ANNUAL REPORT
1996
1996
1996
1996
1996
[GRAPHIC]
SMITH BARNEY
NATURAL RESOURCES
FUND INC.
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October 31, 1996
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
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SMITH BARNEY NATURAL RESOURCES FUND INC.
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Dear Shareholder:
We are pleased to bring you the annual report of the Smith Barney Natural
Resources Fund Inc. which covers the year ended October 31, 1996. In this
report, we summarize the period's prevailing economic and market conditions and
outline the Fund's investment strategy. A detailed summary of performance and
current holdings can be found in the annual report.
Fund Performance Review
For the year ended October 31, 1996, the Smith Barney Natural Resources Fund had
a total return of 39.09% for Class A shares, which compares favorably to the
return of 24.10% for the Standard & Poor's 500 Stock Price Index (S&P 500)* and
35.80% for the average of 41 natural resource funds tracked by Lipper Analytical
Services, Inc., a major fund tracking organization. The chart below shows why we
are bullish on natural resources.
* The S&P 500 is a capitalization-weighted measure of 500 widely held common
stocks and a widely-used stock market benchmark.
WORLDWIDE COMMODITY GROWTH RATES
--------------------------------
1985--1996
COPPER ALUMINIUM ETHYLENE CRUDE OIL GASOLINE
US 3.53 2.63 4.4 1.22 1.16
EUROPE 2.12 3.06 3.81 1.43 1.76
JAPAN 1.29 3.68 4.23 3.0 4.22
CHINA 8.49 10.0 10.84 5.89 4.53
OTHER ASIA 14.22 9.58 9.20 8.79 10.82
Source: Davis Skaggs Investment Management. Donaldson, Lufkin & Jenrette
provided the aluminum data. Salomon Brothers supplied the copper data. Morgan
Stanley provided the ethylene data and Bloomberg Information Services supplied
the information about oil and gas growth rates. Although we believe the
information in this chart to be correct, we cannot guarantee its accuracy.
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The main reason for the Fund's success during the year was strong performances
by the gold and energy sectors of the portfolio. During the first part of the
fiscal year, high lending rates for physical gold combined with budget
uncertainties in the U.S. to create a brief period of outperformance. Gold was
one of the strongest sectors in the financial markets in the first half of the
year.
In the energy sector, strong global demand growth, led by the developing
countries of Southeast Asia, has kept markets surprisingly tight. Cold weather
throughout the Northern Hemisphere last winter also helped, as did Saddam
Hussein's surprise attack on one of the Kurdish factions of northern Iraq, which
served to delay Iraq's return to world oil markets. The Fund's best performing
stocks in the energy sector included Oryx Energy, Snyder Energy, Burlington
Resources, Command Petroleum (Australia), Noram Energy, Enserch Corporation,
Diamond Offshore Drilling, Global Marine, and Noble Drilling Corporation.
Moreover, the Fund's positions in the aluminum, zinc, and paper industries also
contributed to the past year's strong performance.
Economic Outlook
While growth in the United States has remained surprisingly strong, other areas
of the world, such as continental Europe and Japan, have experienced less robust
economic conditions. Central bankers around the developed world (with the
exception of the UK) have been lowering interest rates, and we expect lower
worldwide interest rates to lead to a re-acceleration of global economic growth.
We expect this stronger economic environment will be a good one for the natural
resource industries.
Capital has been readily available in both the developed and developing
countries, and it has been used to expand capacity in many industries. This in
turn should lead to increased demand for raw materials and natural resources. We
believe that investments in natural resources are one of the best ways to
participate in the rapid growth that will characterize many parts of the world
over the next five years. CNN and the U.S. media in general have shown the world
our standard of living, and many countries aspire to something similar over
time. We think it is inevitable that future demand for oil, natural gas,
precious metals, aluminum, copper, fertilizer and other natural resources will
grow at a rate which exceeds historic norms.
Inflation has been pronounced dead and buried by the financial press and, as
this is written, there are few "clouds" suggesting any imminent problem on this
front. However, the wealth effect from higher stock markets around the world
should cause consumption and investment to increase. When Europe and Japan
recover, this may limit additional disinflation in their economies and could
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limit the funds available to invest in our bond market. In this country, many
labor markets are tight, suggesting somewhat higher wage settlements in the year
ahead. We see a modest pick-up in inflation to 3 1/2% in the next 18 months.
Even this relatively small change should be positive for natural resource
investments.
Globalization of the Resource Industries
Whether one is talking about gold mining, paper and forest products, or oil
exploration, the major opportunities in the resource industries are increasingly
found overseas. Countries around the world are looking for sources of hard
currency that can be used to develop their economies. Exploiting their mineral
resources is one way to achieve these hard currency earnings. Although these
countries may be geologically promising, they are generally under-explored
relative to North America because of past economic policies. At the same time,
tougher environmental policies and unreasonable permitting delays are making
North America less attractive for exploration. This combination of factors has
led to the explosion in international activity in all of the natural resource
industries.
In every industry we follow, we are looking for ways to capitalize on this trend
towards globalization. In the paper industry, it has led us to invest in an
Indonesia-based company that benefits from a low-cost wood supply and proximity
to fast-growing Asian markets. In the oil industry, it has led us to invest in
an Australian company operating off the East Coast of India and also a Canadian
company operating off the West coast of Nigeria. In the gold and metals
industry, it has led us to invest in companies operating on almost every
continent of the world.
We believe it is necessary to seek out the best investment opportunities
available, wherever they may be located. This effort requires an assessment of
political risks, but in the end, this type of risk cannot be completely avoided.
Even if we invested only in North American companies, we would still be taking
on similar risks--they are engaged in exactly the same process we are
describing. We seek to limit out risk by ensuring that the Fund is diversified
across a range of countries and industries.
Precious Metals
The Natural Resources Fund's largest commitment was to the precious metals
sector, which represented about one-third of total assets during the second half
of the fiscal year. Our precious metals sector allocation includes 15.5% of Fund
assets invested in North American companies, 8.0% invested in
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Australian companies and 6.9% invested in African companies (primarily South
African).
Within this sector, the Fund has focused on two types of investments. First, we
look for companies that are growing gold reserves and production, and therefore
have the ability to increase in value without an increase in the gold price. In
the gold industry, wealth is generally created by discovery of resources. Much
of the exciting development activity is taking place in previously
under-exploited parts of the world, ranging from the rain forests of South
America to the mountains of Indonesia, to the deserts of Northern Australia. The
Fund has positions in a basket of stocks, ranging from the largest to the
smallest in the industry, which we believe have some of the best exploration and
development projects in the world. The table below lists some of the Fund's
holdings and the locations of their primary operations. This package of
investments provides a comparatively inexpensive exposure to a range of
exploration projects in various stages of development. Over time, we think that
many of these companies will prove to be successful.
Natural Resource Fund's Worldwide Exposure in
Gold Exploration and Development
Company Countries
------- ---------
Golden Star Resources Guyana, French Guiana, Suriname, Brazil, Mali
Homestake Mining North America, Australia, Chile, Guyana, Venezuela
Sons of Gwalia Australia
Philex Mining Philippines
Aurora Gold Indonesia
Emperor Mines Fiji
Newmont Mining North America, Peru, Uzbehkistan, Indonesia
Ranger Minerals Ghana
Normandy Mining Australia, Ghana, Sudan, Turkey, Peru
Goldfields Australia, Tasmania, Papua New Guinea
Meekathara Minerals Australia, Indonesia
Philippine Gold Philippines
Ashanti Goldfields Ghana, Tanzania, Ethiopia, Mali
The second type of gold position the Fund takes is based on valuation or
restructuring. We look for undervalued opportunities with specific catalysts
that can lead to higher valuations. Homestake Mining, for example, fits this
category. The company is valued at about one-half the valuation of its major
North American peers, primarily because it is perceived to be "ex-growth." We
believe Homestake has high quality assets, a good long-range exploration
strategy, and a new CEO in Jack Thompson who is focused on changing the market's
perception of the company.
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In addition to Homestake Mining, other gold holdings which fit into this
category include Hecla Mining, Amax Gold (added since fiscal year end), and all
of our investments in the South African Mining industry. Our South African
positions are discussed in greater detail in a special section that follows this
letter.
Energy
Positions in the energy area represent the next largest commitment of Natural
Resources Fund assets, making up roughly 27% of the portfolio as of October 31,
1996. The various groups that make up the energy sector are weighted in the Fund
as follows: the exploration and production (E&P) industry (10.9% of assets),
energy service companies (9.5% of assets), natural gas pipeline companies (4.8%
of assets), and refining and marketing companies (2.3% of assets).
The exploration and production industry is experiencing a resurgence as strong
prices for both oil and natural gas are leading to improved cash flows. Within
this sector, the Fund's largest holding was Snyder Energy, which has benefited
both from internal corporate restructuring and from pricing improvement for
Rocky Mountain natural gas. In addition, Synder owns 32% of Command Petroleum,
which received a takeover offer at a substantial premium. The Natural Resources
Fund also owned a position in Command Petroleum, which we have recently sold at
a price above the announced takeover price. During 1996, Snyder's stock has
doubled, but we believe it has significantly more upside potential if current
industry conditions persist. Other Fund holdings in the E&P sector include Oryx
Energy, Enserch Exploration Corporation, and American Exploration Company.
Conditions in the energy service industry remain the best they have been since
the early 1980's. Strong cash flow for their customers--international and
domestic oil companies--has led to increased demand for their goods and
services. The industry has been consolidating for fifteen years, and has been
reluctant to add new capacity after years of financial difficulty.
Improved technology has reduced the cost to the oil companies of exploring for
and developing oil and gas. With prices for West Texas Intermediate crude oil
near $24 per barrel and U.S. natural gas over $3.00 per million cubic feet
(mcf), it is easy to argue that prices are unsustainably high. However, even if
commodity prices decrease, we believe that demand for energy service companies
should remain strong. The Fund's largest holdings in the energy service industry
include Noble Drilling, BJ Services, Weatherford Enterra Corporation, Tech Sym
Corporation, and Dresser Industries. In addition, the Fund holds a position in
Far East Livingston Shipbuilding, which we believe
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will benefit from the eventual construction of additional jack-up and
semi-submersible drilling rigs.
In the pipeline sector, the Fund holds positions in Mitchell Energy and
Development, which has a large natural gas processing division and also a
substantial real estate company that we think is unappreciated by the market.
The company is currently involved in a lawsuit in Texas, which could be resolved
as early as mid-1997. Once the lawsuit is settled, we believe the company will
give serious consideration to separating its oil and gas and real estate
companies, which should be positive for the stock. Other positions held by the
Fund as of October 31, 1996 include USX-Delhi Group and Enron Corporation.
In the refining sector, the Natural Resources Fund owns Ultramar and Valero
Energy, both of which benefited from takeovers and restructurings announced in
the last several months. Ultramar agreed to merge with Diamond Shamrock
Corporation, creating one of the largest independent refiners with significant
cost cutting opportunities. Valero recently announced a plan to separate its
refining and pipeline business, a move that is expected to unlock significant
values.
Metals
All of the metals industries suffered in the last six months from the effects of
the Sumitomo copper trading scandal. We believe that the uncertainty caused by
the scandal has created good buying opportunities in many of these industries,
and we have increased the Fund's weighting in this sector. Holdings in the
metals sector represented about 15% of Natural Resources Fund assets at fiscal
year end.
The Fund's largest commitment in the metals sector was to the aluminum industry
which represented 4.6% of assets at the end of the fiscal year. After a long and
protracted inventory correction that saw prices decline more than 40% from their
highs, the price of aluminum bottomed at about $0.60 per pound in the third
quarter. We still have some concerns that demand will not be as strong as the
industry had once hoped, primarily because PET plastic is gaining share from
aluminum cans in the U.S. market. However, new sources of aluminum demand are
being created by beverage can markets in developing nations and by increasing
usage in the automobile and aerospace industries. The Fund's largest holdings in
the aluminum industry are Reynolds Metals, Alcoa Aluminum, and Commonwealth
Aluminum.
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The Fund's next largest commitment is to the titanium industry, where its
holding in Titanium Metals Corporation (TIMET) represented approximately 3% of
Fund assets. The titanium industry is benefiting from increased demand from both
the resurgent aerospace industry and from new applications such as golf club
heads.
Other metals holdings include Savage Resources (Australia) and Asturiana de Zinc
(Spain) in the zinc industry, and Cyprus Amax Minerals in the copper industry.
In the steel industry, the Fund holds Schnitzer Steel, which is one of the
country's largest processors of scrap metal.
Paper
The Natural Resources Fund's holdings in the paper sector represented about 10%
of assets as of October 31, 1996. Our largest position is Buckeye Cellulose
Corporation, a maker of specialty cotton linter pulps which are used in many
industrial applications. We believe Buckeye Cellulose Corp. dominates a
protected niche, which should allow the company to sustain higher returns than
other, more commodity-oriented paper companies over the next several years.
We think the commodity paper sector is also poised to rebound. Many of these
stocks are selling close to book value, which is unusual in today's fully priced
stock market. In addition, we are seeing signs that managements are adopting
shareholder-oriented policies, such as major share repurchases, that have proven
so successful in other industries. The Fund's largest holdings in the commodity
paper sector are Bowater and Champion International.
Chemicals/Agricultural
As of October 31, 1996, holdings in the chemical/agricultural sector represented
about 7% of Natural Resources Fund assets. The largest position is Agrium, a
large, Canadian-based nitrogen fertilizer producer and marketer. Agrium recently
announced a plan to merge with Viridian Corporation, which is another Canadian
fertilizer company. Moreover, the company is building up a substantial
fertilizer distribution capability in Argentina, a market with tremendous
potential that is many years behind North America in fertilizer marketing. Over
time, Agrium hopes to build a world-scale nitrogen fertilizer plant with an
Argentinean partner. Other Fund positions in the chemical sector include General
Chemical Group, International Specialty Products, and Crompton & Knowles
Corporation.
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We would like to thank you for your investment in the Smith Barney Natural
Resources Fund. Please note that a special section entitled "Notes from a Visit
to South Africa -- November 1996" appears after this letter and discusses in
greater detail the Fund's investment strategy in that country. In closing, while
the past year has been a good one, we hope over the next several years to
continue providing results that justify your confidence in our investment
management approach.
Sincerely,
/s/ Heath B. McLendon /s/ John G. Goode
Heath B. McLendon John G. Goode
Chairman and Vice President and
Chief Executive Officer Investment Officer
/s/ David Stadlin
David Stadlin
Investment Officer
December 2, 1996
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ANNOUNCING A NEW SYSTEMATIC INVESTMENT PROGRAM MINIMUM
If you are a shareholder purchasing shares of the Smith Barney Natural Resources
Fund Inc. through Smith Barney's Systematic Investment Program on a monthly
basis or if you plan to do so in the future, the minimum and subsequent
investments for Class A, Class B and Class C shares is now $25. If you are
purchasing shares on a quarterly basis, the minimum initial and subsequent
investments for Class A, Class B and Class C shares is $50. Please contact your
Smith Barney Financial Consultant for more information about the Systematic
Investment Program. However, please note that participating in the Systematic
Investment Program does not ensure a profit or protect you against a loss in
declining markets.
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NOTES FROM A VISIT TO SOUTH AFRICA -- NOVEMBER 1996
Recently, one of us had the opportunity to spend a week in South Africa, during
which time meetings were held with numerous mining company managements, union
representatives and government officials. As the following chart shows, a huge
valuation disparity currently exists between South African mining companies and
those in other parts of the world.
<TABLE>
<CAPTION>
Market Value
Per Reserve Price to
October 1996 Ounce Earnings Ratio
----------------------------------------------------
<S> <C> <C>
North America $207 27X
Australia $206 49X
South Africa $43 11X
</TABLE>
Source: Barclays de Zoete Wedd Securities
This valuation disparity results from a number of historical factors, the
primary culprit being the fact that South Africa was a closed society for so
long. Other factors include Byzantine corporate cross-holdings, foreign exchange
controls, historically belligerent labor relations, deep level orebodies, and a
production curve that has declined steeply in the past several years.
In the 1970's, the South African mining industry produced 1,000 tons of gold; in
1996, it will most likely produce about 500 tons (which is still 25% of the
world's total).* As resource investors, we are intrigued by the following
question: Is the South African mining industry in a permanent state of decline,
or is there hope for improved results in the future? If the industry can improve
its results, perhaps these companies can reduce the valuation disparity which
currently exists. In our view, the long-term return potential for select South
African mining companies may be significant.
The numbers in the table above do not even capture the most important difference
in valuation. In South Africa, individual mining companies have traditionally
been restricted from mining in areas other than a single lease area, which
typically coincided with the land held by one or more farms.
Because they were restricted from exploring for gold outside their lease areas,
South African mining companies had limited lives and were valued as wasting
assets by the market. In addition, these companies employed cash basis
accounting for reporting purposes, in which all capital expenditures are written
off against earnings in the year they are undertaken, an accounting system not
used in most other places in the world.
*Source: Gold Fields Minerals Services
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9
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Today, South African mining company managements are aware of the valuation
disparity, and are taking action to reduce the gap. First, these mining
companies are putting together several mines into larger operating companies
with long lives and "blue sky" exploration prospects. Second, these companies
are canceling the management contracts that have placed the parent mining houses
at odds with the shareholders in the individual mines. Lastly, managements are
taking steps to address the productivity issues that have traditionally damaged
the industry's international reputation. In our view, this last step may be the
most important. All of the mines we visited during this trip had begun educating
their workers and had instituted programs to integrate the management ranks on
the mines. In addition, most South African mining companies have undertaken
team-based productivity initiatives that should empower workers to improve their
own productivity, thereby increasing their real wages.
Because labor makes up about 50% of mining costs, increased labor productivity
should have a very beneficial effect on earnings. In addition, because
management and the unions have not been able to agree on a full calendar
operating schedule, most South African mines sit idle roughly 25% of the year.
The gains to the mining companies from full calendar operations and higher labor
productivity would be enormous.
The union leaders we met offered encouragement in this area. In fact, it was
difficult to tell the difference between labor and management's position on this
point. While there are still substantial issues to be worked out, we remain
hopeful that full calendar operations can become a reality for many South
African mining companies in the near future.
The different management groups have embraced the changes required by the new
realities to differing degrees. The Natural Resources Fund has focused on those
companies we believe are leading this change. We think that the Fund's holdings
in the JCI group (including Western Areas), Vaal Reefs, and the Avgold Group
(Target, ET Consolidated, Hartebeestfontein, Sun and Lorraine) fit this
description.
The Fund's large holdings in Western Areas and Avgold have another common
thread. Both companies have orebodies that are unique in the South African
industry. These orebodies are wider than those being mined by the rest of the
industry, and are therefore amenable to low-cost, mechanized mining. Several
North American mining companies have expressed an interest in entering the South
African industry. We believe that these two orebodies, because they may permit
mechanized mining, are the most likely vehicles for that investment.
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10
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================================================================================
Historical Performance -- Class A Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===========================================================================================
<S> <C> <C> <C> <C> <C> <C>
10/31/96 $16.50 $22.95 $0.00 $0.00 $0.00 39.09%
- -------------------------------------------------------------------------------------------
10/31/95 21.44 16.50 0.00 0.00 0.00 (23.04)
- -------------------------------------------------------------------------------------------
10/31/94 18.89 21.44 0.00 0.00 0.00 13.50
- -------------------------------------------------------------------------------------------
10/31/93 13.27 18.89 0.00 0.00 0.00 42.35
- -------------------------------------------------------------------------------------------
10/31/92 13.93 13.27 0.06 0.00 0.03 (4.09)
- -------------------------------------------------------------------------------------------
10/31/91 13.63 13.93 0.00 0.00 0.00 2.20
- -------------------------------------------------------------------------------------------
10/31/90 16.96 13.63 0.21 0.00 0.11 (18.18)
- -------------------------------------------------------------------------------------------
10/31/89 16.43 16.96 0.00 0.00 0.00 3.23
- -------------------------------------------------------------------------------------------
10/31/88 18.58 16.43 0.00 0.90 0.00 (7.56)
- -------------------------------------------------------------------------------------------
Inception*-10/31/87 15.20 18.58 0.00 0.00 0.00 22.24+
===========================================================================================
Total $0.27 $0.90 $0.14
===========================================================================================
</TABLE>
================================================================================
Historical Performance -- Class B Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===========================================================================================
<S> <C> <C> <C> <C> <C> <C>
10/31/96 $16.15 $22.32 $0.00 $0.00 $0.00 38.20%
- -------------------------------------------------------------------------------------------
10/31/95 21.14 16.15 0.00 0.00 0.00 (23.60)
- -------------------------------------------------------------------------------------------
10/31/94 18.75 21.14 0.00 0.00 0.00 12.75
- -------------------------------------------------------------------------------------------
Inception*-10/31/93 13.35 18.75 0.00 0.00 0.00 40.45+
===========================================================================================
Total $0.00 $0.00 $0.00
===========================================================================================
</TABLE>
================================================================================
Historical Performance -- Class C Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===========================================================================================
<S> <C> <C> <C> <C> <C> <C>
10/31/96 $16.16 $22.32 $0.00 $0.00 $0.00 38.12%
- -------------------------------------------------------------------------------------------
Inception*-10/31/95 20.63 16.16 0.00 0.00 0.00 (21.67)+
===========================================================================================
Total $0.00 $0.00 $0.00
===========================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS AND CAPITAL GAINS, IF ANY,
ANNUALLY.
11
<PAGE>
================================================================================
Average Annual Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
---------------------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Year Ended 10/31/96 39.09% 38.20% 38.12%
- --------------------------------------------------------------------------------
Five Years Ended 10/31/96 10.65 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 10/31/96 4.96 13.76 4.05
================================================================================
<CAPTION>
With Sales Charge(2)
---------------------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Year Ended 10/31/96 32.12% 33.20% 37.12%
- --------------------------------------------------------------------------------
Five Years Ended 10/31/96 9.53 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 10/31/96 4.42 13.42 4.05
================================================================================
</TABLE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
================================================================================
<S> <C>
Class A (Inception* through 10/31/96) 61.78%
- --------------------------------------------------------------------------------
Class B (Inception* through 10/31/96) 67.19
- --------------------------------------------------------------------------------
Class C (Inception* through 10/31/96) 8.19
================================================================================
</TABLE>
(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 and C shares are November 24, 1986, November
6, 1992 and November 7, 1994, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
12
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================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of
the Smith Barney Natural Resources Fund Inc.
vs. MSCI World Index and Standard & Poor's 500 Index+
- --------------------------------------------------------------------------------
November 1986 -- October 1996
[GRAPHIC]
<TABLE>
<CAPTION>
Date Standard & Poor's 500 Index Smith Barney Natural Resources Fund Inc. MSCI World Index
- ---- --------------------------- ---------------------------------------- ----------------
<S> <C> <C> <C>
11/24/86 $ 9,500 $10,000 $10,000
10/87 11,613 12,195 10,640
10/88 10,735 14,737 12,210
10/89 11,081 16,803 15,428
10/90 9,066 14,993 14,273
10/91 9,266 17,456 19,043
10/92 8,886 16,640 20,937
10/93 12,650 21,248 24,058
10/94 14,358 22,983 24,988
10/95 11,049 25,288 31,587
10/31/96 15,369 29,545 39,196
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares at
inception on November 24, 1986, assuming deduction of the maximum 5.00%
sales charge at the time of investment and the reinvestment of dividends
and capital gains, if any, at net asset value through October 31, 1996. The
Morgan Stanley Capital International World Index is an arithmetical average
weighted by the market value performance of 1,468 securities listed on the
stock exchanges of the USA, Europe, Canada, Australia, New Zealand and the
Far East. 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 the
reinvestment of dividends. The indexes are unmanaged and not subject to the
same management and trading expenses of 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 the other
classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption values may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
13
<PAGE>
================================================================================
Portfolio Highlights (unaudited) October 31, 1996
================================================================================
Portfolio Breakdown
[GRAPHIC]
<TABLE>
<S> <C>
Other Investments 13.1%
Singapore 1.7%
Canada 5.1%
Australia 10.8%
United Kingdom 1.2%
United States 60.6%
South Africa 5.4%
Spain 0.7%
Ghana 1.4%
</TABLE>
Top Ten Common Stock Holdings
<TABLE>
<CAPTION>
Percentage of
Total Investments
================================================================
<S> <C>
Golden Star Resources Ltd. 2.9%
Reynolds Metals Co. 2.8
Titanium Metals Corp. 2.7
Agrium Inc. 2.6
Western Areas Gold Mining Co. Ltd. 2.5
Snyder Oil Corp. 2.3
General Chemicals Group Inc. 2.0
Schnitzer Steel Industries Inc. 2.0
Homestake Mining Co. 1.9
BJ Services Co. 1.9
</TABLE>
14
<PAGE>
================================================================================
Schedule of Investments October 31, 1996
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
STOCKS -- 86.9%
Australia -- 10.8%
6,800,000 Anzoil NL+ $ 755,028
800,000 Aurora Gold Ltd.+ 1,522,746
1,500,000 Command Petroleum Ltd.+ 1,344,299
366,300 Emperor Mines Ltd.+ 697,227
761,200 Goldfields Ltd.+ 1,557,560
1,500,000 Kimberly Diamond Co. NL+ 321,204
1,000,000 Meekatharra Minerals Ltd. + 539,306
1,971,077 Normandy Mining Ltd. 2,688,799
212,212 Normandy Mining Ltd. Warrants, Expire 4/30/01+ 76,579
415,000 Orogen Minerals Ltd. GDR+ +++ 657,236
299,600 Ranger Minerals NL+ 997,970
1,123,412 Savage Resources Ltd. 1,113,718
400,000 Sons of Gwalia NL 2,585,496
2,116,666 Tanami Gold NL+ 587,552
- --------------------------------------------------------------------------------
15,444,720
- --------------------------------------------------------------------------------
Canada -- 5.1%
125,000 Avenor Inc. 2,143,763
300,000 Ecuadorian Minerals Corp.+ 335,545
483,100 El Callao Mining Corp.+ 630,397
25,900 Gold Reserve Corp.+ 304,173
150,000 Gran Colombia Resources Inc. + 212,512
25,000 Guyanor Ressources S.A. + 242,338
71,500 Harmac Pacific Inc.+ 653,102
200,000 Ourominas Minerals Inc.+ 648,722
100,000 Ourominas Minerals Inc. Warrants, Expire 8/8/97+ 137,947
750,000 Nelson Gold Corp.+ 385,878
680,600 Pan African Resources Corp.+ 532,869
125,000 Philex Gold Inc.+ +++ 1,001,976
1,013,500 Reclamation Management Ltd.+ 45,344
- --------------------------------------------------------------------------------
7,274,566
- --------------------------------------------------------------------------------
Ghana -- 1.4%
120,000 Ashanti Goldfields Co. Ltd. GDR 1,965,000
- --------------------------------------------------------------------------------
Singapore -- 1.7%
500,000 Far East Levingston Shipbuilding Ltd. 2,416,607
- --------------------------------------------------------------------------------
South Africa -- 5.4%
271,600 Eastern Transvaal Consolidated Mines Ltd. 341,453
64,000 Free State Consolidated Gold Mines Ltd. 559,130
151,300 Free State Consolidated Gold Mines Ltd. ADR 1,342,787
82,300 Hartebeestfontein Gold Mining Co. Ltd. 210,441
14,400 Loraine Gold Mines Ltd.+ 44,798
17,500 Target Exploration Co. Ltd.+ 50,341
11,000 Vaal Reefs Exploration & Mining Co. Ltd. 855,530
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
================================================================================
Schedule of Investments (continued) October 31, 1996
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
South Africa -- 5.4% (continued)
100,000 Vaal Reefs Exploration & Mining Co. Ltd. ADR $ 768,750
233,541 Western Areas Gold Mining Co. Ltd. 3,607,868
- --------------------------------------------------------------------------------
7,781,098
- --------------------------------------------------------------------------------
Spain -- 0.7%
130,000 Asturiana de Zinc S.A.+ 1,019,807
- --------------------------------------------------------------------------------
United Kingdom -- 1.2%
1,450,000 Kenmare Resources PLC 702,450
4,270 Lonrho PLC 10,395
325,000 Philippine Gold PLC+ 979,075
100,000 Reunion Mining PLC Warrants, Expire 4/1/97+@ 0
- --------------------------------------------------------------------------------
1,691,920
- --------------------------------------------------------------------------------
United States -- 60.6%
181,000 Abacan Resource Corp.+ 1,380,125
275,000 Agrium Inc. 3,678,125
30,000 Aluminum Co. of America 1,758,750
80,000 Alyn Corp.+ 1,100,000
122,900 American Exploration Co.+ 1,597,700
224,000 Asia Pacific Resources International Holdings Ltd.+ 1,232,000
60,000 BJ Services Co.+ 2,692,500
50,000 Bowater Inc. 1,768,750
100,000 Buckeye Cellulose Corp.+ 2,612,500
50,000 Burlington Resources, Inc.# 2,518,750
54,000 Champion International Corp. 2,349,000
50,000 Commonwealth Aluminum Corp. 787,500
84,000 Crompton & Knowles Corp. 1,512,000
200,000 Crown Resource Corp.+ 1,175,000
100,000 Cyprus Amax Minerals Co. 2,262,500
40,000 Dresser Industries, Inc. 1,315,000
30,000 Enron Corp. 1,395,000
200,000 Enserch Exploration Inc.+ 1,975,000
150,000 General Chemicals Group Inc. 2,850,000
70,000 GeoScience Corp.+ 752,500
225,000 Golden Star Resources Ltd.+ 4,190,625
100,000 Gradall Industries, Inc.+ 1,087,500
300,000 Grant Geophysical, Inc.+ 421,875
135,000 Hecla Mining Co.+ 759,375
190,451 Homestake Mining Co. 2,713,926
65,000 International Specialty Products Inc.+ 706,875
40,300 Leucadia National Corp. 952,088
80,000 Longview Fibre Co. 1,390,000
53,300 Mitchell Energy & Development Corp., Class A Shares 1,052,675
96,700 Mitchell Energy & Development Corp., Class B Shares 2,006,525
30,000 Newmont Mining Corp. 1,387,500
100,000 Noble Drilling Corp.+ 1,862,500
135,000 Oryx Energy Co.+ 2,598,750
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
================================================================================
Schedule of Investments (continued) October 31, 1996
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
United States -- 60.6% (continued)
70,000 Reynolds Metals Co. $ 3,937,500
105,000 Schnitzer Steel Industries Inc. 2,795,625
212,500 Snyder Oil Corp. 3,240,625
84,000 Stillwater Mining Co. 1,449,000
125,000 Stone Container Corp. 1,906,250
50,000 Tech-Sym Corp.+ 1,343,750
125,000 Titanium Metals Corp.+ 3,843,750
85,000 Ultramar Corp.+ 2,433,125
175,000 USX-Delhi Group 2,296,875
35,000 Valero Energy Corp. 831,250
50,000 Weatherford Enterra, Inc.+ 1,450,000
125,000 Del Webb Corp. 2,000,000
125,000 Willbros Group, Inc.+ 1,171,875
- --------------------------------------------------------------------------------
86,542,539
- --------------------------------------------------------------------------------
TOTAL STOCKS
(Cost -- $111,120,986) 124,136,257
================================================================================
PUTOPTION -- 0.1%
60,000 Golden Star Resources, Put @ $15, Expire 1/18/97
(Cost -- $98,050) 67,500
================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<S> <C> <C>
CONVERTIBLE NOTE -- 0.1%
$ 200,000 Stillwater Mining Co., 7.00%
due 5/1/03+++ (Cost -- $200,000) 193,000
================================================================================
EXCHANGEABLE DEBENTURE -- 0.2%
379,800 Atlas Corp., 7.00% due 12/5/00 (Cost -- $336,978) 341,820
================================================================================
SUB-TOTAL INVESTMENTS
(Cost -- $111,756,014) 124,738,577
================================================================================
REPURCHASE AGREEMENT -- 12.7%
18,139,000 CS First Boston Corp., 5.47% due 11/1/96;
Proceeds at maturity -- $18,141,756; (Fully
collateralized by U.S. Treasury Bill due 3/27/97;
Market value -- $18,511,432) (Cost -- $18,139,000) 18,139,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $129,895,014*) $142,877,577
================================================================================
</TABLE>
+ Non-income producing security.
+++ Security exempt from registration under Rule144A of the Securities Act of
1933. These securities may be resold in transactions that are exempt from
registration, generally to qualified institutional buyers.
# Security segregated by Custodian to cover written call options.
@ Restricted security (See Note 10).
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
17
<PAGE>
================================================================================
Statement of Assets and Liabilities October 31, 1996
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $111,756,014) $124,738,577
Repurchase agreement (Cost -- $18,139,000) 18,139,000
Foreign currency (Cost -- $1,344,894) 1,325,131
Receivable for Fund shares sold 507,893
Receivable for securities sold 61,004
Dividends and interest receivable 10,673
- --------------------------------------------------------------------------------
Total Assets 144,782,278
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares purchased 6,772,044
Payable for securities purchased 5,268,430
Options written (Note 5) 400,000
Management fees payable 84,018
Distribution fees payable 37,203
Payable for open forward foreign currency contracts (Note 6) 10,644
Payable to bank 4,466
Accrued expenses and other liabilities 113,960
- --------------------------------------------------------------------------------
Total Liabilities 12,690,765
- --------------------------------------------------------------------------------
Total Net Assets $132,091,513
================================================================================
NET ASSETS:
Par value of capital shares $ 5,856
Capital paid in excess of par value 130,772,433
Accumulated net investment income 969,082
Accumulated net realized loss from security transactions,
options and foreign currencies (12,330,425)
Net unrealized appreciation of investments, options and
foreign currencies 12,674,567
- --------------------------------------------------------------------------------
Total Net Assets $132,091,513
================================================================================
Shares Outstanding:
Class A 2,201,056
------------------------------------------------------------------------------
Class B 3,314,188
------------------------------------------------------------------------------
Class C 340,531
------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $22.95
------------------------------------------------------------------------------
Class B* $22.32
------------------------------------------------------------------------------
Class C** $22.32
------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $24.16
================================================================================
</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.
18
<PAGE>
================================================================================
Statement of Operations For the Year Ended October 31, 1996
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends $ 1,077,453
Interest 796,977
Less: Foreign withholding tax (28,824)
Interest expense (221,703)
- --------------------------------------------------------------------------------
Total Investment Income 1,623,903
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 763,626
Distribution fees (Note 2) 665,205
Shareholder and system servicing fees 224,618
Registration fees 112,016
Custody 80,895
Shareholder communications 54,316
Audit and legal 48,286
Directors' fees 31,250
Other 7,075
- --------------------------------------------------------------------------------
Total Expenses 1,987,287
- --------------------------------------------------------------------------------
Net Investment Loss (363,384)
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS,
OPTIONS AND FOREIGN CURRENCIES (NOTES 3, 5 AND 6):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 13,906,774
Options written 70,516
Foreign currency transactions (457,262)
- --------------------------------------------------------------------------------
Net Realized Gain 13,520,028
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of
Investments, Options and Foreign Currencies:
Beginning of year 482,865
End of year 12,674,567
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 12,191,702
- --------------------------------------------------------------------------------
Net Gain on Investments, Options and Foreign Currencies 25,711,730
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $25,348,346
================================================================================
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
================================================================================
Statements of Changes in Net Assets For the Years Ended October 31,
================================================================================
<TABLE>
<CAPTION>
1996 1995
========================================================================================
<S> <C> <C>
OPERATIONS:
Net investment loss $ (363,384) $ (455,937)
Net realized gain 13,520,028 3,103,162
Increase (decrease) in net unrealized appreciation 12,191,702 (18,931,243)
- ----------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations 25,348,346 (16,284,018)
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- --
- ----------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders -- --
- ----------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 11):
Net proceeds from sale of shares 544,169,046 490,041,739
Net asset value of shares issued for
reinvestment of dividends -- --
Cost of shares reacquired (491,629,316) (498,628,547)
- ----------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions 52,539,730 (8,586,808)
- ----------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 77,888,076 (24,870,826)
NET ASSETS:
Beginning of year 54,203,437 79,074,263
- ----------------------------------------------------------------------------------------
End of year* $ 132,091,513 $ 54,203,437
========================================================================================
* Includes accumulated net investment income (loss) of: $ 969,082 $ (820,799)
========================================================================================
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Natural Resources Fund Inc. ("Fund"), a Maryland corporation,
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company.
The significant accounting policies followed by the Fund are: (a) security
transactions are accounted for on trade date; (b) securities traded in national
securities markets are valued at the closing prices in the primary exchange on
which they are traded; securities listed or traded on certain foreign exchanges
or other markets whose operations are similar to the U.S. over-the-counter
market (including securities listed on exchanges where the primary market is
believed to be over-the-counter) and listed securities for which no sale was
reported on that date are valued at the mean between the bid and ask prices.
Securities which are listed or traded on more than one exchange or market are
valued at the quotations on the exchange or market determined to be the primary
market for such securities. Gold bullion is valued at the daily London afternoon
fixing; (c) securities maturing within 60 days are valued at cost plus accreted
discount, or minus amortized premium, which approximates market value; (d) the
accounting records of the Portfolio 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 and expense
amounts recorded and collected or paid are adjusted when reported by the
custodian; (e) interest income, adjusted for amortization of premium and
accretion of discount, is recorded on the accrual basis; (f) 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; (g)
dividends and distributions to shareholders are recorded on the ex-dividend
date; (h) gains or losses on the sale of securities are calculated by using the
specific identification method; (i) direct expenses are charged to each class;
management fees and general expenses are allocated on the basis of relative net
assets; (j) 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. At October 31, 1996, 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.
Accordingly, a portion of accumulated realized losses amounting to $1,209,130
was reclassified to paid-in capital. Net investment income, net
21
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
realized gains and net assets were not affected by this change; (k) the Fund
intends to comply with the requirements 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; 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, the Fund may enter into forward exchange contracts in order to
hedge against foreign currency risk. These contracts are marked-to-market daily,
by recognizing the difference between the contract exchange rate and the current
market rate as an unrealized gain or loss. Realized gains or losses are
recognized when contracts are settled.
2. MANAGEMENT AGREEMENT AND OTHER TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment manager to the Fund. The Fund
pays SBMFM a management fee calculated at an annual rate of 0.75% 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
the Fund's shares. For the year ended October 31, 1996, SB received sales
charges of $500,000 on sales of the Fund's Class A shares.
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. In addition, 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 October 31,
1996, CDSCs paid to SB were approximately:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
CDSCs $1,000 $109,000 $10,000
================================================================================
</TABLE>
22
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
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 an annual rate of 0.75% of
the average daily net assets for each class, respectively. For the year ended
October 31, 1996, total Distribution Plan fees incurred were:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $111,199 $511,268 $42,738
================================================================================
</TABLE>
All officers and one Director of the Fund are employees of SB.
3. INVESTMENTS
During the year ended October 31, 1996, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Purchases $150,723,960
- --------------------------------------------------------------------------------
Sales 106,961,975
================================================================================
</TABLE>
At October 31, 1996, aggregate gross unrealized appreciation and
depreciation of investments were as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $17,315,157 *
Gross unrealized depreciation (4,332,594)*
- --------------------------------------------------------------------------------
Net unrealized appreciation $12,982,563 *
================================================================================
</TABLE>
* Substantially the same for Federal income tax purposes.
4. 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 transaction and
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.
23
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
At October 31, 1996, there were no open futures contracts.
5. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily and are included in the schedule
of investments. When a purchased option expires, the Fund will realize a loss in
the amount of the premium paid. When the Fund enters into a closing sales
transaction, the Fund will realize a gain or loss depending on whether the
proceeds from the closing sales transaction are greater or less than the premium
paid for the option. When the Fund exercises a put option, it will realize a
gain or loss from the sale of the underlying security and the proceeds from such
sale will be decreased by the premium originally paid. When the Fund exercises a
call option, the cost of the security which the Fund purchases upon exercise
will be increased by the premium originally paid.
As of October 31, 1996, the Fund held one purchase put option with a total
cost of $98,050.
When a Fund writes a 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 written 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 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 loss if the market price of the underlying
security declines.
24
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
The following covered call option transactions occurred during the year
ended October 31, 1996:
<TABLE>
<CAPTION>
Number of
Premium Contracts
================================================================================
<S> <C> <C>
Options written, outstanding at October 31, 1995 $ 0 0
Options written during the year ended October 31, 1996 228,497 870
Options exercised (101,877) (370)
- --------------------------------------------------------------------------------
Options written, outstanding at October 31, 1996 $126,620 500
================================================================================
</TABLE>
The following represents the covered call option written contracts as of
October 31, 1996:
<TABLE>
<CAPTION>
Number of Strike
Contracts Expiration Price Value
================================================================================
<S> <C> <C> <C> <C>
Covered Call Options Written
500 Burlington Resources, Inc.
(Premiums received-- $126,620) 11/16/96 $42.50 $400,000
================================================================================
</TABLE>
6. FORWARD FOREIGN CURRENCY CONTRACTS
At October 31, 1996, the Fund had open forward foreign currency contracts
as described below. The Fund bears the market risk that arises from changes in
foreign currency exchange rates. The unrealized loss on the contracts reflected
in the accompanying financial statements are as follows:
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Loss
================================================================================
<S> <C> <C> <C> <C>
To Sell:
Australian Dollar 39,350 $ 31,207 11/1/96 $ (160)
Australian Dollar 40,163 31,845 11/6/96 (177)
Spanish Peseta 116,253,000 909,167 1/13/97 (9,167)
- ------------------------------------------------------------------------------
(9,504)
- ------------------------------------------------------------------------------
To Buy:
South African Rand 1,628,263 346,408 11/5/96 (1,140)
- ------------------------------------------------------------------------------
Total Unrealized Loss on Forward
Foreign Currency Contracts $(10,644)
==============================================================================
</TABLE>
25
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
7. 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.
8. FUND CONCENTRATION OF RISK
The Fund's investments in foreign securities may involve risks not present
in domestic investments. Since securities may be denominated in a foreign
currency and may require settlement in foreign currencies and pay interest or
dividends in foreign currencies, changes in the relationship of these foreign
currencies to the U.S. Dollar can significantly affect the value of these
investments and earnings of the Fund. Foreign investments may also subject the
Fund to foreign government exchange restrictions, expropriation, taxation or
other political, social or economic developments, all of which could affect the
market and/or credit risk of the investments.
In addition to the risks described above, risks may arise from forward
foreign currency contracts with respect to the potential inability of
counterparties to meet the terms of their contracts.
The Fund also intends to invest at least 65% of its assets in natural
resource-related investments. As a result of this concentration policy, which is
a fundamental policy of the Fund, the Fund's investment may be subject to
greater risk and market fluctuation than a fund that invests in securities
representing a broader range of investment alternatives. Historically, stock
prices of companies involved in natural resource-related industries have been
volatile.
9. CAPITAL LOSS CARRYFORWARD
At October 31, 1996, the Fund had, for Federal income tax purposes,
approximately $11,968,000 of capital loss carryforwards available to offset any
future realized capital gains. To the extent that these carryforward losses are
used to offset capital gains, it is probable that the gains so offset will not
be distributed. The amount and year of the expiration for each carryforward loss
is indicated below.
<TABLE>
<CAPTION>
10/31/98 10/31/99 10/31/00
================================================================================
<S> <C> <C> <C>
Carryforward Amounts $3,460,000 $7,188,000 $1,320,000
================================================================================
</TABLE>
26
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
10. RESTRICTED SECURITY
The Fund's investment in the following security is restricted as to resale
and is valued under the direction of the Fund's Board of Directors in good
faith, at fair value, taking into consideration the appropriate economic,
financial and other pertinent available information pertaining to the restricted
security. At October 31, 1996, the Fund held the following restricted security:
<TABLE>
<CAPTION>
Value Percentage
Aquisition Per Fair of Total
Security Date Shares Unit Value Net Assets Cost
=====================================================================================
<S> <C> <C> <C> <C> <C> <C>
Reunion Mining PLC
Warrants, Expire 4/1/97 10/26/94 100,000 $0.00 $0 0.00% $0
=====================================================================================
</TABLE>
11. CAPITAL SHARES
At October 31, 1996, the Fund had three billion shares of capital stock
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 in the Fund and has the same rights, except that each class bears
certain expenses specifically related to the distribution of its shares.
At October 31, 1996, total paid-in capital amounted to the following for
each class:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Total Paid-in Capital $63,156,297 $60,703,015 $6,918,977
================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1996 October 31, 1995*
---------------------------- ----------------------------
Shares Amount Shares Amount
==========================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 19,586,022 $ 402,810,122 20,611,514 $ 379,301,425
Shares redeemed (19,074,759) (393,472,638) (20,851,338) (384,748,072)
- ------------------------------------------------------------------------------------------
Net Increase (Decrease) 511,263 $ 9,337,484 (239,824) $ (5,446,647)
==========================================================================================
Class B
Shares sold 6,446,926 $ 130,177,104 5,952,309 $ 107,496,241
Shares redeemed (4,726,657) (93,497,561) (6,141,956) (111,234,263)
- ------------------------------------------------------------------------------------------
Net Increase (Decrease) 1,720,269 $ 36,679,543 (189,647) $ (3,738,022)
==========================================================================================
Class C
Shares sold 533,568 $ 11,181,820 179,087 $ 3,244,073
Shares redeemed (228,398) (4,659,117) (143,726) (2,646,212)
- ------------------------------------------------------------------------------------------
Net Increase 305,170 $ 6,522,703 35,361 $ 597,861
==========================================================================================
</TABLE>
* For Class C shares, transactions are for the period from November 7, 1994
(inception date) to October 31, 1995.
27
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares 1996(1) 1995 1994 1993 1992
===================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $16.50 $21.44 $18.89 $13.27 $13.93
- -------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss) 0.08 (0.23)* (0.06) (0.02) (0.10)
Net realized and unrealized gain (loss) 6.37 (4.71) 2.61 5.64 (0.47)
- -------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 6.45 (4.94) 2.55 5.62 (0.57)
- -------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- -- (0.06)
Capital -- -- -- -- (0.03)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions -- -- -- -- (0.09)
- -------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $22.95 $16.50 $21.44 $18.89 $13.27
- -------------------------------------------------------------------------------------------------------------------
Total Return 39.09% (23.04)% 13.50% 42.35% (4.09)%
- -------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $50,521 $27,884 $41,370 $20,097 $14,138
- -------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.62% 1.99% 1.81% 2.17% 2.85%
Net investment income (loss) 0.15 (1.46) (0.34) (0.14) (0.76)
- -------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 120% 40% 50% 108% 58%
- -------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(2) $0.02 $0.02 -- -- --
===================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed net investment income method does not
accord with results of operations.
(2) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
* Includes realized gains and losses from foreign currency transactions.
28
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class B Shares 1996(1) 1995 1994 1993(2)
========================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $16.15 $21.14 $18.75 $13.35
- --------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.09) (0.22)* (0.33) (0.15)
Net realized and unrealized gain (loss) 6.26 (4.77) 2.72 5.55
- --------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 6.17 (4.99) 2.39 5.40
- --------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- --
- --------------------------------------------------------------------------------------------------------
Total Distributions -- -- -- --
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $22.32 $16.15 $21.14 $18.75
- --------------------------------------------------------------------------------------------------------
Total Return 38.20% (23.60)% 12.75% 40.45%+++
- --------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $73,969 $25,747 $37,704 $40,895
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 2.29% 2.62% 2.54% 2.98%+
Net investment loss (0.83) (2.11) (1.06) (0.96)+
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 120% 40% 50% 108%
- --------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $0.02 $0.02 -- --
========================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed net investment income method does not
accord with results of operations.
(2) For the period from November 6, 1992 (inception date) to October 31, 1993.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
* Includes realized gains and losses from foreign currency transactions.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
29
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares 1996(1) 1995(2)
==============================================================================
<S> <C> <C>
Net Asset Value, Beginning of Year $16.16 $20.63
- -------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss) 0.05 (0.29)*
Net realized and unrealized gain (loss) 6.11 (4.18)
- -------------------------------------------------------------------------------
Total Income (Loss) From Operations 6.16 (4.47)
- -------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- --
- -------------------------------------------------------------------------------
Total Distributions -- --
- -------------------------------------------------------------------------------
Net Asset Value, End of Year $22.32 $16.16
- -------------------------------------------------------------------------------
Total Return 38.12% (21.67)%+++
- -------------------------------------------------------------------------------
Net Assets, End of Year (000s) $7,602 $572
- -------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 2.25% 2.69%+
Net investment loss (0.21) (1.97)+
- -------------------------------------------------------------------------------
Portfolio Turnover Rate 120% 40%
- -------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $0.02 $0.02
===============================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed net investment income method does not
accord with results of operations.
(2) For the period from November 7, 1994 (inception date) to October 31, 1995.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
* Includes realized gains and losses from foreign currency transactions.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
30
<PAGE>
================================================================================
Independent Auditors' Report
================================================================================
The Shareholders and Board of Directors of
Smith Barney Natural Resources Fund Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Smith Barney Natural Resources Fund
Inc. as of October 31, 1996, 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 October 31, 1994
were audited by other auditors whose report thereon, dated December 29, 1994,
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
October 31, 1996, 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 Natural Resources Fund Inc. as of October 31, 1996, 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.
/s/ KPMG PEAT MARWICK LLP
New York, New York
December 19, 1996
31
<PAGE>
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<PAGE>
SMITH BARNEY
NATURAL RESOURCES
FUND INC.
DIRECTORS
Herbert Barg
Alfred J. Bianchetti
Martin Brody
Dwight B. Crane
Burt N. Dorsett
Elliot S. Jaffe
Stephen E. Kaufman
Joseph J. McCann
Heath B. McLendon, Chairman
Cornelius C. Rose, Jr.
OFFICERS
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
John Goode
Vice President and
Investment Officer
David Stadlin
Investment Officer
Irving P. David
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
- ---------------------------------
A Member of TravelersGroup [LOGO]
INVESTMENT ADVISER
AND ADMINISTRATOR
Smith Barney Mutual Funds
Management Inc.
DISTRIBUTOR
Smith Barney Inc.
CUSTODIAN
The Bank of New York
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 Natural Resources Fund
Inc. 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
NATURAL RESOURCES
FUND INC.
388 Greenwich Street
New York, New York 10013
FD0299 12/96
