not
want this consolidation to apply to their
account should contact their Smith
Barney Financial Consultant or the Fund's
transfer agent.
45
<PAGE>
Smith Barney Funds, Inc.
APPENDIX
GNMA Securities. Government National
Mortgage Association ("GNMA"), an agency
of the United States Government, guarantees
the timely payment of monthly
installments of principal and interest on
modified pass-through Certificates,
whether or not such amounts are collected by
the issuer of these Certificates
on the underlying mortgages. Scheduled
payments of principal and interest are
made each month to holders of GNMA
Certificates (such as the U.S. Government
Securities Portfolio and the Monthly Payment
Government Portfolio). Unscheduled
prepayments of mortgages are passed through to
holders of GNMA Certificates at
par with the regular monthly payments of
principal and interest, which have the
effect of reducing future payments on such
Certificates. The income portions of
monthly payments received by these Portfolios
will be included in their net
investment income. See "Dividends,
Distributions and Taxes."
GNMA Certificates have historically involved
no credit risk; however, due to
fluctuations in interest rates, the market
value of such securities will vary
during the period of a shareholder's
investment in the U.S. Government Securi-
ties Portfolio and the Monthly Payment
Government Portfolio. Prepayments and
scheduled payments of principal will be
reinvested by each Portfolio in then
available GNMA Certificates which may bear
interest at a rate lower or higher
than the Certificate from which the payment
was received. As with other debt
securities, the price of GNMA Certificates is
likely to decrease in times of
rising interest rates; however, in periods of
falling interest rates the poten-
tial for prepayment may reduce the general
upward price increase of GNMA Cer-
tificates that might otherwise occur. If a
Portfolio buys GNMA Certificates at
a premium, mortgage foreclosures or
prepayments may result in a loss to the
Portfolio of up to the amount of the premium
paid since only timely payment of
principal and interest is guaranteed.
Other U.S. Government Obligations. In
addition to GNMA Securities and direct
obligations of the U.S. Treasury (such as
Treasury Bills, Notes and Bonds),
U.S. Government Obligations in which the Fund
may invest include: (1) obliga-
tions of, or issued by, Banks for
Cooperatives, Federal Land Banks, Federal
Intermediate Credit Banks, Federal Home Loan
Banks, the Federal Home Loan Bank
Board, or the Student Loan Marketing
Association; (2) other securities fully
guaranteed as to principal and interest by the
United States of America; (3)
other obligations of, or issued by, or fully
guaranteed as to principal and
interest by the Federal National Mortgage
Association or any agency of the
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<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
