SMITH BARNEY FUNDS, INC.- UTILITY PORTFOLIO
Supplement to Prospectus dated April 28, 1995
On June 7, 1995, the Board of Directors
of Smith Barney Funds, Inc. (the "Fund")
approved a proposed reorganization pursuant to
which the assets of the Utility Portfolio (the
"Acquired Portfolio"), a series of the Fund
would be acquired by the Smith Barney
Utilities Fund (the "Acquiring Fund"), a
series of Smith Barney Income Funds through an
exchange of shares of the Acquiring Fund for
substantially all of the Acquired Portfolio's
assets. These shares would then be
distributed to shareholders of the Acquired
Portfolio in liquidation of the Acquired
Portfolio. The Acquired Portfolio and the
Acquiring Fund have substantially similar
investment objectives.
Under the terms of the proposed
reorganization, each shareholder of the
Acquired Portfolio would become a shareholder
of the Acquiring Fund, receiving shares of the
Acquiring Fund with a value equal to the value
of the shareholder's investment in the
portfolio in accordance with the terms of the
plan of reorganization. No sales charge would
be imposed in the transaction, and it is
anticipated that no gain or loss for Federal
income tax purposes would be recognized by
shareholders as a result of the
reorganization.
The proposed reorganization is subject to
the fulfillment of certain conditions,
including the approval of shareholders of the
Acquired Portfolio. Proxy materials
describing the proposed reorganization will be
mailed to Acquired Portfolio shareholders in
anticipation of a meeting of shareholders
expected to be held in early November, 1995.
If approved by shareholders at that time, the
transaction will occur as soon after the
meeting as practicable. In anticipation of
this transaction, shares of the Acquired
Portfolio will not be offered as of June 26,
1995.
________________________________
Dated: June 26, 1995
FD 0964 F5
<PAGE>
SMITH BARNEY FUNDS, INC.
Income and
Growth Portfolio
Utility 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
The Income and Growth Portfolio is one of six investment
portfolios that cur-
rently comprise Smith Barney Funds, Inc. (the "Fund"). The Income
and Growth
Portfolio seeks current income and long-term growth of income and
capital. It
invests primarily, but not exclusively, in common stocks.
The Utility Portfolio is also one of six investment portfolios
that currently
comprise the Fund. The Utility Portfolio seeks current income and
moderate cap-
ital growth. It seeks to achieve its objective by investing in
equity and debt
securities of public utility companies.
This Prospectus sets forth concisely certain information about
the Fund and
each of the Portfolios, including sales charges, distribution and
service fees
and expenses, that prospective investors will find helpful in
making an invest-
ment decision. Investors are encouraged to read this Prospectus
carefully and
retain it for future reference.
Additional information about each of the Portfolios is contained
in a State-
ment 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
contacting a Smith Barney Financial Consultant. The Statement of
Additional
Information has been filed with the Securities and Exchange
Commission (the
"SEC") and is incorporated by reference into this Prospectus in its
entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment 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 15
- --------------------------------------------------
VALUATION OF SHARES 18
- --------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 18
- --------------------------------------------------
PURCHASE OF SHARES 19
- --------------------------------------------------
EXCHANGE PRIVILEGE 31
- --------------------------------------------------
REDEMPTION OF SHARES 35
- --------------------------------------------------
MINIMUM ACCOUNT SIZE 36
- --------------------------------------------------
PERFORMANCE 37
- --------------------------------------------------
MANAGEMENT OF THE FUND 38
- --------------------------------------------------
DISTRIBUTOR 40
- --------------------------------------------------
ADDITIONAL INFORMATION 41
- --------------------------------------------------
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 Income and Growth Portfolio is an
open-end, manage-
ment investment company whose investment objective is to seek
current income
and long-term growth of income and capital by investing primarily,
but not
exclusively, in common stocks. The Utility Portfolio seeks current
income and
moderate capital growth by investing in equity and debt securities
of public
utility companies. 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, for the Income and Growth Portfolio only,
a fifth
Class, Class Z shares, which is offered pursuant to a separate
prospectus, is
offered exclusively to tax-exempt employee benefit and retirement
plans of
Smith Barney Inc. ("Smith Barney") and its affiliates. See
"Purchase of
Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus
an initial
sales charge of up to 5.00% and are subject to an annual service
fee of 0.25%
of the average daily net assets of the Class. The initial sales
charge may be
reduced or waived for certain purchases. Purchases of Class A
shares, which
when combined with current holdings of Class A shares offered with
a sales
charge equal or exceed $500,000 in the aggregate, will be made at
net asset
value with no initial sales charge, but will be subject to a
contingent
deferred sales charge ("CDSC") of 1.00% on redemptions made within
12 months
of purchase. See "Prospectus Summary--Reduced or No Initial Sales
Charge."
Class B Shares. Class B shares are offered at net asset value
subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00%
each year
after the date of purchase to zero. This CDSC may be waived for
certain
redemptions. Class B shares are subject to an annual service fee of
0.25% and
an annual distribution fee of 0.75% of the average daily net assets
of the
Class.
3
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
The Class B shares' distribution fee may cause that Class to have
higher
expenses and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert
automatically
to Class A shares, based on relative net asset value, eight years
after the
date of the original purchase. Upon conversion, these shares will
no longer be
subject to an annual distribution fee. In addition, a certain
portion of Class
B shares that have been acquired through the reinvestment of
dividends and 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. They are subject to an annual service fee of 0.25%
and an annual
distribution fee of 0.75% of the average daily net assets of the
Class C
shares, and investors pay a CDSC of 1.00% if they redeem Class C
shares within
12 months of purchase. 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 the
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 redemp-
tions 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.
In deciding which Class of Portfolio shares to purchase,
investors should
consider the following factors, as well as any other relevant facts
and circum-
stances:
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
4
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
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 purchases
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
5
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and
"Exchange Privilege" for other differences between the Classes of
shares.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to
participate in the
Smith Barney 401(k) Program, which is generally designed to assist
plan 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
(collec-
tively, "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
investment
requirement for Class A, Class B and Class C shares and the
subsequent invest-
ment requirement for all Classes through the Systematic Investment
Plan
described below is $50. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN Each 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."
6
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
MANAGEMENT OF EACH PORTFOLIO Smith Barney Mutual Funds Management
Inc. (former-
ly, Smith, Barney Advisers, Inc.) (the "Manager") serves as each
Portfolio's
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
differential. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of each 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 Income and Growth Portfolio and monthly on
shares of the
Utility Portfolio. Distributions of net realized capital gains, if
any, are
paid annually for each Portfolio. 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 sales
charge or CDSC. Class B shares acquired through dividend and
distribution rein-
vestments 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 a Port-
folio's investment objective will be achieved. The value of the
Portfolio's
investments, and thus the net asset value of a Portfolio's shares,
will fluctu-
ate in response to changes in market and economic conditions, as
well as the
financial condition and prospects of issuers in which a Portfolio
invests. The
Income and Growth Portfolio may invest in foreign securities.
Investments in
foreign securities incur higher costs than investments in U.S.
securities,
including higher costs in making securities transactions as well as
foreign
government
7
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
taxes which may reduce the investment return of the Portfolio. In
addition,
foreign investments may include additional risks associated with
currency
exchange rates, less complete financial information about
individual companies,
less market liquidity and political instability. See "Investment
Objectives and
Management Policies" and "Appendix."
EACH PORTFOLIO'S EXPENSES The following expense table lists the
costs and
expenses an investor will incur either directly or indirectly as a
shareholder
of each Portfolio, 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 BOTH
PORTFOLIOS
CLASS A CLASS B CLASS
C CLASS Y
- -----------------------------------------------------------------
- ------------
<S> <C> <C> <C>
<C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None None
None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever is None* 5.00%
1.00% None
lower)
</TABLE>
<TABLE>
<CAPTION>
APPLICABLE TO THE INCOME AND
GROWTH 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 0.58% 0.58% 0.58% 0.58%
12b-1 fees** 0.25 1.00 1.00 --
Other expenses*** 0.13 0.01 0.17 0.07
- -----------------------------------------------------------------
- ---
TOTAL PORTFOLIO OPERATING EXPENSES 0.96% 1.59% 1.75% 0.65%
- -----------------------------------------------------------------
- ---
</TABLE>
8
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
<TABLE>
<CAPTION>
APPLICABLE TO THE UTILITY
PORTFOLIO
EXPENSE ALLOCATION
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 0.60% 0.60% 0.60%
0.60%
12b-1 fees** 0.25 1.00 1.00
--
Other expenses*** 0.16 0.07 0.17
0.12
- -----------------------------------------------------------------
- --------
TOTAL PORTFOLIO OPERATING EXPENSES 1.01% 1.67% 1.77%
0.72%
- -----------------------------------------------------------------
- --------
</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 each of the
Portfolio's shares
and investors may actually pay lower or no charges, depending on
the amount
purchased and, in the case of Class B, Class C and certain Class A
shares, the
length of time the shares are held and whether the shares are held
through the
Smith Barney 401(k) Program. See "Purchase of Shares" and
"Redemption of
Shares." Smith Barney receives an annual 12b-1 service fee of 0.25%
of the
value of average daily net assets of Class A shares. Smith Barney
also receives
with respect to Class B and Class C shares an annual 12b-1 fee of
1.00% of the
value of average daily net assets of the respective Classes,
consisting of a
0.75% distribution fee and a 0.25% service fee. "Other expenses" in
the above
table include fees for shareholder services, custodial fees, legal
and account-
ing fees, printing costs and registration fees.
9
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
EXAMPLE
The following example is intended to assist an investor in
understanding the
various costs that an investor in each of the Portfolios will bear
directly or
indirectly. The example assumes payment by each Portfolio of
operating expenses
at the levels set forth in the table above. See "Purchase of
Shares," "Redemp-
tion 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:
INCOME AND GROWTH PORTFOLIO
Class A $59 $79 $100 $162
Class B 66 80 97 172
Class C 28 55 95 206
Class Y 7 21 36 81
UTILITY PORTFOLIO
Class A $60 $81 $103 $167
Class B 67 83 101 180
Class C 28 56 96 208
Class Y 7 23 40 89
An investor would pay the
following expenses on the same
investment, assuming the same
annual return and no redemption:
INCOME AND GROWTH PORTFOLIO
Class A $59 $79 $100 $162
Class B 16 50 87 172
Class C 18 55 95 206
Class Y 7 21 36 81
UTILITY PORTFOLIO
Class A $60 $81 $103 $167
Class B 17 53 91 180
Class C 18 56 96 208
Class Y 7 23 40 89
- ---------------------------------------------------------------
</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.
10
<PAGE>
Smith Barney Funds, Inc.
PROSPECTUS SUMMARY (CONTINUED)
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 to Shareholders. No information is presented
for Class
Y shares, because no Class Y shares were outstanding for the
periods shown.
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT
EACH YEAR:
INCOME AND GROWTH PORTFOLIO
<TABLE>
<CAPTION>
CLASS A SHARES 1994(1) 1993 1992 1991
1990
- -----------------------------------------------------------------
- ---------------
<S> <C> <C> <C> <C>
<C>
NET ASSET VALUE, BEGINNING
OF YEAR $13.31 $12.48 $12.51
$10.54 $12.69
- -----------------------------------------------------------------
- ---------------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income 0.43 0.46 0.50
0.56 0.67
Net realized and
unrealized gain (loss) on
investments (1.00) 1.56 0.38
2.19 (1.87)
- -----------------------------------------------------------------
- ---------------
Total Income (Loss) from
Investment Operations (0.57) 2.02 0.88
2.75 (1.20)
- -----------------------------------------------------------------
- ---------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.42) (0.46) (0.51)
(0.73) (0.70)
Distribution from net
realized gains on
security transactions (2) (0.14) (0.73) (0.40)
(0.05) (0.25)
- -----------------------------------------------------------------
- ---------------
Total Distributions (0.56) (1.19) (0.91)
(0.78) (0.95)
- -----------------------------------------------------------------
- ---------------
NET ASSET VALUE, END OF
YEAR $12.18 $13.31 $12.48
$12.51 $10.54
- -----------------------------------------------------------------
- ---------------
TOTAL RETURN (P) (4.31)% 16.38% 7.23%
26.57% (9.46)%
- -----------------------------------------------------------------
- ---------------
NET ASSETS, END OF YEAR
(000S) $544,572 $627,870 $573,085
$583,686 $513,586
- -----------------------------------------------------------------
- ---------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.96% 0.91% 0.92%
0.84% 0.45%
Net investment income 3.31 3.42 3.97
4.80 5.69
- -----------------------------------------------------------------
- ---------------
PORTFOLIO TURNOVER RATE 26.77% 46.10% 39.16%
44.50% 47.99%
- -----------------------------------------------------------------
- ---------------
<CAPTION>
CLASS A SHARES (CONTINUED) 1989 1988 1987 1986
1985
- -----------------------------------------------------------------
- ---------------
<S> <C> <C> <C> <C>
<C>
NET ASSET VALUE, BEGINNING
OF YEAR $11.00 $10.05 $11.40
$10.10 $8.69
- -----------------------------------------------------------------
- ---------------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income 0.70 0.61 0.71
0.69 0.68
Net realized and
unrealized gain (loss) on
investments 2.00 1.14 (0.93)
1.41 1.61
- -----------------------------------------------------------------
- ---------------
Total Income (Loss) from
Investment Operations 2.70 1.75 (0.22)
2.10 2.29
- -----------------------------------------------------------------
- ---------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.70) (0.63) (0.50)
(0.67) (0.66)
Distribution from net
realized gains on
security transactions (2) (0.31) (0.17) (0.63)
(0.13) (0.22)
- -----------------------------------------------------------------
- ---------------
Total Distributions (1.01) (0.80) (1.13)
(0.80) (0.88)
- -----------------------------------------------------------------
- ---------------
NET ASSET VALUE, END OF
YEAR $12.69 $11.00 $10.05
$11.40 $10.10
- -----------------------------------------------------------------
- ---------------
TOTAL RETURN (P) 25.11% 17.67% (2.83)%
21.04% 27.30%
- -----------------------------------------------------------------
- ---------------
NET ASSETS, END OF YEAR
(000S) $589,952 $517,948 $546,974
$379,345 $85,591
- -----------------------------------------------------------------
- ---------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.44% 0.49% 0.45%
0.56% 0.74%
Net investment income 5.65 5.58 5.90
5.99 7.19
- -----------------------------------------------------------------
- ---------------
PORTFOLIO TURNOVER RATE 38.06% 25.76% 51.34%
54.22% 24.93%
- -----------------------------------------------------------------
- ---------------
</TABLE>
(1) On October 10, 1994, former Class C shares were exchanged into
Class A
shares and therefore Class C share activity for the period from
January 1,
1994 through October 9, 1994 is included with Class A Share
activity.
(2) Net short term gains, if any, are included and reported as
ordinary income
for income tax purposes.
(P) Total returns do not reflect sales charges.
12
<PAGE>
Smith Barney Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD:
INCOME AND GROWTH PORTFOLIO
<TABLE>
<CAPTION>
CLASS B SHARES 1994(1)
- -----------------------------------------------------------------
- ------------
<S> <C> <C>
<C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.54
- -----------------------------------------------------------------
- ------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.03
Net realized and unrealized loss on
investments (0.19)
- -----------------------------------------------------------------
- ------------
Total Loss from Investment Operations (0.16)
- -----------------------------------------------------------------
- ------------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.09)
Distribution from net realized gains on
security transactions (2) (0.14)
- -----------------------------------------------------------------
- ------------
Total Distributions (0.23)
- -----------------------------------------------------------------
- ------------
NET ASSET VALUE, END OF PERIOD $12.15
- -----------------------------------------------------------------
- ------------
TOTAL RETURN (P) (1.28)%++
- -----------------------------------------------------------------
- ------------
NET ASSETS, END OF PERIOD (000S) $354
- -----------------------------------------------------------------
- ------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.59%+*
Net investment income 2.11+
- -----------------------------------------------------------------
- ------------
PORTFOLIO TURNOVER RATE 26.77%
- -----------------------------------------------------------------
- ------------
<CAPTION>
CLASS C SHARES 1994(3) 1993
1992(4)
- -----------------------------------------------------------------
- ------------
<S> <C> <C>
<C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.30 $12.48
$12.87
- -----------------------------------------------------------------
- ------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.31 0.38
0.17
Net realized and unrealized
gain (loss) on investments (0.95) 1.53
(0.10)
- -----------------------------------------------------------------
- ------------
Total Income (Loss) from Investment
Operations (0.64) 1.91
0.07
- -----------------------------------------------------------------
- ------------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.34) (0.36)
(0.06)
Distribution from net realized gains (2) (0.14) (0.73)
(0.40)
- -----------------------------------------------------------------
- ------------
Total Distributions (0.48) (1.09)
(0.46)
- -----------------------------------------------------------------
- ------------
NET ASSET VALUE, END OF PERIOD $12.18 $13.30
$12.48
- -----------------------------------------------------------------
- ------------
TOTAL RETURN (P) (4.91)% 15.46%
(0.57)%++
- -----------------------------------------------------------------
- ------------
NET ASSETS, END OF PERIOD (000S) $27,507 $15,408
$1,504
- -----------------------------------------------------------------
- ------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.75% 1.65%
1.58%+
Net investment income 2.49 2.59
1.80+
- -----------------------------------------------------------------
- ------------
PORTFOLIO TURNOVER RATE 26.77% 46.10%
39.16%
- -----------------------------------------------------------------
- ------------
</TABLE>
(1) For the period from November 7, 1994 (inception date) to
December 31, 1994.
(2) Net short term gains, if any, are included and reported as
ordinary income
for income tax purposes.
(3) On November 7, 1994 former Class B shares were renamed Class C
shares.
(4) For the period from December 2, 1992 (inception date) to
December 31, 1992.
++ Not annualized as it may not be representative of the total
return for the
year.
+ Annualized.
(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)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT
EACH PERIOD:
UTILITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A SHARES 1994(1) 1993 1992
1991 1990(2)
- -----------------------------------------------------------------
- -----------------
<S> <C> <C> <C> <C>
<C>
NET ASSET VALUE,
BEGINNING OF PERIOD $13.29 $13.07 $13.07
$11.94 $11.94
- -----------------------------------------------------------------
- -----------------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income 0.79 0.82 0.79
0.78 0.01
Net realized and
unrealized gain (loss)
on investments (1.91) 0.52 0.17
1.20 --
- -----------------------------------------------------------------
- -----------------
Total Income (Loss) from
Investment Operations (1.12) 1.34 0.96
1.98 0.01
- -----------------------------------------------------------------
- -----------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.81) (0.81) (0.79)
(0.79) (0.01)
Distributions from net
realized gains on
security transactions
(3) (0.05) (0.31) (0.17)
(0.06) --
- -----------------------------------------------------------------
- -----------------
Total Distributions (0.86) (1.12) (0.96)
(0.85) (0.01)
- -----------------------------------------------------------------
- -----------------
NET ASSET VALUE, END OF
PERIOD $11.31 $13.29 $13.07
$13.07 $11.94
- -----------------------------------------------------------------
- -----------------
TOTAL RETURN (P) (8.56)% 10.37% 7.77%
17.21% 0.08%++
- -----------------------------------------------------------------
- -----------------
NET ASSETS, END OF
PERIOD (000S) $68,788 $113,080 $126,437
$104,905 $71,237
- -----------------------------------------------------------------
- -----------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.01% 0.98% 1.07%
1.00% 1.00%+
Net investment income 6.54 5.97 6.13
6.61 7.58+
- -----------------------------------------------------------------
- -----------------
PORTFOLIO TURNOVER RATE 23.54% 36.68% 27.54%
39.45% --
- -----------------------------------------------------------------
- -----------------
<CAPTION>
CLASS B SHARES CLASS C
SHARES (5)
--------------
- ----------------------------
1994(4) 1994
1993 1992(6)
- -----------------------------------------------------------------
- -----------------
<S> <C> <C> <C> <C>
<C>
NET ASSET VALUE,
BEGINNING OF PERIOD $11.29 $13.28
$13.07 $12.98
- -----------------------------------------------------------------
- -----------------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income 0.14 0.71
0.73 0.02
Net realized and
unrealized gain on
investments 0.06 (1.91)
0.50 0.26
- -----------------------------------------------------------------
- -----------------
Total Income (Loss) from
Investment Operations 0.20 (1.20)
1.23 0.28
- -----------------------------------------------------------------
- -----------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.12) (0.71)
(0.71) (0.03)
Distribution from net
realized gains on
security transactions
(3) (0.05) (0.05)
(0.31) (0.16)
- -----------------------------------------------------------------
- -----------------
Total Distributions (0.17) (0.76)
(1.02) (0.19)
- -----------------------------------------------------------------
- -----------------
NET ASSET VALUE, END OF
PERIOD $11.32 $11.32
$13.28 $13.07
- -----------------------------------------------------------------
- -----------------
TOTAL RETURN (P) 1.82%++ (9.19)%
9.48% 2.23%++
- -----------------------------------------------------------------
- -----------------
NET ASSETS, END OF
PERIOD (000S) $737 $7,889
$7,573 $860
- -----------------------------------------------------------------
- -----------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.67%+ 1.77%
1.72% 1.55%+
Net investment income 4.71+ 5.87
5.12 2.45+
- -----------------------------------------------------------------
- -----------------
PORTFOLIO TURNOVER RATE 23.54% 23.54%
36.68% 27.45%
- -----------------------------------------------------------------
- -----------------
</TABLE>
(1) On October 10, 1994 former Class C shares were exchanged into
Class A
shares and therefore Class C share activity for the period from
January 1,
1994 through October 9, 1994 is included with the Class A share
activity.
(2) For the period from December 28, 1990 (inception date) to
December 31,
1990.
(3) Net short term gains, if any, are included and reported as
ordinary income
for tax purposes.
(4) For the period from November 7, 1994 (inception date) to
December 31, 1994.
(5) On November 7, 1994 former Class B shares were renamed Class C
shares.
(6) For the period from December 2, 1992 (inception date) to
December 31, 1992.
++ Not annualized as it may be representative of the total return
for the
year.
+ Annualized.
(P) Total returns do not reflect sales charges.
14
<PAGE>
Smith Barney Funds, Inc.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Income and Growth Portfolio seeks current income and
long-term growth of
income and capital by investing primarily, but not exclusively, in
common
stocks. The Utility Portfolio seeks current income and moderate
capital growth
by investing in equity and debt securities of public utility
companies. Of
course, no assurance can be given that a Portfolio's objective will
be
achieved.
The Income and Growth Portfolio invests primarily in common
stocks offering
a current return from dividends and will also normally include some
interest-
paying debt obligations (such as U.S. Government Obligations,
investment grade
bonds and debentures) and high quality short-term debt obligations
(such as
commercial paper and repurchase agreements collateralized by U.S.
Government
securities with broker/dealers or other financial institutions,
including the
Fund's custodian); and this Portfolio may also purchase preferred
stocks and
convertible securities. Temporary defensive investments or a higher
percentage
of debt securities may be held when deemed advisable by the
Manager. To the
extent the Portfolio's assets are invested for temporary defensive
purposes,
such assets will not be invested in a manner designed to achieve
the Portfo-
lio's investment objective. In the selection of common stock
investments,
emphasis is generally placed on issues with established dividend
records as
well as potential for price appreciation. From time to time,
however, a por-
tion of the assets may be invested in non-dividend paying stocks.
The Portfo-
lio may make investments in foreign securities, though management
currently
intends to limit such investments to 5% of the Portfolio's assets,
and an
additional 10% of its assets may be invested in sponsored American
Depositary
Receipts representing shares in foreign securities that are traded
in United
States securities markets.
The Utility Portfolio, under normal conditions, invests at least
65% of its
total assets in securities of companies in the public utilities
industry and
companies deriving a majority of their revenues from their public
utility
operations. Public utility investments include companies engaged in
the manu-
facture, production, generation, transmission, sale and
distribution of gas
and electric energy, and companies engaged in the communications
field,
including telephone, telegraph, satellite, microwave and other
companies pro-
viding communication facilities for the public benefit (but
excluding public
broadcasting companies). The Portfolio will invest in both equity
securities
(common stocks and securities convertible into common stocks) and
debt securi-
ties (bond and preferred stock) of public utility companies. The
Portfolio
will shift its asset allocation without restriction between types
of utilities
and between equity and debt securities
15
<PAGE>
Smith Barney Funds, Inc.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
based upon the Manager's determination of how to achieve the
Portfolio's
investment objective in light of prevailing market, economic and
financial
conditions. For example, at a particular time the Manager may
choose to allo-
cate up to 100% of the Portfolio's assets in a particular type of
security
(e.g., equity securities) or in a specific utility industry segment
(e.g.,
electric utilities). See "Additional Information" for further
information.
The Utility Portfolio's investments in debt securities will be
primarily in
securities rated investment grade by Moody's Investors Service,
Inc.
("Moody's") (Aaa, Aa, A, Baa) or Standard & Poor's Corporation
("S&P") (AAA,
AA, A, BBB). The Portfolio may invest up to 10% of its assets in
securities
rated Ba or B by Moody's or BB or B by S&P whenever the Manager
believes that
the incremental yield on such securities is advantageous to the
Portfolio in
comparison to the additional risk involved. The yields on lower
rated debt
securities generally are higher than the yields available on higher
rated
securities. However, investments in lower rated securities may be
subject to
greater market fluctuations and greater risks of loss of income or
principal
(including the possibility of default by, or bankruptcy of, the
issuers of
such securities) than higher rated securities. Lower rated
securities also may
have speculative characteristics. The Portfolio also may invest in
debt secu-
rities that, while not rated, are determined by the Manager to be
of compara-
ble quality to the rated securities in which the Portfolio may
invest.
The remainder of the Utility Portfolio's assets may be invested
in any type
of security, including U.S. Government securities, money market
instruments,
and equity and debt securities of non-utility companies believed to
afford a
reasonable opportunity for achieving the Portfolio's investment
objective.
Though it has no present intention to do so, the Portfolio may buy
or sell put
and call options up to 15% of its net assets, provided such options
are listed
on a national securities exchange. The Portfolio may enter into
repurchase
agreements and may invest up to 15% of its total assets in equity
and debt
securities of foreign issuers. See "Appendix." During times when
the Manager
believes a defensive posture in the market is warranted, the
Portfolio may
invest temporarily up to 100% of its assets in U.S. Government
securities,
money market instruments and debt securities (whether or not they
are utility
securities) such as investment grade bonds and debentures. To the
extent the
Portfolio's assets are invested for temporary defensive purposes,
such assets
will not be invested in a manner designed to achieve the
Portfolio's invest-
ment objective.
16
<PAGE>
Smith Barney Funds, Inc.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
The Utility Portfolio's investment objective 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"). The Income and
Growth Portfo-
lio's investment objective and policies, as well as the Utility
Portfolio's
investment policies, are non-fundamental and, as such, may be
changed by the
Board of Directors, provided such change is not prohibited by the
investment
restrictions (which are set forth in the Statement of Additional
Information)
or applicable law, and any such change will first be disclosed in
the then
current prospectus.
PORTFOLIO TRANSACTIONS AND TURNOVER
All orders for transactions in securities and options on behalf
of the Port-
folio are placed by the Manager with broker/dealers that the
Manager selects,
including Smith Barney and other affiliated brokers. Brokerage will
be allo-
cated to Smith Barney, to the extent and in the manner permitted by
applicable
law, provided that, in the judgment of the Board of Directors of
the Fund, the
commission, fee or other remuneration received or to be received by
Smith Bar-
ney (or any broker/dealer affiliate of Smith Barney that is also a
member of a
securities exchange) is reasonable and fair compared to the
commission, fee or
other remuneration received by other brokers in connection with
comparable
transactions involving similar securities being purchased or sold
on a securi-
ties exchange during the same or comparable period of time. The
Fund normally
expects to allocate to Smith Barney between 50% and 60% of each
Portfolio's
transactions to be executed for such account on an agency basis. In
all trades
directed to Smith Barney, the Fund has been assured that its orders
will be
accorded priority over those received from Smith Barney for its own
account or
for any of its directors, officers or employees. The Fund will not
deal with
Smith Barney in any transaction in which Smith Barney acts as
principal.
Although it is anticipated that most investments of each
Portfolio will be
long-term in nature, the rate of portfolio turnover will depend
upon market
and other conditions, and it will not be a limiting factor when the
Investment
Manager believes that portfolio changes are appropriate. It is
expected that
each Portfolio's annual turnover rate will not exceed 100%. As the
portfolio
turnover rate increases, so will a Portfolio's brokerage and other
transaction
related expenses. Investors should realize that risk of loss is
inherent in
the ownership of any securities and that shares of each Portfolio
will fluctu-
ate with the market values of its securities.
17
<PAGE>
Smith Barney Funds, Inc.
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.
Securities that are listed or traded on a securities exchange are
valued at
the last sale price on the principal exchange on which they are
listed and
securities trading on the NASDAQ System are valued at the last sale
price
reported as of the close of the NYSE. If no last sale is reported,
the forego-
ing securities and over-the-counter securities other than those
traded on the
NASDAQ System are valued at the mean between the last reported bid
and asked
prices. Debt obligations are valued at the mean between the bid and
asked quo-
tations for those securities or if no quotations are available,
then for secu-
rities of similar 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 securities 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,
if any, including restricted securities, 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
Income and
Growth Portfolio and monthly income dividends on shares of the
Utility Portfo-
lio and makes annual distributions of capital gains, if any, on
such shares.
If a shareholder does not otherwise instruct, dividends and
capital gain
distributions will be reinvested automatically in additional shares
of the
same Class at net asset value, subject to no sales charge or CDSC.
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.
18
<PAGE>
Smith Barney Funds, Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
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, the Portfolio must meet certain tests,
including dis-
tributing at least 90% of its investment company taxable income,
and deriving
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 the same Portfolio, are taxable to
sharehold-
ers of each Portfolio 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 short-term capital losses) are
taxable to share-
holders as long-term capital gains. Information as to the tax
status of divi-
dends 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.
PURCHASE OF SHARES
GENERAL
Each Portfolio offers four 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
redemp-
19
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
tions. 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. The
Income and
Growth Portfolio also offers a fifth class of shares: Class Z
shares, which are
offered without a sales charge, CDSC, service fee or distribution
fee, exclu-
sively to tax-exempt employee benefit and retirement plans of Smith
Barney and
its affiliates. Investors meeting these criteria who are interested
in acquir-
ing Class Z shares should contact a Smith Barney Financial
Consultant for a
Class Z Prospectus. See "Prospectus Summary -- Alternative Purchase
Arrange-
ments" 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
purchase shares directly from the Fund through TSSG. When
purchasing shares of
the 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 the 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
the Portfolio is $25. For each Portfolio's Systematic Investment
Plan, the min-
imum 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 min-
imum 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.
20
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
Purchase orders received by the Fund or Smith Barney 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 (the
"trade date"). Orders received by dealers or Introducing 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. The Port-
folio 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 preau-
thorized transfers of $50 or more to charge the regular bank
account or other
financial institution indicated by the shareholder on a monthly or
quarterly
basis to provide systematic additions to the shareholder's
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 shareholder's
Smith Barney
brokerage account or redeem the shareholder's shares of a Smith
Barney money
market fund to make additions to the account. Additional
information is avail-
able from the Fund or a Smith Barney Financial Consultant.
21
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charges applicable to purchases of Class A shares of
each Portfo-
lio 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 5.00% 5.26%
4.50%
$ 25,000 - 49,999 4.00 4.17 3.60
50,000 - 99,999 3.50 3.63 3.15
100,000 - 249,999 3.00 3.09 2.70
250,000 - 499,999 2.00 2.04 1.80
500,000 and 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."
Members of the selling group may receive up to 90% of the sales
charge and
may be deemed to be underwriters of the Fund as defined in the
Securities Act
of 1933, as amended.
The reduced sales charges shown above apply to the aggregate of
purchases of
Class A shares of the 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 Direc-
22
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
tor 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
purchase 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 the
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 sold
with a maximum 5.00% sales charge) and who wish to reinvest their
redemption
proceeds in the Portfolio, provided the reinvestment is made within
60 calendar
days of the redemption; and (e) accounts managed by registered
investment advi-
sory subsidiaries of Travelers. In order to obtain such discounts,
the pur-
chaser must provide sufficient information at the time of purchase
to permit
verification that the purchase would qualify for the elimination of
the sales
charge.
RIGHT OF ACCUMULATION
Class A shares of 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 the 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
information at the
time of purchase to permit verification that the purchase qualifies
for the
reduced sales charge. The right of accumulation is subject to
modification or
discontinuance at any time with respect to all shares purchased
thereafter.
23
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
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
enable Smith
Barney to realize economies of scale in its costs of distributing
shares. A
qualified group must have more than 10 members, must be available
to arrange
for group meetings between representatives of the Portfolio 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 purchase at net
asset value,
the purchaser must provide sufficient information at the time of
purchase to
permit verification that the purchase qualifies for the reduced
sales charge.
Approval of group purchase reduced sales charge plans is subject to
the dis-
cretion of Smith Barney.
24
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
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%) and
expenses
applicable to such Portfolio's Class A shares, which may include a
CDSC of
1.00%. Please contact a Smith Barney Financial Consultant or TSSG
for further
information.
DEFERRED SALES CHARGE ALTERNATIVES
CDSC Shares are sold at net asset value next determined without
an initial
sales charge so that the full amount of an investor's purchase
payment may be
immediately invested in 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 sales charge currently held by an investor equal or
exceed
$500,000 in the aggregate.
25
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
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."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
-----------------------------
<S> <C>
First 5.00%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth 0.00
Seventh 0.00
Eighth 0.00
-----------------------------
</TABLE>
Class B shares will convert automatically to Class A shares eight
years
after the date on which they were purchased and thereafter will no
longer be
subject to any distribution fees. There will also be converted at
that time
such proportion of Class B Dividend Shares owned by the shareholder
as the
total number of his or her Class B shares converting at the time
bears to the
total number of outstanding Class B shares (other than Class B
Dividend
Shares) owned by the
26
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
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 such 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.
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.
27
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
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 the
Portfolio with
any investment company by merger, acquisition of assets or
otherwise. In addi-
tion, a shareholder who has redeemed shares from other funds of the
Smith Bar-
ney 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 of retirement plans under Section 401(a) of the Code. To the
extent appli-
cable, the same terms and conditions are offered to all
Participating Plans in
the Smith Barney 401(k) Program.
Each 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. 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
28
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
CDSC. Once a Participating Plan has made an initial investment in
the Portfo-
lio, 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 Portfolio are offered to
any Partici-
pating Plan that purchases less than $250,000 of one or more funds
of the
Smith Barney Mutual Funds. Class B shares acquired through the
Smith Barney
401(k) Program are subject to a CDSC of 3.00% of redemption
proceeds, if the
Participating Plan terminates within eight years of the date the
Participating
Plan first enrolled in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled in the
Smith 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 additional 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 investors. See "Purchase of Shares -- Deferred Sales
Charge Alterna-
tives."
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 redemp-
tion 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
29
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
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 such 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 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 Par-
ticipating Plan first became enrolled in the Smith Barney 401(k)
Program,
unlike the applicability of the CDSC to other shareholders, which
depends on
the number of years since those shareholders made the purchase
payment from
which the amount is being redeemed.
The CDSC will be waived on redemptions of Class A, Class B and
Class C
shares in connection with lump-sum or other distributions made by
a Partici-
pating Plan as a result of: (a) the retirement of an employee in
the Partici-
pating Plan; (b) the termination of employment of an employee in
the Partici-
pating 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 per-
mitted under Section 401(k) of the Code; or (f) redemptions of
shares in con-
nection with a loan made by the Participating Plan to an employee.
30
<PAGE>
Smith Barney Funds, Inc.
PURCHASE OF SHARES (CONTINUED)
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
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
31
<PAGE>
Smith Barney Funds, Inc.
EXCHANGE PRIVILEGE (CONTINUED)
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
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
32
<PAGE>
Smith Barney Funds, Inc.
EXCHANGE PRIVILEGE (CONTINUED)
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 the
Portfolio.
** Available for exchange with Class A, Class B and Class Y
shares of the
Portfolio. In addition, shareholders who own Class C shares of
the
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 the Portfolio.
+ Available for exchange with Class B and Class C shares of the
Portfolio.
++ Available for exchange with Class A and Class Y shares of the
Portfolio.
In addition, shareholders who own Class C shares of the
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.
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 in 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
33
<PAGE>
Smith Barney Funds, Inc.
EXCHANGE PRIVILEGE (CONTINUED)
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
the 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 the Portfolio's performance and its
shareholders. The
Manager may determine that a pattern of frequent exchanges is
excessive 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 dis-
cretion, 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 Bar-
ney 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
registra-
tion 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.
34
<PAGE>
Smith Barney Funds, Inc.
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 redemp-
tion proceeds will be remitted on or before the seventh day
following receipt
of proper tender, except on any days on which the NYSE is closed or
as permit-
ted under the 1940 Act in extraordinary circumstances. The Fund
anticipates
that, in accordance with regulatory changes, beginning on or about
June 1,
1995, payment will be made on the third business day after receipt
of proper
tender. Generally, if the redemption proceeds are remitted to a
Smith Barney
brokerage account, these funds will not be invested for the
shareholder's ben-
efit without specific instruction and Smith Barney will benefit
from the use
of temporarily uninvested funds. Redemption proceeds for shares
purchased by
check, other than a certified or official bank check, will be
remitted upon
clearance of the check, which may take up to ten days or more.
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./(Income and Growth Portfolio or Utility
Portfolio)
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number
or dollar
amount of shares to be redeemed, (b) identify the shareholder's
account number
and (c) be signed by each registered owner exactly as the shares
are regis-
tered. If the shares to be redeemed were issued in certificate
form, the cer-
tificates must
35
<PAGE>
Smith Barney Funds, Inc.
REDEMPTION OF SHARES (CONTINUED)
be endorsed for transfer (or be accompanied by an endorsed stock
power) and
must be submitted to TSSG together with the redemption request. Any
signature
appearing on a redemption request, share certificate or stock power
must be
guaranteed by an eligible guarantor institution, such as a domestic
bank, sav-
ings and loan institution, domestic credit union, member bank of
the Federal
Reserve System or member firm of a national securities exchange.
TSSG may
require additional supporting documents for redemptions made by
corporations,
executors, administrators, trustees or guardians. A redemption
request will not
be deemed properly received until TSSG receives all required
documents in
proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
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 involuntarily liquidate 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 a 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.
36
<PAGE>
Smith Barney Funds, Inc.
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
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 may also be accompanied with nonstandard total return
information for
differing periods computed in the same manner but without
annualizing the
total return or taking sales charges into account. The Income and
Growth Port-
folio calculates current dividend return for each of its Classes by
dividing
the current dividend 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 Utility Portfolio calculates
current divi-
dend return for each of its Classes by annualizing the most recent
monthly
distribution, 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 Class' current dividend return may vary from time
to time
depending on market conditions, the composition of its investment
portfolio
and operating expenses. These factors and possible differences in
the methods
used in calculating current dividend return should be considered
when compar-
ing 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 perfor-
mance information may include data from Lipper Analytical Services,
Inc. and
other financial publications. Each Portfolio will include
performance data for
Class A, Class B, Class C and Class Y shares in any advertisement
or informa-
tion including performance data of that Portfolio.
37
<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 and each
Portfolio, including agreements with the Fund's distributor,
investment manag-
er, custodian and transfer agent. The day-to-day operations of each
Portfolio
are delegated to the Manager. The Statement of Additional
Information contains
background information 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 Portfolios, thus Smith Barney may also be considered
an invest-
ment 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 Fund's last fiscal year the management fee was 0.58% of
the Income
and Growth Portfolio's average net assets and 0.60% of the Utility
Portfolio's
average net assets. Total expenses of the Income and Growth
Portfolio were
0.96% of average net assets for Class A shares, 1.59% of average
net assets for
Class B shares and 1.75% of average net assets for Class C shares.
Total
expenses of the Utility Portfolio were 1.01% of average net assets
for Class A
shares, 1.67% of average net assets for Class B shares and 1.77% of
average net
assets for Class C shares.
38
<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
approximately $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 Bar-
ney 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
Bruce D. Sargent, a Vice President and Director of the Manager,
is also a
Vice President and Director of Smith Barney Funds, Inc. and the
portfolio man-
ager of the Income and Growth Portfolio. Mr. Sargent co-manages the
day to day
operations of the Income and Growth Portfolio and has been involved
in equity
investing for over 25 years. He currently manages over $1 billion
of assets.
Ayako Weissman, Managing Director of Smith Barney, serves as
co-manager of
the Income and Growth Portfolio. Ms. Weissman has been involved in
equity
investing for Smith Barney for over 7 years and currently manages
over $250
million of assets.
Philip Miller, a Managing Director of Smith Barney, is the
portfolio manager
of the Utility Portfolio and manages its day to day operations,
including mak-
ing all investment decisions. He has been involved in equity
investing for
approximately 15 years.
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.
39
<PAGE>
Smith Barney Funds, Inc.
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
adopted by each
Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"), Smith
Barney is
paid a service fee with respect to Class A, Class B and Class C
shares of each
Portfolio at the annual rate of 0.25% of the average daily net
assets attrib-
utable to these Classes. Smith Barney is also paid a distribution
fee with
respect to Class B and Class C shares at the annual rate of 0.75%
of the aver-
age daily net assets attributable to these Classes. Class B shares
that auto-
matically convert to Class A shares eight years after the date of
original
purchase will no longer be subject to a distribution fee. The fees
are used by
Smith Barney to pay its Financial Consultants for servicing
shareholder
accounts and, in the case of Class B and Class C shares, to cover
expenses
primarily intended to result in the sale of those shares. These
expenses
include: advertising expenses; the cost of printing and mailing
prospectuses
to potential investors; payments to and expenses of Smith Barney
Financial
Consultants and other persons who provide support services in
connection with
the distribution of shares; interest and/or carrying charges; and
indirect and
overhead costs of Smith Barney associated with the sale of
Portfolio 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 Class A, Class B and Class C
shares, a con-
tinuing fee for servicing shareholder accounts for as long as a
shareholder
remains a holder of that Class. Smith Barney Financial Consultants
may receive
different levels of compensation for selling different Classes of
shares.
Actual distribution expenses for Class B and Class C shares of
each Portfo-
lio for any given year may exceed the fees received pursuant to the
Plan and
will be carried forward and paid by each 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.
40
<PAGE>
Smith Barney Funds, Inc.
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 shares in one of fifteen separate Portfolios and may authorize
the issu-
ance of additional series of shares in the future. The assets of
each Portfo-
lio 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 a
Portfolio represent
interests in the assets of that Portfolio and have identical
voting, dividend,
liquidation and other rights on the same terms and conditions
except that
expenses related to the distribution of each Class of shares are
borne solely
by 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 the Fund will assist shareholders in calling such a meeting as
required by
the 1940 Act. Shares do not have cumulative voting rights or
preemptive rights
and are fully paid, transferable and nonassessable when issued for
payment as
described in this Prospectus.
PNC Bank, National Association, located at 17th and Chestnut
Streets, Phila-
delphia, Pennsylvania 19103 serves as custodian of the 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.
41
<PAGE>
Smith Barney Funds, Inc.
APPENDIX
U.S. GOVERNMENT OBLIGATIONS
In addition to Government National Mortgage Association ("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)
obligations of, or issued by, Banks for Cooperatives, Federal Land
Banks, Fed-
eral 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
United States; and (4) obligations currently or previously sold by
the Federal
Home Loan Mortgage Corporation.
FOREIGN INVESTMENTS
Each Portfolio will ordinarily purchase foreign securities that
are traded
in the United States or purchase American Depositary Receipts,
which are cer-
tificates issued by U.S. banks representing the right to receive
securities of
a foreign issuer deposited with that bank or a correspondent bank.
However,
each Portfolio may purchase the securities of foreign issuers
directly in for-
eign markets. Foreign securities may involve a high degree of risk.
Foreign
securities usually are denominated in foreign currencies, which
means their
value will be affected by changes in exchange rates between other
currencies
and the U.S. dollar as well as the other factors that affect
securities pric-
es. Foreign companies may not be subject to accounting standards or
governmen-
tal supervision comparable to U.S. companies, and there may be less
publicly
available information about their operations. There is generally
less govern-
mental regulation of foreign securities markets, and security
trading prac-
tices abroad may offer less protection to investors such as the
Portfolios.
Foreign securities can also be affected by political or financial
instability
abroad, and may be less liquid or more volatile than domestic
investments.
SECURITIES LENDING
Each Portfolio 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 securities equal to no less than the market
value,
determined daily, of the securities loaned. The risks in lending
portfolio
securities
A-1
<PAGE>
Smith Barney Funds, Inc.
APPENDIX (CONTINUED)
consist of possible delay in recovery of the securities or possible
loss of
rights in the collateral should the borrower fail financially.
Management will
limit such lending to not more than one-third of the value of the
Utility Port-
folio's total assets and twenty percent of the value of the Income
and Growth
Portfolio's total assets.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each Portfolio may purchase or sell securities on a when-issued
or delayed
delivery basis. When-issued or delayed delivery transactions arise
when securi-
ties are purchased or sold by a Portfolio with payment and delivery
taking
place in the future in order to secure what is considered to be an
advantageous
price and yield to the Portfolio at the time of entering into the
transaction.
The Fund's Custodian will maintain, in a segregated account of each
Portfolio,
cash, U.S. Government securities or other liquid high-grade debt
obligations
having a value equal to or greater than the Portfolio's purchase
commitments;
the Custodian will likewise segregate securities sold on a delayed
basis.
REPURCHASE AGREEMENTS
Each Portfolio may on occasion enter into repurchase agreements,
wherein the
seller agrees to repurchase a security from the Portfolio at an
agreed-upon
future date, normally the next business day. The resale price is
greater than
the purchase price, which reflects the agreed-upon rate of return
for the
period the Portfolio holds the security and which is not related to
the coupon
rate on the purchased security. The Fund requires continual
maintenance of the
market value of the collateral in amounts at least equal to the
resale price,
thus risk is limited to the ability of the seller to pay the
agreed-upon amount
on the delivery date; however, if the seller defaults, realization
upon the
collateral by the Portfolio may be delayed or limited or the
Portfolio might
incur a loss if the value of the collateral securing the repurchase
agreement
declines and might incur disposition costs in connection with
liquidating the
collateral. A Portfolio will only enter into repurchase agreements
with
broker/dealers or other financial institutions that are deemed
creditworthy by
the Manager under guidelines approved by the Board of Directors. It
is the pol-
icy of the Fund not to invest in repurchase agreements that do not
mature
within seven days if any such investment together with any other
illiquid
assets held by a Portfolio amount to more than 15% of that
Portfolio's total
assets.
A-2
<PAGE>
Smith Barney Funds, Inc.
APPENDIX (CONTINUED)
RISK FACTORS AFFECTING PUBLIC UTILITY COMPANIES
Because the Utility Portfolio concentrates its investments in
public utility
companies, its portfolio may be subject to greater risk and market
fluctua-
tions than a portfolio of securities representing a broader range
of invest-
ment alternatives. Unlike industrial companies, the rates that
utility compa-
nies may charge their customers generally are subject to review and
limitation
by governmental regulatory commissions. Although rate changes of a
utility
usually fluctuate in approximate correlation with financing costs,
due to
political and regulatory factors rate changes ordinarily occur
after an inter-
val following the changes in financing costs. This factor will tend
to affect
favorably a utility company's earnings and dividends in times of
decreasing
costs, but conversely will tend to affect adversely earnings and
dividends
when costs are rising. In addition, the value of public utility
debt securi-
ties (and, to a lesser extent, equity securities) tends to have an
inverse
relationship to the movement of interest rates.
Among the risks affecting the public utility companies are the
following:
risks of increases in fuel and other operating costs; the high cost
of borrow-
ing to finance capital construction during inflationary periods;
restrictions
on operations and increased costs and delays associated with
compliance with
environmental and nuclear safety regulations; the difficulties
involved in
obtaining natural gas for resale or fuel for generating electricity
at reason-
able prices; the risks in connection with the construction and
operation of
nuclear power plants; the effects of energy conservation and the
effects of
regulatory changes, such as the possible adverse effects on profits
of recent
increased competition among telecommunications companies and
electric utili-
ties companies.
A-3
<PAGE>
[LOGO OF SMITH BARNEY APPEARS HERE]
SMITH BARNEY
FUNDS, INC.
INCOME AND
GROWTH PORTFOLIO
UTILITY PORTFOLIO
388 Greenwich Street
New York, New York 10013
FD 2320 D5
