ANNUAL REPORT
================================================================================
1997
1997
1997
1997
1997 [Photograph]
Smith Barney
Growth and Income Fund
----------------------------------
January 31, 1997
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
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- -----------------------------------
Smith Barney Growth and Income Fund
- -----------------------------------
Dear Shareholder:
We are pleased to provide you with the annual report for the Smith Barney Growth
and Income Fund for the fiscal year ended January 31, 1997. In this letter we
summarize the period's prevailing economic and market conditions and outline our
portfolio strategy. A detailed summary of performance and current holdings can
be found in the appropriate sections that follow in the annual report.
Fund Performance
Over the last year the Growth and Income Fund's Class A shares returned 20.97%.
This is a very satisfying return. However, it trailed the S&P 500's return of
26.34%, a broad measure of the stock market. There are several reasons for this
differential. As we will discuss in the pages to follow, technology stocks were
among the stock market leaders last year. Our participation in that market
sector was in the more mature dividend-paying stocks -- a strategy which
penalized relative performance. Another factor is that your Fund had about 10%
of the assets invested in bonds and cash-equivalents during the year. This fixed
income position, although fairly small, reflected our desire to increase income
and reduce volatility in the portfolio. Such conservatism is penalized in a fast
rising stock market, but should prove beneficial in any period of market
weakness.
Definitely Not Your Average Year . . .
Last year was not your typical year in the financial markets. Stock investors
achieved much better than average returns as the broad markets surged 20% plus
from January 1996 through January 1997. Bond investors, on the other hand,
realized low single-digit returns. Now that's not how it's supposed to work, at
least not in the markets of the last decade or so. Stocks don't go up while
bonds go sideways. Stock and bond markets are "supposed" to move in tandem. So
what's happening?
Well, for one thing, the economy really, truly may be different this time. A
sage once said that those four words, "it's different this time" have cost more
people more money than any other four words in the English language. But at the
risk of proving the wise man right, let's look at how it really is different.
We are now in the sixth year of an economic recovery. Now this time span alone
is somewhat different, as the typical post-war recovery is only four years or
so. Even more unusual, however, has been the behavior of inflation.
1
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Generally inflation heads lower for the first year or two of economic recovery
and then starts rising. That hasn't happened this time. In fact, inflation today
shows no sign of resurgence. The latest Consumer Price Index (CPI) shows a 3%
increase over the past year. And those of you who both received and read our
last annual report know of our concerns that the CPI seriously overstates actual
inflation.
One other thing that's supposed to happen as economic recoveries advance is that
productivity turns negative as a result of slowing growth and rising wages. But
this also hasn't happened this time, as productivity has been on the upswing.
Why? Well, economic growth has been slower and steadier than usual. (Another
instance where things are different?) So there hasn't been a "slowing" of growth
because there wasn't any acceleration or "peaking" of growth.
This combination of slower-than-average growth, lower-than-average inflation and
higher-than-average productivity was a winner in the stock market. The stock
market decided that these factors would lead to better-than-average earnings
growth -- a judgment reflected in the continuing strong earnings reports. In
fact, at this writing in mid-February, more than 55% of companies have reported
year-end earnings ahead of analysts' expectations; less than 30% have
disappointed.
The bond market has taken these same fundamentals to a quite different
conclusion. Low inflation is fabulous for bonds, but not if it is about to end.
So the bond market has been an agnostic on the view that "it's different this
time." As a non-believer, the fixed income markets have focused on the eventual
rise in inflation as the business cycle matures.
Where do we stand? Do we agree with the stock market or bond market? We're going
to get to that topic, but first let's take a look at the stock market and how it
has impacted the Smith Barney Growth and Income Fund.
The Stock Market Soared . . .
At the outset, we should probably point out that one portion of last year's
stock market rise was absolutely typical. Stocks had to overcome a lot of
skepticism at the beginning of 1996. Investors fretted over earnings, inflation,
valuation levels and just about everything else. These concerns were the
building blocks of the "wall of worry" -- a wall that according to market lore
must be climbed. And as it turned out, the stock market easily climbed any and
all obstacles erected by the pessimists.
We have been referring to the market as if it is a monolith -- clearly an
exaggeration. For "the market" ultimately consists of individual stocks.
2
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Analytically, however, it is useful to consolidate individual companies into
sectors of related industries. One can then get a clearer perspective on broad
trends. Last year, for example, the technology and finance sectors were market
leaders, while utilities and basic materials lagged.
Technology stocks surged due to the incredible underlying demand for advanced
products such as computers, microprocessors and communications equipment.
Corporations large and small have come to realize the need to upgrade their
technology to continue to compete. And consumers have snapped up faster personal
computers and smaller, more capable cellular telephones. This strong fundamental
demand led to outstanding stock performance.
The Growth and Income Fund has a weighting in technology roughly equal to that
of the S&P 500 Index. The technology stocks in our Fund, however, tend to be
more mature, established companies given our strategy of only buying
dividend-paying stocks. Unfortunately many of the "hottest" technology stocks do
not pay dividends. Although somewhat of a disadvantage last year, we believe
that our focus on dividends makes sense for conservative, long-term investors.
Finance stocks were also strong performers, as earnings continued to positively
surprise analysts and consolidation continued among banks and insurance
companies. In the slow-growth environment of the last several years, the modest
earnings growth of finance companies has proven to be relatively attractive to
investors. Again, the Growth and Income Fund has roughly a market weighting in
finance stocks, which boosted performance over the past year.
As noted above, two of the lagging market sectors were basic materials and
utilities. The basic material sector lagged, perhaps as a response to low
inflation both in the U.S. and worldwide. The Fund was overweighted in this
sector -- a negative for performance. Utilities often trail a strongly
up-trending market. But last year they also suffered as investors sorted out the
impact of deregulation on both electric and telephone companies. Your Fund was
underweighted in this sector, which aided relative performance.
. . . While Bonds Snoozed
As discussed, the bond market significantly trailed the stock market over the
last year. Bond returns were only modestly positive, with interest income
compensating for an erosion in bond principal. Even without signs of inflation
last year, bond investors were and are skeptics. After six years of economic
recovery, they grew increasingly nervous that inflation would reappear. The
result was a rise in interest rates. There were no bond trades in your Fund
during the last six months.
3
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Fund Activity
We would like to reiterate the Growth and Income Fund's investment strategy. We
buy quality or "blue chip" companies with a history of rising dividends. We
believe that our emphasis on increasing dividends is a short-cut to identifying
successful companies that are focused on shareholders. We also look for
companies with strong balance sheets, excellent management teams and promising
product lines.
We tend to be relatively patient investors. We do, however, actively manage the
portfolio and over the last six months we bought and sold a number of
securities. Stocks sold included International Flavors and Fragrances, Raytheon
and CSX Corporation. We sold International Flavors following a series of
earnings disappointments that made it clear that growth in the company's core
markets was slowing. Raytheon's consumer businesses sputtered, prompting us to
sell the stock. CSX made a (so far) unsuccessful takeover attempt of another
portfolio holding, Conrail. We sold CSX as we believed the cost of such a
takeover would be prohibitive.
New purchases included Disney, Ericsson Telephone and Pall Corp. Investor
concerns over Disney's ABC network provided an opportunity to purchase a great
company at a very reasonable valuation. Ericsson is a key player in the
worldwide move to wireless communications. And Pall is a world leader in filters
and fluid control, one that was selling at attractive prices relative to its
great long-term growth record.
Looking Ahead . . .
Earlier in this letter, we posited that stock investors believed "it's different
this time", while bond investors were skeptical. We come down on the side of
those who think it is different this time. We believe that the economic cycle
will continue to be quite positive for investors: moderate growth, strong
productivity, low inflation and decent corporate profits.
But that doesn't mean that we should see repeats of the extraordinary stock
performance of the last few years. Instead we expect more normal returns in line
with corporate earnings, which have been growing at a 10% clip. Why do these
more moderate returns make sense? Given earning expectations, and current levels
of inflation and interest rates, we believe that the stock market is roughly at
fair value. Fair value implies that there will be no major upward revision in
market valuation -- unlike the last two years. Without such a valuation boost,
stock returns should approximate earnings growth. Although such returns are less
than what we have seen most recently in the market, they are in line with
long-term stock market history.
4
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In closing, thank you for investing in the Smith Barney Growth and Income Fund.
We look forward to continuing to help you achieve your investment goals.
Sincerely,
/s/ Heath B. McLendon /s/ R. Jay Gerken
Heath B. McLendon R. Jay Gerken, CFA
Chairman and Vice President and
Chief Executive Officer Investment Officer
February 21, 1997
5
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Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
-------------------
Beginning End Income Capital Gain Total(1)
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
1/31/97 $12.16 $14.30 $0.20 $0.18 20.97%
- --------------------------------------------------------------------------------
1/31/96 9.62 12.16 0.20 0.20 30.97
- --------------------------------------------------------------------------------
1/31/95 10.36 9.62 0.19 0.14 (3.93)
- --------------------------------------------------------------------------------
1/31/94 9.58 10.36 0.23 0.00 10.70
- --------------------------------------------------------------------------------
Inception* - 1/31/93 9.50 9.58 0.00 0.00 0.84+
================================================================================
Total $0.82 $0.52
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
Net Asset Value
-------------------
Beginning End Income Capital Gain Total(1)
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
1/31/97 $12.19 $14.33 $0.15 $0.18 20.43%
- --------------------------------------------------------------------------------
1/31/96 9.65 12.19 0.15 0.20 30.23
- --------------------------------------------------------------------------------
1/31/95 10.38 9.65 0.14 0.14 (4.33)
- --------------------------------------------------------------------------------
1/31/94 9.58 10.38 0.15 0.00 10.01
- --------------------------------------------------------------------------------
Inception* - 1/31/93 9.50 9.58 0.00 0.00 0.84+
================================================================================
Total $0.59 $0.52
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
Net Asset Value
-------------------
Beginning End Income Capital Gain Total(1)
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
1/31/97 $12.19 $14.33 $0.15 $0.18 20.43%
- --------------------------------------------------------------------------------
1/31/96 9.65 12.19 0.15 0.20 30.23
- --------------------------------------------------------------------------------
Inception* - 1/31/95 9.91 9.65 0.06 0.14 (0.58)+
================================================================================
Total $0.36 $0.52
================================================================================
6
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- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
Net Asset Value
-------------------
Beginning End Income Capital Gain Total(1)
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
1/31/97 $12.16 $14.34 $0.22 $0.18 21.48%
- --------------------------------------------------------------------------------
Inception* - 1/31/96 12.08 12.16 0.00 0.00 N/A**
================================================================================
Total $0.22 $0.18
================================================================================
It is the Fund's policy to distribute dividends quarterly and capital gains, if
any, annually.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
------------------------------------------
Class A Class B Class C Class Y
================================================================================
Year Ended 1/31/97 20.97% 20.43% 20.43% 21.48%
- --------------------------------------------------------------------------------
Inception* - 1/31/97 13.32 12.78 19.73 21.48
================================================================================
With Sales Charge(2)
------------------------------------------
Class A Class B Class C Class Y
================================================================================
Year Ended 1/31/97 14.92% 15.43% 19.43% 21.48%
- --------------------------------------------------------------------------------
Inception* - 1/31/97 11.96 12.62 19.73 21.48
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 1/31/97) 69.91%
- --------------------------------------------------------------------------------
Class B (Inception* through 1/31/97) 66.46
- --------------------------------------------------------------------------------
Class C (Inception* through 1/31/97) 55.91
- --------------------------------------------------------------------------------
Class Y (Inception* through 1/31/97) 21.48
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from initial purchase and declines thereafter by 1.00% per year until
no CDSC is incurred. Class C shares reflect the deduction of a 1.00% CDSC,
which applies if shares are redeemed within the first year of purchase.
* Inception dates for Class A, B, C and Y shares are November 6, 1992,
November 6, 1992, August 15, 1994 and January 31, 1996, respectively.
** Information is not meaningful since the class was only open for 1 day.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
7
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- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of
the Smith Barney Growth and Income Fund vs.
Standard & Poor's 500 Index+
- --------------------------------------------------------------------------------
November 1992 -- January 1997
[The following table was represented as a line graph in the printed material.]
Smith Barney Growth Standard & Poor's
and Income Fund 500 Index
--------------- ---------
11/6/92 9500 10000
1/93 9580 10554
7/93 9817 10932
1/94 10605 11910
7/94 10161 11495
1/95 10188 11973
7/95 11996 14491
1/96 13344 16596
7/96 13671 16890
1/31/97 16142 20965
+ Hypothetical illustration of $10,000 invested in Class A shares at
inception on November 6, 1992, assuming deduction of the maximum 5.00%
sales charge at the time of investment and reinvestment of dividends and
capital gains, if any, at net asset value through January 31, 1997. The
Standard & Poor's 500 Index is an index composed of widely held common
stocks listed on the New York Stock Exchange, American Stock Exchange and
the over-the-counter market. Figures for the index include reinvestment of
dividends. The index is unmanaged and is not subject to the same management
and trading expenses as a mutual fund. The performance of the Fund's other
classes may be greater or less than the Class A shares' performance
indicated on this chart, depending on whether greater or lesser sales
charges and fees were incurred by shareholders investing in other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
8
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- --------------------------------------------------------------------------------
Schedule of Investments January 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 88.9%
================================================================================
Banks -- 1.0%
50,000 State Street Boston Corp. $ 3,656,250
- --------------------------------------------------------------------------------
Commercial Services -- 2.8%
65,000 Reuters Holdings PLC ADR 4,151,875
75,000 W.W. Grainger, Inc. 5,793,750
- --------------------------------------------------------------------------------
9,945,625
- --------------------------------------------------------------------------------
Consumer Durables -- 3.9%
175,000 Chrysler Corp. 6,103,125
95,000 Genuine Parts Co. 4,191,875
110,000 Leggett & Platt, Inc. 3,533,750
- --------------------------------------------------------------------------------
13,828,750
- --------------------------------------------------------------------------------
Consumer Non-Durables -- 5.9%
160,000 Coca-Cola Co. 9,260,000
60,000 Kimberly Clark Corp. 5,850,000
50,000 Procter & Gamble Co. 5,775,000
- --------------------------------------------------------------------------------
20,885,000
- --------------------------------------------------------------------------------
Consumer Services -- 2.3%
100,000 McDonald's Corp. 4,550,000
120,000 TCA Cable Television, Inc. 3,615,000
- --------------------------------------------------------------------------------
8,165,000
- --------------------------------------------------------------------------------
Electronic Technology -- 10.3%
140,000 AMP, Inc. 5,705,000
130,000 Electronic Data Systems Corp. 5,980,000
60,000 Harris Corp. 4,567,500
240,000 Hewlett-Packard Co. 12,630,000
110,000 Motorola, Inc. 7,507,500
- --------------------------------------------------------------------------------
36,390,000
- --------------------------------------------------------------------------------
Energy -- 6.5%
125,000 Duke Power Co. 5,859,375
65,000 Exxon Corp. 6,735,625
45,000 Mobil Corp. 5,906,250
100,000 Phillips Petroleum Co. 4,412,500
- --------------------------------------------------------------------------------
22,913,750
- --------------------------------------------------------------------------------
Entertainment -- 1.8%
85,000 Walt Disney Co. 6,226,250
- --------------------------------------------------------------------------------
Finance -- 10.8%
90,000 Beneficial Corp. 6,052,500
85,000 Greenpoint Financial Corp. 4,632,500
60,000 J.P. Morgan & Co., Inc. 6,180,000
130,000 KeyCorp 6,808,750
105,000 Mercury General Corp. 5,735,625
80,000 NationsBank Corp. 8,640,000
- --------------------------------------------------------------------------------
38,049,375
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
9
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- --------------------------------------------------------------------------------
Schedule of Investments (continued) January 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Health Technology -- 6.6%
90,000 Eli Lilly & Co. $ 7,841,250
140,000 Johnson & Johnson 8,067,500
80,000 Merck & Co. 7,260,000
- --------------------------------------------------------------------------------
23,168,750
- --------------------------------------------------------------------------------
Industrial Services -- 2.0%
100,000 Fluor Corp. 7,112,500
- --------------------------------------------------------------------------------
Machinery -- 1.7%
275,000 Pall Corp. 6,153,125
- --------------------------------------------------------------------------------
Manufacturing -- 0.5%
60,000 John H. Harland & Co. 1,747,500
- --------------------------------------------------------------------------------
Minerals -- 1.2%
225,000 Worthington Industries, Inc. 4,359,375
- --------------------------------------------------------------------------------
Process Industries -- 6.0%
100,000 Bemis, Inc. 4,087,500
140,000 M.A. Hanna Co. 3,010,000
225,000 Monsanto Co. 8,521,875
100,000 Temple-Inland Inc. 5,525,000
- --------------------------------------------------------------------------------
21,144,375
- --------------------------------------------------------------------------------
Producer Manufacturer -- 6.9%
100,000 Belden, Inc. 3,812,500
100,000 General Electric Co. 10,300,000
80,000 Hubbell, Inc. Class B Shares 3,540,000
80,000 Minnesota Mining & Manufacturing Co. 6,820,000
- --------------------------------------------------------------------------------
24,472,500
- --------------------------------------------------------------------------------
Real Estate -- 1.3%
130,000 Arden Realty, Inc. 3,477,500
45,500 Kilroy Realty Corp.+ 1,165,938
- --------------------------------------------------------------------------------
4,643,438
- --------------------------------------------------------------------------------
Retail -- 4.1%
165,000 Circuit City Stores, Inc. 5,795,625
75,000 May Department Stores Co. 3,337,500
140,000 Nordstrom, Inc. 5,197,500
- --------------------------------------------------------------------------------
14,330,625
- --------------------------------------------------------------------------------
Technology Services -- 1.8%
150,000 Automatic Data Processing Inc. 6,206,250
- --------------------------------------------------------------------------------
Telecommunications -- 1.9%
200,000 Ericsson LM Telephone ADR 6,734,375
- --------------------------------------------------------------------------------
Textiles-Apparel Manufacturing -- 1.8%
150,000 Liz Claiborne, Inc. 6,318,750
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
10
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- --------------------------------------------------------------------------------
Schedule of Investments (continued) January 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Transportation -- 3.5%
53,584 Conrail Inc. $ 5,746,884
90,000 Union Pacific Corp. 5,400,000
46,579 Union Pacific Resources, Corp. 1,321,693
- --------------------------------------------------------------------------------
12,468,577
- --------------------------------------------------------------------------------
Utilities -- 4.3%
90,000 Ameritech Corp. 5,377,500
100,000 Bellsouth Corp. 4,437,500
110,000 GTE Corp. 5,170,000
- --------------------------------------------------------------------------------
14,985,000
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $215,088,369) 313,905,140
================================================================================
FOREIGN STOCK -- 1.5%
================================================================================
Australia -- 1.5%
378,869 Broken Hill Proprietary Co.
(Cost-- $4,550,186) 5,192,835
================================================================================
PREFERRED CONVERTIBLE STOCK -- 1.2%
================================================================================
Energy -- 1.2%
72,540 Unocal Corp.
(Cost-- $3,504,500) 4,225,455
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
CORPORATE DEBENTURES -- 3.5%
================================================================================
Financial Services -- 2.3%
$ 4,000,000 Dean Witter Discover & Co., 6.875% due 3/1/03 4,015,000
4,000,000 General Motors Acceptance Corp., 7.000% due 9/15/02 4,055,000
- --------------------------------------------------------------------------------
8,070,000
- --------------------------------------------------------------------------------
Retail Trade -- 1.2%
4,000,000 Limited Inc., 7.800% due 5/15/02 4,120,000
- --------------------------------------------------------------------------------
TOTAL CORPORATE DEBENTURES
(Cost-- $11,858,940) 12,190,000
================================================================================
REPURCHASE AGREEMENT -- 4.9%
17,288,000 Chase Manhattan Bank, 5.500% due 2/3/97; Proceeds
at maturity -- $17,295,924; (Fully collateralized by
U.S. Treasury Notes, 6.375% due 3/31/01;
Market value-- $17,633,860) (Cost-- $17,288,000) 17,288,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $252,289,995*) $352,801,430
================================================================================
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
11
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- --------------------------------------------------------------------------------
Statement of Assets and Liabilities January 31, 1997
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $252,289,995) $ 352,801,430
Cash 592
Receivable for securities sold 1,847,098
Receivable for Fund shares sold 1,623,757
Dividends and interest receivable 517,246
Deferred organization cost 28,849
- --------------------------------------------------------------------------------
Total Assets 356,818,972
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 4,730,872
Payable for Fund shares purchased 188,526
Investment advisory fees payable 129,734
Administration fees payable 57,659
Distribution fees payable 28,983
Accrued expenses 73,665
- --------------------------------------------------------------------------------
Total Liabilities 5,209,439
- --------------------------------------------------------------------------------
Total Net Assets $ 351,609,533
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 24,551
Capital paid in excess of par value 249,172,449
Overdistributed net investment income (219,075)
Accumulated net realized gain from security transactions 2,120,173
Net unrealized appreciation of investments 100,511,435
- --------------------------------------------------------------------------------
Total Net Assets $ 351,609,533
================================================================================
Shares Outstanding:
Class A 9,317,249
----------------------------------------------------------------------------
Class B 9,575,491
----------------------------------------------------------------------------
Class C 206,423
----------------------------------------------------------------------------
Class Y 5,451,703
----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 14.30
----------------------------------------------------------------------------
Class B* $ 14.33
----------------------------------------------------------------------------
Class C** $ 14.33
----------------------------------------------------------------------------
Class Y (and redemption price) $ 14.34
----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $ 15.05
================================================================================
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed less than one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended January 31, 1997
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 5,392,984
Interest 1,823,903
Less: Foreign withholding tax (11,420)
- --------------------------------------------------------------------------------
Total Investment Income 7,205,467
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 1,256,354
Distribution fees (Note 2) 1,223,991
Administration fees (Note 2) 558,380
Shareholder and system servicing fees 298,027
Registration fees 82,487
Shareholder communications 60,000
Audit and legal 41,942
Amortization of deferred organization costs 38,471
Trustees' fees 25,000
Custody 9,600
Other 1,131
- --------------------------------------------------------------------------------
Total Expenses 3,595,383
- --------------------------------------------------------------------------------
Net Investment Income 3,610,084
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 24,180,712
Cost of securities sold 18,154,310
- --------------------------------------------------------------------------------
Net Realized Gain 6,026,402
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 54,786,451
End of year 100,511,435
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 45,724,984
- --------------------------------------------------------------------------------
Net Gain on Investments 51,751,386
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 55,361,470
================================================================================
See Notes to Financial Statements.
13
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- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended January 31,
- --------------------------------------------------------------------------------
1997 1996
================================================================================
OPERATIONS:
Net investment income $ 3,610,084 $ 3,060,648
Net realized gain 6,026,402 3,447,016
Increase in net unrealized appreciation 45,724,984 47,361,227
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 55,361,470 53,868,891
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (3,848,619) (3,195,880)
Net realized gains (4,202,531) (3,659,283)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (8,051,150) (6,855,163)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares 128,069,584 21,941,512
Net asset value of shares issued for
reinvestment of dividends 6,071,405 6,321,441
Cost of shares reacquired (53,788,201) (38,622,469)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions 80,352,788 (10,359,516)
- --------------------------------------------------------------------------------
Increase in Net Assets 127,663,108 36,654,212
NET ASSETS:
Beginning of year 223,946,425 187,292,213
- --------------------------------------------------------------------------------
End of year* $ 351,609,533 $ 223,946,425
================================================================================
* Includes undistributed (overdistributed)
net investment income of: $ (219,075) $ 33,910
================================================================================
See Notes to Financial Statements.
14
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- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Growth and Income Fund ("Fund"), a separate investment
fund of the Smith Barney Equity Funds ("Trust"), a Massachusetts business trust,
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Trust consists of this
Fund and one other separate investment fund, the Smith Barney Strategic
Investors Fund. The financial statements and financial highlights for the other
fund are presented in a separate annual report.
The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing prices on such markets;
securities for which no sales price were reported and U.S. government agencies
and obligations are valued at current quoted bid prices; (c) securities that
have a maturity of more than 60 days are valued at prices based on market
quotations for securities of similar type, yield and maturity; (d) securities
maturing within 60 days are valued at cost plus accreted discount, or minus
amortized premium, as applicable; (e) dividend income is recorded on ex-dividend
date and interest income is recorded on an accrual basis; (f) gains or losses on
the sale of securities are recorded using the specific identification method;
(g) dividends and distributions to shareholders are recorded on the ex-dividend
date; (h) the accounting records are maintained in U.S. dollars. All assets and
liabilities denominated in foreign currencies are translated into U.S. dollars
based on the rate of exchange of such currencies against U.S. dollars on the
date of valuation. Purchases and sales of securities, and income and expenses
are translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income or expense amounts
recorded and collected or paid are adjusted when reported by the custodian bank;
(i) direct expenses are charged to each class; management fees and general fund
expenses are allocated on the basis of relative net assets; (j) the Fund intends
to comply with the applicable provisions of the Internal Revenue Code of 1986,
as amended, pertaining to regulated investment companies and to make
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes; (k) the character of income and gains to be
distributed are determined in accordance with income tax regulations which may
differ from generally accepted accounting principals. Reclassifications were
made to the Fund's capital accounts to reflect permanent book/tax differences
and income and gains available for distributions under income tax regulations;
and (l) estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
In addition, organization costs have been deferred and are being amortized
on a straight line basis over a five-year period, beginning with the
commencement of the Fund's operations in November 1992.
15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as an investment advisor to the Trust. The
Fund pays SBMFM an advisory fee calculated at an annual rate of 0.45% of the
average daily net assets. This fee is calculated daily and paid monthly.
SBMFM also acts as the Fund's administrator for which it receives a fee
calculated at an annual rate of 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
year ended January 31, 1997, SB received sales charges of approximately $105,014
on sales of the Fund's Class A shares and brokerage commissions of $8,046.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase and thereafter declines by 1.00% per year until no CDSC is incurred.
Class C shares have a 1.00% CDSC, which applies if redemption occurs within the
first year of purchase. In certain cases, Class A shares also have a 1.00% CDSC,
which applies if redemption occurs within the first year of purchase. This CDSC
only applies to those purchases of Class A shares, which, when combined with
current holdings of Class A shares, equal or exceed $500,000 in the aggregate.
These purchases do not incur an initial sales charge. For the year ended January
31, 1997, CDSCs paid to SB were:
Class A Class B Class C
================================================================================
CDSCs $1,000 $165,000 $1,000
================================================================================
Pursuant to a Distribution Plan, the Fund pays a service fee with respect
to Class A, B and C shares calculated at the annual rate of 0.25% of the average
daily net assets for each respective class. In addition, the Fund pays a
distribution fee with respect to Class B and C shares calculated at the annual
rate of 0.50% of the average daily net assets for each class. For the year ended
January 31, 1997, total Distribution Plan fees incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $296,444 $913,828 $13,719
================================================================================
All officers and one Trustee of the Trust are employees of SB.
3. INVESTMENTS
During the year ended January 31, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $91,349,006
- --------------------------------------------------------------------------------
Sales 24,180,712
================================================================================
16
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At January 31, 1997, aggregate gross unrealized appreciation and
depreciation of investments were as follows:
================================================================================
Gross unrealized appreciation $102,315,596)*
Gross unrealized depreciation (1,804,161)*
- --------------------------------------------------------------------------------
Net unrealized appreciation $100,511,435)*
================================================================================
* Substantially the same for Federal income tax purposes.
4. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of) U.S. Government
Securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
5. REVERSE REPURCHASE AGREEMENT
The Fund may enter into reverse repurchase agreement transactions for
leveraging purposes. A reverse repurchase agreement involves a sale by the Fund
of securities that it holds with an agreement by the Fund to repurchase the same
securities at an agreed upon price and date. A reverse repurchase agreement
involves the risk that the market value of the securities sold by the Fund may
decline below the repurchase price of the securities. The Fund will establish a
segregated account with its custodian, in which the Fund will maintain cash,
U.S. government securities or other liquid high grade debt obligations equal in
value to its obligations with respect to reverse repurchase agreements.
At January 31, 1997, the Fund had no reverse repurchase agreements.
6. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. During the period the futures contract is
open, changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
the Fund's basis in the contract. The Fund enters into such contracts to hedge a
portion of its portfolio. The Fund bears the market risk that arises from
changes in the value of the financial instruments and securities indices
(futures contracts) and the credit risk should a counterparty fail to perform
under such contracts.
As of January 31, 1997, the Fund had no open futures contracts.
7. OPTIONS CONTRACTS
When a Fund writes a covered call or put option, an amount equal to the
premium received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of the
closing purchase transaction exceeds the premium received when the option was
sold) without regard to any unrealized gain or loss on the underlying security,
and the liability related to such option is eliminated. When a written call
option is exercised, the cost of the security sold will be decreased by the
premium originally received. When a put option is exercised, the amount of the
premium originally received will reduce the cost of the security which the Fund
purchased upon exercise. When written index options are exercised, settlement is
made in cash. The risk associated with purchasing options is limited to the
premium originally paid. The Fund enters into options for hedging purposes. The
risk in writing a covered call option is that the Fund gives up the opportunity
to participate in any increase in the price of the underlying security beyond
the exercise price. The risk in writing a put option is that the Fund is exposed
to the risk of a loss if the market price of the underlying security declines.
During the year ended January 31, 1997, the Fund did not write any options.
8. LENDING OF PORTFOLIO SECURITIES
The Fund has an agreement with its custodian whereby the custodian may lend
securities owned by the Fund to brokers, dealers and other financial
organizations, and receives a lenders fee, which is shared 60% by the Fund and
40% by the custodian. Fees earned by the Fund on securities lending are recorded
in interest income. Loans of securities by the Fund are collateralized by cash,
U.S. Government securities or high quality money market instruments that are
maintained at all times in an amount at least equal to the current market value
of the loaned securities, plus a margin which may vary between 2% and 5%
depending on the type of securities loaned. The custodian establishes and
maintains the collateral in a segregated account. The Fund maintains exposure
for the risk of any losses in the investment of amounts received as collateral.
At January 31, 1997, the Fund had no securities on loan to brokers.
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
9. SHARES OF BENEFICIAL INTEREST
At January 31, 1997, the Trust had an unlimited number of shares of
beneficial interest authorized with a par value of $0.001 per share. The Fund
has the ability to issue multiple classes of shares. Each share of a class
represents an identical interest and has the same rights, except that each class
bears certain expenses specifically related to the distribution of its shares.
At January 31, 1997, total paid-in capital amounted to the following for
each class:
Class A Class B Class C Class Y
================================================================================
Total Paid-in Capital $91,692,366 $84,344,928 $2,547,026 $70,612,680
================================================================================
Transactions in shares of each class were as follows:
Year Ended Year Ended
January 31, 1997 January 31, 1996
------------------- -------------------
Shares Amount Shares Amount
================================================================================
Class A
Shares sold 1,784,241 $ 23,454,721 398,594 $ 4,510,317
Shares issued on
reinvestment 245,313 3,295,197 309,676 3,512,515
Shares redeemed (1,765,700) (22,970,126) (1,532,561) (16,678,833)
- --------------------------------------------------------------------------------
Net Increase (Decrease) 263,854 $ 3,779,792 (824,291) $ (8,656,001)
================================================================================
Class B
Shares sold 2,434,025 $ 31,747,272 1,475,451 $ 16,587,023
Shares issued on
reinvestment 201,222 2,723,850 244,263 2,793,248
Shares redeemed (2,320,760) (30,178,477) (2,011,887) (21,878,315)
- --------------------------------------------------------------------------------
Net Increase (Decrease) 314,487 $ 4,292,645 (292,173) $ (2,498,044)
================================================================================
Class C
Shares sold 172,314 $ 2,259,911 74,320 $ 839,172
Shares issued on
reinvestment 3,845 52,358 1,352 15,678
Shares redeemed (48,539) (639,598) (5,726) (65,321)
- --------------------------------------------------------------------------------
Net Increase 127,620 $ 1,672,671 69,946 $ 789,529
================================================================================
Class Y*
Shares sold 5,451,289 $ 70,607,680 414 $ 5,000
- --------------------------------------------------------------------------------
Net Increase 5,451,289 $ 70,607,680 414 $ 5,000
================================================================================
* Inception date is January 31, 1996.
19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class A Shares 1997 1996(1) 1995 1994(1) 1993(2)
=====================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $ 12.16 $ 9.62 $ 10.36 $ 9.58 $ 9.50
- -----------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.19 0.20 0.20 0.20 0.01
Net realized and unrealized gain (loss) 2.33 2.74 (0.61) 0.81 0.07
- -----------------------------------------------------------------------------------------------------
Total Income (Loss) from Operations 2.52 2.94 (0.41) 1.01 0.08
- -----------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.20) (0.20) (0.19) (0.23) --
Net realized gains (0.18) (0.20) (0.14) -- --
- -----------------------------------------------------------------------------------------------------
Total Distributions (0.38) (0.40) (0.33) (0.23) --
- -----------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 14.30 $ 12.16 $ 9.62 $ 10.36 $ 9.58
- -----------------------------------------------------------------------------------------------------
Total Return 20.97% 30.97% (3.93)% 10.70% 0.84%++
- -----------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $133,272 $110,089 $95,054 $ 4,468 $ 3,520
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.12% 1.16% 1.41% 1.54% 1.41%+
Net investment income 1.48 1.77 1.86 2.00 0.28+
- -----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 9% 15% 127% 79% 1%
- -----------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $ 0.06 $ 0.06 -- -- --
=====================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year,
since use of the undistributed net investment income method did not accord
with results of operations.
(2) For the period from November 6, 1992 (inception date) to January 31, 1993.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
20
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class B Shares 1997 1996(1) 1995 1994(1) 1993(2)
=====================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $ 12.19 $ 9.65 $ 10.38 $ 9.58 $ 9.50
- -----------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss) 0.13 0.14 0.17 0.15 (0.01)
Net realized and unrealized gain (loss) 2.34 2.75 (0.62) 0.80 0.09
- -----------------------------------------------------------------------------------------------------
Total Income (Loss) from Operations 2.47 2.89 (0.45) 0.95 0.08
- -----------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.15) (0.15) (0.14) (0.15) --
Net realized gains (0.18) (0.20) (0.14) -- --
- -----------------------------------------------------------------------------------------------------
Total Distributions (0.33) (0.35) (0.28) (0.15) --
- -----------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 14.33 $ 12.19 $ 9.65 $ 10.38 $ 9.58
- -----------------------------------------------------------------------------------------------------
Total Return 20.43% 30.23% (4.33)% 10.01% 0.84%++
- -----------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $137,187 $112,891 $92,153 $68,144 $35,173
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.62% 1.65% 1.90% 1.99% 1.91%+
Net investment income (loss) 0.98 1.27 1.38 1.55 (0.22)+
- -----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 9% 15% 127% 79% 1%
- -----------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $ 0.06 $ 0.06 -- -- --
=====================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year,
since use of the undistributed net investment income method did not accord
with results of operations.
(2) For the period from November 6, 1992 (inception date) to January 31, 1993.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class C Shares Class Y Shares
--------------------------------- --------------------
1997 1996(1) 1995(2) 1997 1996(1)(3)
======================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $ 12.19 $ 9.65 $ 9.91 $ 12.16 $ 12.08
- ------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.14 0.13 0.07 0.22 --
Net realized and unrealized gain (loss) 2.33 2.76 (0.13) 2.36 0.08
- ------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.47 2.89 (0.06) 2.58 0.08
- ------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.15) (0.15) (0.06) (0.22) --
Net realized gains (0.18) (0.20) (0.14) (0.18) --
- ------------------------------------------------------------------------------------------------------
Total Distributions (0.33) (0.35) (0.20) (0.40) --
- ------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 14.33 $ 12.19 $ 9.65 $ 14.34 $ 12.16
- ------------------------------------------------------------------------------------------------------
Total Return 20.43% 30.23% (0.58)%++ 21.48% N/A*
- ------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 2,958 $ 961 $ 85 $78,192 $ 5
- ------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.61% 1.62% 1.83%+ 0.73% N/A*
Net investment income 0.94 1.11 1.44+ 1.73 N/A*
- ------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 9% 15% 127% 9% 15%
- ------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4) $ 0.06 $ 0.06 -- $ 0.06 $ 0.06
======================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year,
since use of the undistributed net investment income method did not accord
with results of operations.
(2) For the period from August 15, 1994 (inception date) to January 31, 1995.
(3) Inception date is January 31, 1996.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
* Information is not meaningful since the class was only open for 1 day.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
22
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
the Smith Barney Equity Funds:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Smith Barney Growth and Income Fund of
the Smith Barney Equity Funds as of January 31, 1997, the related statement of
operations for the year then ended and the statement of changes in net assets
and financial highlights for each of the years in the two-year period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for each of the years in the three-year period
ended January 31, 1995 were audited by other auditors whose report thereon,
dated March 22, 1995, expressed an unqualified opinion on those financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 1997, by correspondence with the custodian. As to securities
purchased or sold but not received or delivered, we performed other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Smith Barney Growth and Income Fund of the Smith Barney Equity Funds as of
January 31, 1997, the results of its operations for the year then ended and the
changes in its net assets and financial highlights for each of the years in the
two-year period then ended, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
New York, New York
March 12, 1997
23
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year
ended January 31, 1997:
-- long term capital gain distributions paid of $3,934,949.
-- 73.02% of the ordinary dividends paid as qualifying for the corporate
dividends received deduction.
24
<PAGE>
Smith Barney Growth and SMITH BARNEY
Income Fund ------------
A Member of TravelersGroup[Logo]
Trustees
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon, Chairman
Madelon DeVoe Talley
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President and Treasurer
R. Jay Gerken
Vice President and Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank, N.A.
Shareholder
Servicing Agent
First Data Investors Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for
the general information of the
shareholders of Smith Barney Growth
and Income Fund. It is not
authorized for distribution to prospective
investors unless accompanied or preceded
by a current Prospectus for the Fund,
which contains information concerning
the Fund's investment policies and
expenses as well as other pertinent
information.
Smith Barney Growth
and Income Fund
388 Greenwich Street
New York, New York 10013
FD01089 3/97
[GRAPHIC]
[GRAPHIC] SMITH BARNEY
STRATEGIC
INVESTORS FUND
ANNUAL REPORT
January 31, 1997
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.(SM)
<PAGE>
SMITH BARNEY
STRATEGIC INVESTORS FUND
- --------------------------------------------------------------------------------
We are pleased to announce that effective February 24, 1997, the SMITH BARNEY
STRATEGIC INVESTORS FUND'S name has been changed to the CONCERT SOCIAL AWARENESS
FUND. This name change reflects an important part of Smith Barney Mutual Funds'
strategy - listening to the concerns of our shareholders and developing
investments that meet their needs.
In addition, certain changes have been made to the Fund's investment policies.
The Fund's investment objective of seeking high total return consisting of
current income and capital appreciation has not changed. However, the Fund's
investment objectives will be achieved by investing in a variable combination of
equity and fixed income securities issued by companies that, in the opinion of
the Fund's portfolio managers, make a positive contribution to society through
their products and services or through the way that they do business. In
addition, the Fund will avoid companies that are engaged in activities that
could have a negative social impact.
NASDAQ
Symbols
- ----------------------------------------------------------------------
Class A SSIAX
Class B SESIX
Smith Barney Strategic Investors Fund's
Average Annual Total Returns*
- ----------------------------------------------------------------------
Since
Inception Date One-Year Five-Year Inception
- ----------------------------------------------------------------------
Class A (6/6/92) 6.80% N/A 12.13%
Class B (2/2/87) 6.60% 11.26% 10.78%
Class C (5/5/93) 10.65% N/A 11.41%
* Assumes reinvestment of all dividends and capital gain distributions, if any,
at net asset value. In addition, Class A shares reflect the deduction of the
maximum initial sales charge of 5.00%; Class B shares reflect the deduction of
a 5.00% CDSC, which applies if shares are redeemed less than one year from
initial purchase and declines thereafter by 1.00% per year until no CDSC is
incurred. Class C shares reflect the deduction of a 1.00% CDSC, which applies
if shares are redeemed within the first year of purchase.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and redemption
value may be more or less than the original cost.
[GRAPHIC]
"At Smith Barney Mutual Funds, your investment needs come first. Our goal is to
deliver consistent and competitive returns over time using a wide range of
investment strategies."
JESSICA M. BIBLIOWICZ
President,
Smith Barney Strategic Investors Fund
<TABLE>
<CAPTION>
- ---------------------------------------------
What's Inside
- ---------------------------------------------
<S> <C>
Shareholder Letter...................... 1
An Interview with Portfolio Managers
Robert J. Brady and Ellen S. Cammer..... 4
Historical Performance.................. 7
Smith Barney Strategic Investors Fund
at a Glance............................. 9
Schedule of Investments................. 10
Statement of Assets and Liabilities..... 15
Statement of Operations................. 16
Statements of Changes in Net Assets..... 17
Notes to Financial Statements........... 18
Financial Highlights.................... 21
Tax Information......................... 24
Independent Auditors' Report............ 25
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[GRAPHIC]
HEATH B. MCLENDON
Chairman and Chief Executive Officer
[GRAPHIC]
ROBERT J. BRADY, CFA
Investment Officer
[GRAPHIC]
ELLEN S. CAMMER
Investment Officer
Dear Shareholder:
We are pleased to provide you with the annual report for the Smith Barney
Strategic Investors Fund (the "Fund") for the fiscal year ended January 31,
1997. In this report, we summarize the period's prevailing economic and market
conditions and outline our portfolio strategy. A detailed summary of performance
and current holdings can be found in the appropriate sections that follow in the
report.
FUND'S INVESTMENT OBJECTIVE AND PERFORMANCE
The Fund seeks to provide high total return made up of current income and
capital appreciation, through a carefully determined balance of stocks and
bonds. The Fund's asset allocation in the past has been based on guidelines set
by Smith Barney's Investment Policy Group, and the Portfolio Managers have made
their selection of individual securities within the model's framework. However,
with the changes to the Fund's investment policies which became effective on
February 24, 1997, the Fund's asset allocation will no longer be based on
recommendations made by Smith Barney's Investment Policy Group. Instead, the
asset allocation decision will be made by the Fund's Portfolio Managers. Under
normal market conditions, the Fund will have between 65% and 85% of its assets
invested in equity securities and between 15% and 35% in fixed income
securities. The mix of the Fund's investments may vary from time to time to
reflect current market conditions. Other changes to the Strategic Investors
Fund, including its name change to the Concert Social Awareness Fund, are
discussed in an interview with the Fund's portfolio managers, Robert Brady and
Ellen Cammer, that follows this letter.
Over the twelve-month period covering this report, the Fund paid income
dividends totaling $0.60 per share and had a total return of 12.41% for Class A
shares. Over the same period, the Standard and Poor's 500 Index ("S&P 500")
posted a total return of 26.33%, and the Lehman Brothers Government/Corporate
Bond Index had a return of 2.39%. Keep in mind that past performance is not a
guarantee of future performance. As a balanced fund that invests in both stocks
and bonds, the Fund's participation in the continuing stock market rally was
held back by the modest returns produced by the bond market during the past
year.
EQUITY MARKET AND FUND UPDATE
The Fund's positive equity performance during the year ended January 1997 was
aided by a strong overall stock market which saw price gains above 25% for most
widely-followed market indices. For example, as we noted above, the S&P 500 rose
26.33% and the Dow Jones Industrial Average climbed 29.15%. Generally speaking,
growth-type stocks outperformed value-type investments, and large company stocks
proved more rewarding than mid-sized and small company stocks.
There are several factors that contributed to the equity performance of the Fund
during the year. On a positive note, the Fund was overweighted in financial
stocks, which turned out to be one of the strongest market sectors and added
noticeable value to the Fund. Mitigating the overall contribution from a strong
stock market was the fact that the Fund, following the Investment Policy
Committee guidelines, was divesting stocks throughout most of the year. For
Smith Barney Strategic Investors Fund
1
<PAGE>
example, the Fund's stock allocation moved sequentially from 60% at the
beginning of the year to 55% - then to 50% - down to 45% before increasing again
to 50% of total assets by year-end. Throughout the period covered by this
report, the stock allocation averaged around 50% of total Fund assets.
As the new fiscal year begins, we remain cautiously optimistic about the
prospects for stock prices. In our view, all of the gains recorded since this
bull market began can be explained by the positive change in the underlying
fundamental conditions that determine stock prices - inflation, interest rates
and corporate earnings. Since we can explain the price gains, we do not believe
the change entails any unjustified speculation. But, in the same vein, today's
stock prices capture the majority of the fundamental inputs; therefore future
progress will be more dependent on improvement in those conditions - i.e.,
continued low inflation and interest rates and increasing corporate earnings -
not on the premise that stocks are undervalued. However, stock prices will
become increasingly sensitive to mood swings concerning those prospects, and
that means heightened volatility.
FIXED INCOME MARKET AND FUND UPDATE
A jump start was recorded in the U.S. job market during the first quarter of
1996, with a net payroll gain of 618,000 jobs. The strength of the job market
and the general economy was reflected in bond prices as the yield on the 30-year
U.S. Treasury bond rose from 6.03% at the end of January 1996 to over 7% in
April, 1996. Interest rates then began to trade in a narrow range until
September, when weakening U.S. economic growth sparked a rally that took the 30-
year Treasury yield from 7.12% to a low of 6.13% at the end of November.
December, on the other hand, was a decidedly different month, as renewed growth
in the job market and somewhat higher consumer spending drove interest rates
higher once again. As of January 31, 1997, the yield on the 30-year U.S.
Treasury bond was 6.80%, 44 basis points above the November close.
During the twelve-month period covered by this report, yields on shorter
maturity securities in the two- and three-year range, rose 1.03% or 103 basis
points to end the period at 5.93% and 6.04%, respectively. This resulted in some
"flattening" of the yield curve - i.e., the spread between the yields on long-
term Treasuries and short-term Treasuries decreased. As a result of higher
interest rates across all maturities, the fixed income markets provided
disappointing returns for the year. As we noted earlier, the Lehman
Government/Corporate Index returned 2.39% for the twelve months ended January
31, 1997.
In response to stronger-than-expected U.S. economic growth, we shortened the
Fund's fixed income portfolio duration from 6 to 4.5 years during the first
quarter. (Duration is a rough measure of how a bond or bond portfolio may react
to a change in interest rates.) We also added to our higher-yielding mortgage-
backed and asset-backed securities to generate higher income. As the year
progressed, we also lowered our exposure to corporate bonds, as high valuations
relative to U.S. Treasuries seemed to be reflecting undeserved optimism. Taking
advantage of the recent rise in interest rates, we have extended our portfolio
duration slightly to a still defensive 4.8 years. As of January 31, 1997, the
fixed income portion of the Fund was allocated among the following areas: 47%
U.S. government securities, 23% corporate bonds, 6% asset-backed securities and
24% mortgage-backed securities.
OUTLOOK
It's important to note that the Federal Reserve Board has refrained from
adjusting short-term interest rates since January of last year. Without tangible
news of rising inflation, it appears that the Fed will remain on the sidelines
and hold rates steady. If monetary tightening or easing is required, we expect
the required changes to remain well below the historical norms established in
the 1970's and 80's. If this scenario pans out, interest rates may continue to
show volatility but remain within the trading range established over the last
two years. We also believe that the U.S. economy is experiencing a late cycle
bounce that is not likely to lead to a prolonged expansion. Over the next six
months, we expect to see signs of a slower economy and a more positive interest
rate environment.
1997 Annual Report to Shareholders
2
<PAGE>
On a final note, we believe that all of the proposed changes to the Fund will be
positive for our shareholders. Aside from the changes to the Fund's asset
allocation decisions, a social awareness overlay has been added to the
investment process. We do not believe that the Fund's portfolio will be
drastically repositioned over a short time period due to these policy changes,
but rather over a more prudent, longer-term period.
Thank you for your investment in the Smith Barney Strategic Investors Fund. We
look forward to continuing to help you achieve your investment goals.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman and
Chief Executive Officer
/s/ Robert J. Brady, CFA
Robert J. Brady, CFA
Investment Officer
/s/ Ellen S. Cammer
Ellen S. Cammer
Investment Officer
February 24, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------
Top Ten Holdings* January 31, 1997
- ---------------------------------------------------
<S> <C> <C>
1. Intel Corp. 3.3%
- ---------------------------------------------------
2. American Express Co. 3.1
- ---------------------------------------------------
3. Chase Manhattan Corp. 3.0
- ---------------------------------------------------
4. Textron, Inc. 2.8
- ---------------------------------------------------
5. Aluminum Co. of America 2.7
- ---------------------------------------------------
6. Tenet Healthcare Corp. 2.7
- ---------------------------------------------------
7. Schering-Plough Corp. 2.5
- ---------------------------------------------------
8. Xerox Corp. 2.5
- ---------------------------------------------------
9. Allstate Corp. 2.4
- ---------------------------------------------------
10. BankAmerica Corp. 2.4
- ---------------------------------------------------
</TABLE>
* As a percentage of total Common Stocks.
Smith Barney Strategic Investors Fund
3
<PAGE>
- --------------------------------------------------------------------------------
An Interview with Portfolio Managers Robert J. Brady and Ellen S. Cammer
- --------------------------------------------------------------------------------
THE BENEFITS OF SOCIALLY AWARE INVESTING
Portfolio Managers Bob Brady and Ellen Cammer recently spoke with us about all
of the exciting changes taking place in their Fund and some insights regarding
their investment style.
Bob, could you tell us about the benefits of Concert Social Awareness Fund and
how is it different from Strategic Investors Fund?
Bob: The Fund's objective is to seek high total return consisting of income and
capital appreciation - that hasn't changed. We will continue to apply the same
investment disciplines that we applied before. What we've added is a social
awareness screen. We believe that there is a direct correlation between
companies that maintain a positive social awareness and their long-term
investment potential. For example, companies that are proactive environmentally
can usually avoid costly litigation and expensive clean-up costs. In addition,
companies that create diverse and professionally satisfying workplaces generally
attract the most talented people, which in turn helps to increase both their
productivity and profitability. In other words, being socially responsible can
be very good for the bottom line. Another key change to the Fund's investment
policies is that its asset allocation will no longer rely on recommendations
made by Smith Barney's Investment Policy Group. Instead, we will determine the
Fund's allocation.
Ellen, why has socially aware investing moved into the investment mainstream?
Ellen: This style of investing has moved into the mainstream of America as a
consequence of some very specific demographic and business trends that are
evident in our economy today. We see two simultaneous trends here that make it
clear that socially aware investing is here to stay. On the business side, we
see a convergence between social interests and business interests. The social
investor, or the person who's interested in the social aspects of the business
community, is looking at issues such as the environment, corporate diversity
policies and practices, and a company's involvement and visibility in the local
community. The second trend is that the same people who are influencing business
decisions in the workplace and the community are becoming savers and investors,
and not just consumers. So it's natural and logical that they should extend
their social interests into their investment portfolios.
We believe that you don't have to sacrifice principles for profits or profits
for principles. We believe that good, well-managed companies understand that the
way to successfully compete in today's highly competitive world is to build
strong consumer franchises, recognition and good reputations for both their
products and themselves. They do this not only via their products and services,
but also in the way they conduct themselves in their business dealings and in
the community, and the opportunities they offer to their employees. We think
that this will separate companies out over time. And as investment managers, we
are seeking companies that make good business decisions which will hopefully
translate into good investment decisions. It's a new era, and we think that the
social aspects must be part of the total investment equation.
What is "supportive investing" and how will it be utilized by Concert Social
Awareness Fund?
Bob: Supportive investing simply means that we are trying to be supportive of
companies that are doing socially beneficial things in the world in which they
operate. It's not simply a matter of avoiding certain types of companies or
industries. Instead, we seek out those companies that have positive policies and
programs. We think that supportive screening is the new wave of social
investing.
1997 Annual Report to Shareholders
4
<PAGE>
But will the Fund avoid any specific areas?
Ellen: Although the world of social investing has become more supportive rather
than punitive, there are certain areas that we avoid. We attempt to avoid any
companies that do significant damage to the environment or are problematic from
a product safety standpoint.
Concert Social Awareness Fund's future allocation will center around 75% stocks
and 25% fixed income. How close are you to this future allocation?
Bob: Prior to the conversion of this Fund on February 24, 1997 it had an asset
allocation of roughly 50% stocks, 40% bonds, and 10% cash. Our game plan is to
increase the stock allocation to 75%. The market will give us some opportunities
over the coming months to restructure our holdings in a very prudent manner.
We're applying our social screens to the existing holdings, and will have made
any necessary changes by the fall.
Bob and Ellen, can you review the investment discipline that's been guiding this
Fund?
Bob: We begin with our own very specific investment disciplines and supplement
them with the research resources of Wall Street. Our equity discipline is very
value oriented. We study a population of about 1,700 stocks every week in order
to identify attractive investment candidates. That will not change. On the fixed
income side, the Fund will be invested in governments, governments agencies,
mortgage issues, and corporate bonds. The corporate bonds will be subjected to
the same social screens that we use on the equity side.
Ellen: At the same time that we analyze the financial qualities of each company,
we're also doing social research on it. Our proprietary social research in both
the equity and fixed income disciplines is supplemented by research from Kinder,
Lyndenberg & Domini, the Investor Responsibility Research Center, the Council on
Economic Priorities, Interfaith Center on Corporate Responsibility, among
others. The resulting Fund clearly blends both financial and social research.
Does one type of stock seem to predominate?
Bob: We're skewed more towards the larger cap area, although we do have some
mid-cap representation and from time to time will have some smaller cap names in
there as well. There are so many large cap companies today that fully qualify
for inclusion in this Fund. The average market capitalization of our holdings is
about $19 billion; that compares to about $40 billion for the average company in
the S&P 500, and about $3 billion in the S&P mid-caps. So you can see that this
is more of an S&P type fund, with a little bit of a bias towards the mid-cap
arena.
Bob, can you give us an idea of some of the types of companies you're talking
about?
Bob: We could invest in companies like Aetna, Chase Manhattan, American Express,
Microsoft, Xerox, Unilever, and Lucent Technologies. You can get a flavor that
these are large and mid-to-large cap stocks that are in many mainstream,
conservative investment portfolios, but they are also companies we are very
comfortable with from a social awareness perspective. But each one would qualify
for different reasons. Some of them have very active community investment
programs, some have outstanding employee relationship programs such as daycare
centers or flexible hours. All of these kinds of efforts are considered and
weighed as part of a company's social profile.
However, if the nature of a company changes so that it violates one of our
social criteria, we'll sell it. Let us give you an example. An auto parts
company recently merged with an overseas operation that had a significant
weapons division; so although the auto parts company was still okay from an
investment perspective, it now would have violated our weapons avoidance screen
and would have been sold. So social considerations go hand-in-hand with
investment decisions.
Smith Barney Strategic Investors Fund
5
<PAGE>
Your extensive experience in managing socially aware portfolios makes you
uniquely qualified to run this Fund. Can you tell us about it?
Bob: We've been managing socially aware portfolios for Smith Barney clients
since the mid-1980s. We have approximately $400 million in assets in
individually-managed accounts in addition to approximately $400 million in this
Fund. These combined assets place us in a highly visible spot in the social
investment community. We are extremely recognized in this community on a
national basis. Our experience suggests that investors don't have to sacrifice
any investment returns to apply social considerations to their investment
program.
What makes your approach different from that of your peers?
Ellen: It's the totality of our social investment program that makes us
different, not just one specific issue. Our approach reflects much more of a
total philosophy that links an investment philosophy along with a social
philosophy. We construct portfolios that are invested in good solid companies
that understand that they have a financial responsibility to shareholders as
well as a responsibility to be a positive influence on the environment in which
they operate. It's much more than simply applying an avoidance screen or some
other client-imposed objective. There are a limited number of managers out there
who share our approach, and even fewer mutual fund managers.
1997 Annual Report to Shareholders
6
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Historical Performance - Class A Shares
- ---------------------------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1/31/97 $19.00 $19.36 $0.60 $1.32 12.41%
1/31/96 15.91 19.00 0.52 0.52 26.47
1/31/95 17.72 15.91 0.47 0.66 (3.82)
1/31/94 16.85 17.72 0.56 1.46 17.80
Inception*- 1/31/93 16.80 16.85 0.11 0.85 6.12+
===================================================================================================
Total $2.26 $4.81
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Historical Performance - Class B Shares
- ---------------------------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1/31/97 $19.05 $19.42 $0.45 $1.32 11.60%
1/31/96 15.97 19.05 0.42 0.52 25.58
1/31/95 17.79 15.97 0.35 0.66 (4.54)
1/31/94 16.84 17.79 0.34 1.46 16.88
1/31/93 17.26 16.84 0.50 1.49 9.68
1/31/92 15.61 17.26 0.55 0.88 19.96
1/31/91 15.57 15.61 0.51 0.46 6.80
1/31/90 15.03 15.57 0.71 0.38 10.76
1/31/89 13.62 15.03 0.48 0.11 15.10
Inception*- 1/31/88 14.00 13.62 0.23 0.07 (0.57)+
===================================================================================================
Total $4.54 $7.35
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Historical Performance - Class C Shares
- ---------------------------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1/31/97 $19.08 $19.46 $0.45 $1.32 11.65%
1/31/96 15.97 19.08 0.42 0.52 25.77
1/31/95 17.79 15.97 0.35 0.66 (4.54)
Inception*- 1/31/94 17.54 17.79 0.28 1.46 11.83+
===================================================================================================
Total $1.50 $3.96
===================================================================================================
</TABLE>
Smith Barney Strategic Investors Fund
7
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Historical Performance - Class Y Shares
- --------------------------------------------------------------------------------
Net Asset Value
----------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
=============================================================================================
<S> <C> <C> <C> <C> <C>
Inception*- 1/31/97 $19.00 $19.39 $0.49 $1.32 11.94%+
=============================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS QUARTERLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
------------------------------------------
Class A Class B Class C Class Y
================================================================================
Year Ended 1/31/97 12.41% 11.60% 11.65% N/A
Five Years Ended 1/31/97 N/A 11.39 N/A N/A
Inception* through 1/31/97 13.48 10.78 11.41 11.94%+
================================================================================
With Sales Charge(2)
---------------------------------------------
Class A Class B Class C Class Y
================================================================================
Year Ended 1/31/97 6.80% 6.60% 10.65% N/A
Five Years Ended 1/31/97 N/A 11.26 N/A N/A
Inception* through 1/31/97 12.13 10.78 11.41 11.94%+
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 1/31/97) 70.93%
Class B (Inception* through 1/31/97) 178.50
Class C (Inception* through 1/31/97) 49.90
Class Y (Inception* through 1/31/97) 11.94+
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charge with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed less than
one year from initial purchase and declines thereafter by 1.00% per year
until no CDSC is incurred. Class C shares reflect the deduction of a 1.00%
CDSC, which applies if shares are redeemed within the first year of
purchase.
* Inception dates for Class A, B, C and Y shares are November 6, 1992, February
2, 1987, May 5, 1993 and March 28, 1996, respectively.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
1997 Annual Report to Shareholders
8
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney Strategic Investors Fund at a Glance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares of the
Smith Barney Strategic Investors Fund vs. the Lehman Government/Corporate Bond
Index, Lehman Government/Corporate Long-Term Bond Index and Standard & Poor's
500 Index*
February 1987 -- January 1997
<TABLE>
<CAPTION>
Smith Barney Lehman Government/ Lehman Government/
Strategic Corporate Corporate Standard &
Investors Bond Long-Term Poor's 500
Fund Index Bond Index Index
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Feb 1987 $10,000 $10,000 $10,000 $10,000
Jan 1988 9,944 10,437 10,248 9,666
Jan 1989 11,445 11,001 10,859 11,608
Jan 1990 12,677 12,232 12,152 13,288
Jan 1991 13,539 13,581 13,506 14,403
Jan 1992 16,240 15,364 15,493 17,672
Jan 1993 17,812 17,142 17,752 19,542
Jan 1994 20,818 18,908 20,564 22,060
Jan 1995 19,872 18,320 19,131 22,175
Jan 1996 24,955 21,567 24,249 30,746
Jan 1997 27,850 22,081 24,133 38,841
</TABLE>
* Hypothetical illustration of $10,000 invested in Class B shares at inception
on February 2, 1987, assuming reinvestment of dividends and capital gains,
if any, at net asset value through January 31, 1997. The Lehman
Government/Corporate Bond Index is a combination of the Government and
Corporate Bond indexes, including U.S. Treasury and Agency securities and
Yankee Bonds. The Lehman Government/Corporate Long-Term Bond Index is a
combination of Government and Corporate bonds with maturities of 10 years or
more. The Standard & Poor's 500 Index is composed of widely held common
stocks listed on the New York Stock Exchange, American Stock Exchange and
over-the-counter market. Figures for the index include reinvestment of
dividends. The indexes are unmanaged and are not subject to the same
management and trading expenses as a mutual fund. The performance of the
Fund's other classes may be greater or less than the Class B shares'
performance indicated on this chart, depending on whether greater or lesser
sales charges and fees were incurred by shareholders investing in other
classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
INDUSTRY DIVERSIFICATION OF COMMON STOCKS
Basic Materials 6.7%
Capital Goods 6.7%
Communication Services 3.2%
Consumer Cyclicals 14.3%
Consumer Staples 7.0%
Energy 6.3%
Financials 24.6%
Healthcare 8.2%
Technology 16.2%
Transportation 2.8%
Utilities 4.0%
INVESTMENT BREAKDOWN
Corporate Bonds and Notes 9.0%
Asset-Backed Securities 2.5%
Common Stocks 49.8%
U.S. Government Obligations 18.9%
Repurchase Agreements 10.3%
Mortgage-Backed Securities 9.5%
Smith Barney Strategic Investors Fund
9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
COMMON STOCKS - 49.8%
Basic Materials - 3.3%
75,000 Aluminum Co. of America $ 5,175,000
25,000 Century Aluminum Co. 468,750
80,000 Engelhard Corp. 1,590,000
50,000 Olin Corp. 1,831,250
80,000 Praxair, Inc. 3,710,000
- --------------------------------------------------------------------------------
12,775,000
- --------------------------------------------------------------------------------
Capital Goods - 3.3%
26,300 General Electric Co. 2,708,900
35,000 Lockheed Martin Corp. 3,220,000
5,000 Primex Technologies, Inc.+ 96,875
13,500 Schlumberger Ltd. 1,500,187
53,900 Textron, Inc. 5,248,513
- --------------------------------------------------------------------------------
12,774,475
- --------------------------------------------------------------------------------
Communication Services - 1.6%
57,000 GTE Corp. 2,679,000
93,200 MCI Communications Corp. 3,273,650
- --------------------------------------------------------------------------------
5,952,650
- --------------------------------------------------------------------------------
Consumer Cyclicals - 7.1%
38,800 Dillards Department Stores, Inc. 1,159,150
17,200 Fleetwood Enterprises, Inc. 460,100
40,000 Home Depot, Inc. 1,980,000
25,000 ITT Corp.+ 1,428,125
143,400 Kaufman & Broad Home Corp. 2,025,525
74,700 Liz Claiborne, Inc. 3,146,738
59,286 Lucas Varity PLC ADR+ 1,971,259
89,700 May Department Stores Co. 3,991,650
54,000 Nine West Group, Inc.+ 2,787,750
14,352 Payless Shoesource, Inc.+ 538,200
55,000 Pep Boys - Manny, Moe & Jack Co. 1,746,250
51,800 Philips Electronics NV 2,072,000
100,100 Toys `R' Us Inc.+ 2,502,500
18,500 VF Corp. 1,230,250
- --------------------------------------------------------------------------------
27,039,497
- --------------------------------------------------------------------------------
Consumer Staples - 3.5%
72,000 American Stores Co. 3,024,000
38,700 Kroger Co.+ 1,847,925
80,000 Nabisco Holdings Corp., Class A Shares 3,060,000
35,000 Newell Co. 1,155,000
25,000 Unilever NV 4,112,500
- --------------------------------------------------------------------------------
13,199,425
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
1997 Annual Report to Shareholders
10
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (cont'd) January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Energy - 3.1%
50,000 Chevron Corp. $ 3,318,750
34,900 Kerr McGee Corp. 2,399,375
26,300 Mobil Corp. 3,451,875
8,400 Royal Dutch Petroleum Co. ADR 1,457,400
44,100 YPF Sociedad Anonima ADR 1,229,287
- --------------------------------------------------------------------------------
11,856,687
- --------------------------------------------------------------------------------
Financials - 12.3%
45,000 Ace Ltd. 2,660,625
70,547 Allstate Corp. 4,638,465
93,300 American Express Co. 5,819,588
60,000 Associates First Capital Corp. 2,917,500
40,311 BankAmerica Corp. 4,499,715
35,000 Bank of Boston Corp. 2,493,750
49,000 Bay Apartment Communities, Inc. 1,764,000
62,088 Chase Manhattan Corp. 5,743,140
105,200 Federal Home Loan Mortgage Corp. 3,182,300
64,800 H.F. Ahmanson & Co. 2,430,000
25,000 ITT Hartford Group, Inc. 1,834,375
30,900 J.P. Morgan & Co. 3,182,700
42,200 Lincoln National Corp. 2,262,975
23,100 Mid Ocean Ltd. 1,172,325
35,400 St. Paul Cos., Inc. 2,212,500
- --------------------------------------------------------------------------------
46,813,958
- --------------------------------------------------------------------------------
Healthcare - 4.1%
69,696 Columbia/HCA Healthcare Corp. 2,752,992
15,000 Dentsply International, Inc. 746,250
64,000 Schering-Plough Corp. 4,840,000
30,000 Smithkline Beecham Units ADR 2,167,500
190,500 Tenet Healthcare Corp.+ 5,143,500
- --------------------------------------------------------------------------------
15,650,242
- --------------------------------------------------------------------------------
Technology - 8.1%
39,900 Beckman Instruments, Inc. 1,576,050
40,000 Computer Associates International, Inc. 1,815,000
34,200 Eastman Kodak Co. 2,966,850
40,000 Electronics Data Systems Corp. 1,840,000
65,000 EMC Corp.+ 2,461,875
38,500 Intel Corp. 6,246,625
22,400 International Business Machine Corp. 3,522,400
72,963 Lucent Technologies, Inc. 3,958,243
25,000 Motorola, Inc. 1,706,250
80,000 Xerox Corp. 4,690,000
- --------------------------------------------------------------------------------
30,783,293
- --------------------------------------------------------------------------------
Transportation - 1.4%
11,900 Burlington Northern Santa Fe 1,041,250
100,500 Canadian Pacific Ltd. 2,726,063
75,000 Mesaba Holdings, Inc.+ 1,031,250
24,300 Pittston Burlington Group 489,037
- --------------------------------------------------------------------------------
5,287,600
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
Smith Barney Strategic Investors Fund
11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (cont'd) January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Utilities - 2.0%
75,700 CMS Energy Corp. $ 2,535,950
61,100 Enron Corp. 2,520,375
16,500 Illinova Corp. 435,188
50,000 Niagara Mohawk Power Corp.+ 506,250
83,700 Public Service Co. of New Mexico 1,674,000
- --------------------------------------------------------------------------------
7,671,763
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost - $126,378,297) 189,804,590
================================================================================
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
=====================================================================================
<S> <C> <C>
CORPORATE BONDS AND NOTES - 9.0%
Financial Services - 3.2%
$2,500,000 Associates Corp. North American, Notes, 7.250% due 9/1/99 2,556,250
2,000,000 Dean Witter Discover & Co., Notes, 6.000% due 3/1/98 2,001,720
950,000 First USA Bank, Notes, 8.100% due 2/21/97 951,093
1,550,000 Ford Motor Credit Co., Notes, 5.625% due 3/3/97 1,550,357
3,000,000 Household Finance Corp., Sr. Notes, 7.510% due 3/10/98 3,050,940
2,000,000 John Deere Capital Corp., Medium Term Notes,
5.405% due 4/15/98++ 1,987,400
- -------------------------------------------------------------------------------------
12,097,760
- -------------------------------------------------------------------------------------
Industrial - 3.0%
1,500,000 Case Corp., Notes, 7.250% due 8/1/05 1,496,250
1,500,000 Lucent Technologies, Inc., Notes, 7.250% due 7/15/06 1,526,250
2,000,000 Oryx Energy Co., Debentures, 8.125% due 10/15/05 2,032,500
2,000,000 Service Corp. Intl., Senior Notes, 7.000% due 6/1/15 2,015,000
350,000 Southwest Airlines Co., Series 1994-A3, 8.700% due 7/1/11 377,562
2,000,000 Tenet Healthcare Corp., Sr. Notes, 8.625% due 12/1/03 2,085,000
2,000,000 WMX Technologies, Inc., Notes, 7.100% due 8/1/26 2,055,000
- -------------------------------------------------------------------------------------
11,587,562
- -------------------------------------------------------------------------------------
Yankee - 1.7%
2,000,000 ABN AMRO Bank NV Chicago, Sub. Notes,
7.550% due 6/28/06 2,060,000
2,500,000 Capital Desjardins, Inc., Sr. Notes, 7.370% due 8/8/05 2,515,625
2,000,000 Philips Electronics NV, Notes, 7.200% due 6/1/26 2,007,500
- -------------------------------------------------------------------------------------
6,583,125
- -------------------------------------------------------------------------------------
Utilities - 1.1%
2,000,000 HNG Internorth, Inc., Notes, 9.625% due 3/15/06 2,332,500
2,000,000 Transcontinental Gas Pipeline Corp., Debentures,
7.080% due 7/15/26 2,035,000
- -------------------------------------------------------------------------------------
4,367,500
- -------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost - $34,462,184) 34,635,947
=====================================================================================
</TABLE>
See Notes to Financial Statements.
1997 Annual Report to Shareholders
12
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Schedule of Investments (cont'd) January 31, 1997
- --------------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
======================================================================================
<S> <C> <C>
ASSET-BACKED SECURITIES - 2.5%
$ 5,000,000 Carco Auto Loan Master Trust, Series 1994-2,
7.875% due 7/15/99 $ 5,060,550
643,208 Equity Credit Corp., Home Equity Loan Trust, Series 1993-3,
5.150% due 9/15/08 611,704
1,646,528 FNMA Remic Pass Thru Certificates, Series 1993-104,
5.500% due 3/25/98 1,639,663
2,000,000 Sears Credit Account Master Trust, Series 1995-2A,
8.100% due 6/15/04 2,115,980
- --------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost - $9,408,953) 9,427,897
======================================================================================
U.S. GOVERNMENT OBLIGATIONS - 18.9%
6,000,000 U.S. Treasury Notes, 6.625% due 3/31/97 6,013,140
12,350,000 U.S. Treasury Notes, 5.750% due 9/30/97 12,368,525
3,000,000 U.S. Treasury Notes, 5.625% due 10/31/97 3,002,190
2,000,000 U.S. Treasury Notes, 7.375% due 11/15/97 2,026,860
2,450,000 U.S. Treasury Notes, 5.375% due 11/30/97 2,446,545
750,000 U.S. Treasury Notes, 7.125% due 2/29/00 771,398
4,400,000 U.S. Treasury Notes, 6.250% due 8/31/00 4,412,232
2,000,000 U.S. Treasury Notes, 6.250% due 10/31/01 1,998,100
5,978,000 U.S. Treasury Notes, 6.375% due 8/15/02 6,004,004
2,000,000 U.S. Treasury Notes, 7.500% due 2/15/05 2,127,400
2,000,000 U.S. Treasury Notes, 6.875% due 5/15/06 2,048,560
3,000,000 U.S. Treasury Notes, 6.500% due 10/15/06 2,997,450
9,500,000 U.S. Treasury Bonds, 7.125% due 2/15/23 9,756,310
17,900,000 U.S. Treasury Bonds, 6.000% due 2/15/26 15,992,218
- --------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost - $71,879,436) 71,964,932
======================================================================================
MORTGAGE-BACKED SECURITIES - 9.5%
27,514 Federal Home Loan Mortgage Corp., 6.250% due 7/1/02 26,104
71,602 Federal Home Loan Mortgage Corp., 8.500% due 12/1/02 74,332
128,200 Federal National Mortgage Association, 5.500% due 3/1/99 120,908
4,989,029 Federal National Mortgage Association, 6.000% due 11/1/03 4,868,943
3,467,059 Federal National Mortgage Association, 7.500% due 10/1/09 3,522,290
3,253,658 Federal National Mortgage Association, 8.000% due 3/1/10 3,355,337
1,930,025 Federal National Mortgage Association, 6.000% due 2/1/11 1,860,062
131,533 Federal National Mortgage Association, 8.000% due 7/1/24 134,534
4,770,176 Federal National Mortgage Association, 7.500% due 5/1/25 4,785,059
3,036,270 Government National Mortgage Association, 7.000% due 12/15/24 2,988,813
4,894,722 Government National Mortgage Association, 7.500% due 2/15/26 4,909,994
9,806,470 Government National Mortgage Association, 6.500% due 4/15/26 9,355,961
- --------------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES
(Cost - $35,226,072) 36,002,337
======================================================================================
SUB-TOTAL INVESTMENTS
(Cost - $277,354,942) 341,835,703
======================================================================================
</TABLE>
See Notes to Financial Statements.
Smith Barney Strategic Investors Fund
13
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Schedule of Investments (cont'd) January 31, 1997
- --------------------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
============================================================================================
<S> <C> <C>
REPURCHASE AGREEMENTS - 10.3%
$ 9,117,000 Chase Manhattan Corp., 5.498% due 2/3/97; Proceeds at maturity -
$9,121,177; (Fully collateralized by U.S. Treasury Notes,
6.375% due 3/31/01; Market value - $9,299,393) $ 9,117,000
30,000,000 CS First Boston Corp., 5.477% due 2/3/97; Proceeds at maturity -
$30,013,693; (Fully collateralized by U.S. Treasury Notes,
7.250% due 2/15/98; Market value - $30,613,979) 30,000,000
- --------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost - $39,117,000) 39,117,000
============================================================================================
TOTAL INVESTMENTS - 100%
(Cost - $316,471,942*) $380,952,703
============================================================================================
</TABLE>
+ Non-income producing security.
++ Variable rate note - interest rate resets quarterly.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
1997 Annual Report to Shareholders
14
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost - $277,354,942) $341,835,703
Repurchase agreements (Cost - $39,117,000) 39,117,000
Cash 35,147
Interest receivable 2,872,201
Receivable for securities sold 1,637,528
Dividends receivable 134,775
Receivable for Fund shares sold 124,961
- --------------------------------------------------------------------------------
Total Assets 385,757,315
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares purchased 643,959
Investment advisory fees payable 180,618
Administration fees payable 65,679
Distribution fees payable 49,768
Accrued expenses 5,640
- --------------------------------------------------------------------------------
Total Liabilities 945,664
- --------------------------------------------------------------------------------
Total Net Assets $384,811,651
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 19,843
Paid-in capital in excess of par value 309,533,478
Undistributed net investment income 1,049,534
Accumulated net realized gain from security transactions 9,728,035
Net unrealized appreciation of investments 64,480,761
- --------------------------------------------------------------------------------
Total Net Assets $384,811,651
================================================================================
Shares Outstanding:
Class A 9,196,849
Class B 10,433,620
Class C 205,578
Class Y 7,380
Net Asset Value:
Class A (and redemption price) $ 19.36
Class B* $ 19.42
Class C** $ 19.46
Class Y (and redemption price) $ 19.39
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $ 20.38
================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
Smith Barney Strategic Investors Fund
15
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------
Statement of Operations For the Year Ended January 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest $ 12,499,850
Dividends 4,105,065
Less: Foreign withholding tax (56,724)
- -------------------------------------------------------------------------------------------------
Total Investment Income 16,548,191
- -------------------------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 2,579,846
Investment advisory fees (Note 2) 2,146,284
Administration fees (Note 2) 780,467
Shareholder and system servicing fees 575,502
Shareholder communications 214,461
Registration fees 85,184
Audit and legal 59,356
Trustees' fees 24,639
Custody 17,168
Other 55,507
- -------------------------------------------------------------------------------------------------
Total Expenses 6,538,414
- -------------------------------------------------------------------------------------------------
Net Investment Income 10,009,777
- -------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 263,018,094
Cost of securities sold 233,219,522
- -------------------------------------------------------------------------------------------------
Net Realized Gain 29,798,572
- -------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 60,421,558
End of year 64,480,761
- -------------------------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 4,059,203
- -------------------------------------------------------------------------------------------------
Net Gain on Investments 33,857,775
- -------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 43,867,552
=================================================================================================
</TABLE>
See Notes to Financial Statements.
1997 Annual Report to Shareholders
16
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended January 31,
- ------------------------------------------------------------------------------------------------------
<CAPTION>
1997 1996
======================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 10,009,777 $ 10,396,146
Net realized gain 29,798,572 15,912,267
Increase in net unrealized appreciation 4,059,203 63,677,310
- ------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 43,867,552 89,985,723
- ------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (10,549,573) (10,078,312)
Net realized gains (25,686,983) (10,995,342)
- ------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (36,236,556) (21,073,654)
- ------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 31,606,383 31,431,185
Net asset value of shares issued for reinvestment of dividends 34,034,031 19,789,136
Cost of shares reacquired (93,222,755) (92,622,989)
- ------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (27,582,341) (41,402,668)
- ------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (19,951,345) 27,509,401
NET ASSETS:
Beginning of year 404,762,996 377,253,595
- ------------------------------------------------------------------------------------------------------
End of year* $384,811,651 $404,762,996
======================================================================================================
* Includes undistributed net investment income of: $ 1,049,534 $ 1,589,330
======================================================================================================
</TABLE>
See Notes to Financial Statements.
Smith Barney Strategic Investors Fund
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Strategic Investors Fund ("Fund"), a separate investment fund
of the Smith Barney Equity Funds ("Trust"), a Massachusetts business trust, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Trust consists of the
Fund and one other separate investment fund, the Smith Barney Growth and Income
Fund. The financial statements and financial highlights for the other fund are
presented in a separate annual report.
The significant accounting policies followed by the Fund are: (a) security
transactions are accounted for on trade date; (b) securities traded on national
securities markets are valued at the closing prices on such markets or, if there
were no sales during the day, at current quoted bid price; securities primarily
traded on foreign exchanges are generally valued at the preceding closing values
of such securities on their respective exchanges, except that when a significant
occurrence subsequent to the time a value was so established is likely to have
significantly changed the value, then the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Trustees or its delegates; over-the-counter securities and U.S.
Government and Agency obligations are valued at the mean between the bid and ask
prices; (c) securities maturing within 60 days are valued at cost plus accreted
discount, or minus amortized premium, which approximates market value; (d)
dividend income is recorded on the ex-dividend date; foreign dividends are
recorded on the ex-dividend date or as soon as practical after the Fund
determines the existence of a dividend declaration after exercising reasonable
due diligence; (e) interest income is recorded on the accrual basis including
the amortization of premium and the accretion of discount, where applicable; (f)
gains and losses on the sale of securities are calculated by using the specific
identification method; (g) dividends and distributions to shareholders are
recorded on the ex-dividend date; (h) the accounting records are maintained in
U.S. dollars. All assets and liabilities denominated in foreign currencies are
translated into U.S. dollars based on the rate of exchange of such currencies
against the U.S. dollars on the date of valuation. Purchases and sales of
securities, and income and expenses are translated at the rate of exchange
quoted on the respective date that such transactions are recorded. Differences
between income and expense amounts recorded and collected or paid are adjusted
when reported by the custodian bank; (i) direct expenses are charged to each
class; management fees and general fund expenses are allocated on the basis of
relative net assets; (j) the Fund intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
(k) the character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles; and (l) estimates and assumptions are required to be made
regarding assets, liabilities and changes in net assets resulting from
operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS
Smith Barney Strategy Advisors Inc. ("SBSA"), a subsidiary of Smith Barney
Mutual Funds Management Inc. ("SBMFM"), which, in turn, is a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Fund. The Fund
pays SBSA an investment advisory fee calculated at an annual rate of 0.55% of
the average daily net assets. This fee is calculated daily and paid monthly.
1997 Annual Report to Shareholders
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
SBMFM acts as the Trust's administrator for which the Fund pays a fee calculated
at an annual rate of 0.20% of the average daily net assets. This fee is
calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Trust shares and primary broker for its portfolio agency transactions. For the
year ended January 31, 1997, SB received sales charges of $49,000 on sales of
the Fund's Class A shares and brokerage commissions of $6,276.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B shares,
which applies if redemption occurs within one year from initial purchase and
declines thereafter by 1.00% per year until no CDSC is incurred. Class C shares
have a 1.00% CDSC, which applies if redemption occurs within the first year of
purchase. For the year ended January 31, 1997, CDSCs paid to SB were:
Class B Class C
==================================================
CDSCs $261,000 $2,000
==================================================
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
Class A, B and C shares calculated at the annual rate of 0.25% of the average
daily net assets of each respective class. The Fund also pays a distribution fee
with respect to Class B and C shares calculated at the annual rate of 0.75% of
the average daily net assets for each class, respectively. For the year ended
January 31, 1997, total Distribution Plan fees incurred were:
Class A Class B Class C
=================================================================
Distribution Plan Fees $440,493 $2,100,943 $38,410
=================================================================
All officers and one Trustee of the Trust are employees of SB.
3. INVESTMENTS
During the year ended January 31, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
============================================
Purchases $221,969,361
Sales 263,018,094
============================================
At January 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
=============================================
Gross unrealized appreciation $65,931,502 *
Gross unrealized depreciation (1,450,741)*
- ---------------------------------------------
Net unrealized appreciation $64,480,761 *
=============================================
*Substantially the same for Federal income tax purposes.
4. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed upon higher repurchase price. The Fund requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
5. SHARES OF BENEFICIAL INTEREST
At January 31, 1997, the Trust had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share. The Fund has the
ability to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses, including those specifically related to the distribution of its
shares.
Smith Barney Strategic Investors Fund
19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At January 31, 1997, total paid-in capital amounted to the following for each
class:
Class A Class B Class C Class Y
=============================================================================
Total Paid-in Capital $149,837,324 $155,952,666 $3,622,768 $140,563
=============================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
January 31, 1997* January 31, 1996
-------------------------- --------------------------------
Shares Amount Shares Amount
==============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 765,757 $ 14,636,058 541,718 $ 9,924,073
Shares issued on reinvestment 853,742 16,284,236 502,417 8,979,258
Shares redeemed (1,633,537) (31,295,560) (1,845,569) (32,325,484)
- ----------------------------------------------------------------------------------------------
Net Decrease (14,038) $ (375,266) (801,434) $(13,422,153)
==============================================================================================
Class B
Shares sold 794,793 $ 15,242,197 1,095,309 $ 19,529,792
Shares issued on reinvestment 908,864 17,375,708 588,732 10,665,928
Shares redeemed (3,153,244) (60,500,586) (3,328,074) (59,194,543)
- ----------------------------------------------------------------------------------------------
Net Decrease (1,449,587) $(27,882,681) (1,644,033) $(28,998,823)
==============================================================================================
Class C
Shares sold 78,020 $ 1,597,496 111,657 $ 1,977,320
Shares issued on reinvestment 24,149 364,156 7,158 143,950
Shares redeemed (74,564) (1,426,609) (64,317) (1,102,962)
- ----------------------------------------------------------------------------------------------
Net Increase 27,605 $ 535,043 54,498 $ 1,018,308
==============================================================================================
Class Y
Shares sold 6,860 $ 130,632 - -
Shares issued on reinvestment 520 9,931 - -
Shares redeemed - - - -
- ----------------------------------------------------------------------------------------------
Net Increase 7,380 $ 140,563 - -
==============================================================================================
</TABLE>
* For Class Y shares, transactions are for the period from March 28, 1996
(inception date) to January 31, 1997.
6. SUBSEQUENT EVENT
On February 14, 1997, the Fund's shareholders approved a change of certain
investment policies. The investment objective of the Fund remains high total
return consisting of current income and capital appreciation. The Fund's
shareholders approved changes to certain investment policies of the Fund whereby
the Fund would seek to achieve its objectives by investing in equity and fixed
income securities of issuers who demonstrate a positive awareness of their
impact on the society within which they operate. In addition to instituting this
social awareness overlay to the investment process, the Fund would no longer
modify the percentage of its assets invested in various types of securities in
response to determinations made by Smith Barney's Investment Policy Group, but
would instead maintain, under normal conditions, between 65% and 85% of its
assets invested in equity securities and 15% and 35% invested in fixed income
securities.
These changes became effective on February 24, 1997. In addition, the Fund
changed its name from "Smith Barney Strategic Investors Fund" to "Concert Social
Awareness Fund" to reflect these changes in its investment policies.
1997 Annual Report to Shareholders
20
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class A Shares 1997 1996 1995 1994(1) 1993(2)
=================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 19.00 $ 15.91 $ 17.72 $16.85 $ 16.80
Income (Loss) From Operations:
Net investment income 0.57 0.61 0.57 0.52 0.13
Net realized and unrealized gain (loss) 1.71 3.52 (1.25) 2.37 0.88
Total Income (Loss) From Operations 2.28 4.13 (0.68) 2.89 1.01
Less Distributions From:
Net investment income (0.60) (0.52) (0.47) (0.56) (0.11)
Net realized gains (1.32) (0.52) (0.66) (1.46) (0.85)
Total Distributions (1.92) (1.04) (1.13) (2.02) (0.96)
Net Asset Value, End of Year $ 19.36 $ 19.00 $ 15.91 $17.72 $ 16.85
Total Return 12.41% 26.47% (3.82)% 17.80% 6.12%++
Net Assets, End of Year (000s) $178,072 $175,007 $159,247 $6,216 $ 693
Ratios to Average Net Assets:
Expenses 1.28% 1.21% 1.33% 1.25% 1.25%+
Net investment income 2.98 3.10 2.89 2.85 3.61+
Portfolio Turnover Rate 68% 81% 103% 131% 93%
Average commissions per share paid
on equity transactions(3) $ 0.06 $ 0.06 - - -
=================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since use of the undistributed method did not accord with results of
operations.
(2) For the period from November 6, 1992 (inception date) to January 31, 1993.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
Smith Barney Strategic Investors Fund
21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class B Shares 1997 1996 1995 1994(1) 1993
===================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 19.05 $ 15.97 $ 17.79 $ 16.84 $ 17.26
Income (Loss) From Operations:
Net investment income 0.43 0.49 0.39 0.38 0.51
Net realized and unrealized gain (loss) 1.71 3.53 (1.20) 2.37 1.06
Total Income (Loss) From Operations 2.14 4.02 (0.81) 2.75 1.57
Less Distributions From:
Net investment income (0.45) (0.42) (0.35) (0.34) (0.50)
Net realized gains (1.32) (0.52) (0.66) (1.46) (1.49)
Total Distributions (1.77) (0.94) (1.01) (1.80) (1.99)
Net Asset Value, End of Year $ 19.42 $ 19.05 $ 15.97 $ 17.79 $ 16.84
Total Return 11.60% 25.58% (4.54)% 16.88% 9.68%
Net Assets, End of Year (000s) $202,597 $226,360 $216,035 $334,408 $287,983
Ratios to Average Net Assets:
Expenses 2.03% 1.94% 2.00% 1.98% 2.02%
Net investment income 2.23 2.37 2.21 2.11 2.84
Portfolio Turnover Rate 68% 81% 103% 131% 93%
Average commissions per share paid
on equity transactions(2) $ 0.06 $ 0.06 - - -
====================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since use of the undistributed method did not accord with results of
operations.
(2) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
1997 Annual Report to Shareholders
22
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class C Shares 1997 1996 1995(1) 1994(2)(3)
=====================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $19.08 $15.97 $ 17.79 $ 17.54
Income (Loss) From Operations:
Net investment income 0.44 0.45 0.38 0.32
Net realized and unrealized gain (loss) 1.71 3.60 (1.19) 1.67
Total Income (Loss) From Operations 2.15 4.05 (0.81) 1.99
Less Distributions From:
Net investment income (0.45) (0.42) (0.35) (0.28)
Net realized gains (1.32) (0.52) (0.66) (1.46)
Total Distributions (1.77) (0.94) (1.01) (1.74)
Net Asset Value, End of Year $19.46 $19.08 $ 15.97 $ 17.79
Total Return 11.65% 25.77% (4.54)% 11.83%++
Net Assets, End of Year (000s) $4,000 $3,396 $ 1,972 $ 399
Ratios to Average Net Assets:
Expenses 2.01% 1.94% 1.98% 1.93%+
Net investment income 2.25 2.31 2.24 2.16+
Portfolio Turnover Rate 68% 81% 103% 131%
Average commissions per share paid
on equity transactions(4) $ 0.06 $ 0.06 - -
===================================================================================
</TABLE>
(1) On November 7, 1994, the former Class D shares were renamed Class C shares.
(2) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since use of the undistributed method did not accord with results of
operations.
(3) For the period from May 5, 1993 (inception date) to January 31, 1994.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
Smith Barney Strategic Investors Fund
23
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class Y Shares 1997(1)
==============================================
<S> <C>
Net Asset Value, Beginning of Year $19.00
Income From Operations:
Net investment income 0.51
Net realized and unrealized gain 1.69
Total Income From Operations 2.20
Less Distributions From:
Net investment income (0.49)
Net realized gains (1.32)
Total Distributions (1.81)
Net Asset Value, End of Year $19.39
Total Return++ 11.94%
Net Assets, End of Year (000s) $ 143
Ratios to Average Net Assets+:
Expenses 0.90%
Net investment income 3.31
Portfolio Turnover Rate 68%
Average commissions per share paid
on equity transactions $ 0.06
==============================================
</TABLE>
(1) For the period from March 28, 1996 (inception date) to January 31, 1997.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
January 31, 1997:
* long-term capital gain distributions paid of $25,103,188.
* 34.56% of the ordinary dividends paid as qualifying for the corporate
dividends received deduction.
In addition, for those states that provide an exemption to taxable income, the
Fund designates 26.66% of the ordinary dividends paid as derived from Federal
Government obligations.
1997 Annual Report to Shareholders
24
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
THE SMITH BARNEY EQUITY FUNDS:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Smith Barney Strategic Investors Fund of the
Smith Barney Equity Funds as of January 31, 1997, the related statement of
operations for the year then ended and the statements of changes in net assets
and financial highlights for each of the years in the two-year period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for each of the years in the three-year period
ended January 31, 1995 were audited by other auditors whose report thereon,
dated March 22, 1995, expressed an unqualified opinion on those financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 1997, by correspondence with the custodian. As to securities sold
but not delivered, we performed other appropriate auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Smith
Barney Strategic Investors Fund of the Smith Barney Equity Funds as of January
31, 1997, the results of its operations for the year then ended and the changes
in its net assets and financial highlights for each of the years in the two-year
period then ended, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
March 14, 1997
Smith Barney Strategic Investors Fund
25
<PAGE>
SMITH BARNEY
STRATEGIC INVESTORS FUND
TRUSTEES
Lee Abraham
Antoinette C. Bentley
Allan Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon, Chairman
Madelon Devoe Talley
OFFICERS
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President and Treasurer
Robert J. Brady, CFA
Investment Officer
Ellen S. Cammer
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
INVESTMENT MANAGER
Smith Barney Strategy Advisors Inc.
ADMINISTRATOR
Smith Barney Mutual Funds Management Inc.
DISTRIBUTOR
Smith Barney Inc.
CUSTODIAN
PNC Bank, N.A.
SHAREHOLDER SERVICING AGENT
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Strategic Investors Fund. It is not authorized for distribution to
prospective investors unless accompanied or preceded by an effective prospectus
for the Fund, which contains information concerning the Fund's investment
policies and expenses as well as other pertinent information.
SMITH BARNEY
- ---------------------------------
A Member of TravelersGroup [LOGO]
SMITH BARNEY STRATEGIC INVESTORS FUND
Smith Barney Mutual Funds
388 Greenwich Street
New York, New York 10013
FD0912 3/97
[GRAPHIC] Because we care about the environment, this annual report has
been printed with soy-based inks on 20% post-consumer recycled paper, deinked
using a non-chlorine bleach process.
