<PAGE>
[GRAPHIC]
Smith Barney
Natural
Resources
Fund Inc.
- ----------------
ANNUAL REPORT
- ----------------
October 31, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(R)
<PAGE>
[PHOTO] [PHOTO]
Smith Barney Heath B. John G.
Natural Resources McLendon Goode
Fund Inc.
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Natural
Resources Fund Inc. ("Fund") for the year ended October 31, 1998. In this report
we have summarized the period's prevailing economic and market conditions and
outlined the Fund's investment strategy. A detailed summary of performance and
current holdings can be found in the appropriate sections that follow.
Performance Update
The Natural Resources Fund seeks long-term capital appreciation by investing
primarily in natural resource investments. For the year ended October 31, 1998,
the Fund posted a negative total return of 28.13% for Class A shares. In
comparison, the Fund's Lipper Analytical Services, Inc. peer group generated a
negative total return of 26.60% for the same period. (Lipper is a major fund
tracking organization.)
A Specialty Series Fund
The Natural Resources Fund is part of the Specialty Series of Smith Barney
Mutual Funds. Specialty Series mutual funds explore opportunities in a narrower
sector of the market or by using a narrower investment focus.
Economic and Market Update
All natural resources funds have been challenged so far in 1998 by the bear
market in the natural resources industry caused, in our view, primarily by
economic crises in developing markets around the world. The crises started with
the collapse of the Thai baht in July of 1997 and spread quickly from there to
Indonesia, Singapore, Taiwan, Malaysia and Hong Kong. China and Japan did not
experience currency crises, but their economies were affected by the region's
chaos. By early this year, fears of similar turmoil spread to all of the world's
regions including South America, the former Soviet Union, etc., and even the
developed nations in North America and Europe.
- --------------------------------------------------------------------------------
Smith Barney Natural Resources Fund Inc. 1
<PAGE>
Investors correctly perceived these events as negative for the natural resource
industry, which depend on economic activity for growth in demand. In fact,
virtually every natural resource industry has been involved in a bear market
since the Asian crisis began in earnest last October. Yet, the downdraft reached
what appears to be a climactic end in August, with resource stocks down 50%-70%,
and in many cases selling at valuation levels not seen in the last fifteen
years.
In response to the poor performance of natural resource stocks and because we
thought this mediocre performance would continue, we raised the Fund's cash
position to 35% and held this cash position throughout August. In September,
with many natural resource stocks selling at very low historic levels, we became
fully invested. Raising such large levels of cash has not been how we have
normally managed the Fund in the past. Yet, even the most casual observer would
admit that this past year has not been a "normal" one for natural resources.
Since the end of August, natural resource stocks have performed better, and the
Fund has rebounded as well. Since its low of $13.76 per share on August 31,
1998, the Fund's net asset value ("NAV") has increased by 20.35% to $16.56 on
October 31, 1998 for Class A shares. As we will discuss in the next section of
this letter, we think that natural resource stocks have reached a major cyclical
bottom, and are likely to experience better performance over the next 12 to 18
months.
We are committed to finding the companies that we believe are the best
positioned to benefit from the eventual upturn. In some cases, that may mean the
largest companies in a particular industry. In other cases, it may involve
smaller-sized companies that are well-positioned to succeed in a specific market
niche. In all cases, it will involve buying these companies at historically low
valuations. The current market environment offers great opportunities in this
regard.
Market Outlook
During the reporting period, many natural resource stocks reached valuation
levels not seen since the recessions of 1981-1982 or 1990-1992. Many stocks in
the group are currently trading at or below book value, and many have dividend
yields of 4% to 5% or more, compared with an average yield of roughly 1.5% for
the S&P 500 as of the end of October.
While the immediate future is always difficult to predict, we think these
valuation levels offer an attractive starting point for long-term investors who
are interested in the opportunities presented by natural resource industries. In
our opinion, as the world's economies eventually recover from the shocks of the
past year, growth should reaccelerate in many parts of the world. When this
happens, natural resource stocks should have tremendous earnings leverage.
- --------------------------------------------------------------------------------
2 1998 Annual Report to Shareholders
<PAGE>
A section follows on page four entitled "Opportunities in the Paper Industry"
where we discuss in greater detail why we think select paper company stocks are
attractive.
The last year has been a difficult one for the Fund. Yet, we are convinced that
the worst may be behind us and that patient long-term investors who seek capital
appreciation and who can tolerate significant short-term volatility should
ultimately be rewarded. We encourage you to visit our improved Web site at
www.smithbarney.com. Thank you for your investment in the Smith Barney Natural
Resources Fund. We look forward to helping you pursue your investment goals in
the years ahead.
Sincerely,
/s/ Heath B. McLendon /s/ John G. Goode
Heath B. McLendon John G. Goode
Chairman Vice President and
Investment Officer
November 23, 1998
- --------------------------------------------------------------------------------
Smith Barney Natural Resources Fund Inc. 3
<PAGE>
Opportunities in the Paper Industry
One of the more interesting developments in the natural resource industries
lately has been the voluntary and involuntary reduction of capital spending that
is occurring virtually across the board. In the developed countries, capital
expenditures are being reduced because of lower cash flows, and also because
many managers have become more focused on improving the returns on the capital
employed in their business. In the developing world, where many investments
over the last several years may have been made with little regard to the returns
they would generate, the events of the past year are forcing similar spending
cuts.
We think that these spending cuts are the seeds from which the next industry
upturns will sprout. Demand in many of these industries grows steadily over time
- -- supply growth is the variable that changes substantially throughout the
business cycle. The next time demand recovers it will meet less new supply in
many industries than has been the case in previous economic recoveries. This
should make for powerful improvements in profitability in these industries.
Nowhere is this more true than in the paper industry, which is very capital
intensive. In the last two years, we have seen significant consolidation within
this industry, creating the possibility of capacity reduction in several paper
grades. In addition, one of the byproducts of the Asian crisis has been the
cancellation of numerous projects scheduled to be built in the region. Over the
next two years, the paper industry is planning to add less new papermaking
capacity than at any time since the 1940s.
Paper stocks tend to trade in anticipation of announced price changes.
Currently, prices are weak, and they may head lower in the next few months.
However, if demand stabilizes, we expect the conditions described above to cause
prices to reach bottom levels relatively soon and go higher thereafter.
We believe that paper stocks, having reached valuation levels similar to those
last seen in the recession of 1990-1992, offer attractive risk/reward tradeoffs.
As of October 31, 1998, the Fund holds roughly a 14% position in the paper
industry, and will likely use any sell off in the group to add to our position.
The Fund's largest paper industry holdings at the present time are Georgia
Pacific Corporation, Weyerhauser Corporation, Union Camp Corporation, Champion
International and Jefferson Smurfit Corporation.
- --------------------------------------------------------------------------------
4 1998 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Historical Performance -- Class A Shares
================================================================================
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>
10/31/98 $23.23 $16.56 $0.00 $0.16 $0.00 (28.13)%
- ---------------------------------------------------------------------------------------
10/31/97 22.95 23.23 0.33 0.00 0.00 2.67
- ---------------------------------------------------------------------------------------
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
=======================================================================================
Total $0.60 $0.16 $0.14
=======================================================================================
<CAPTION>
=======================================================================================
Historical Performance -- Class B Shares
=======================================================================================
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>
10/31/98 $22.60 $16.00 $0.00 $0.16 $0.00 (28.61)%
- ---------------------------------------------------------------------------------------
10/31/97 22.32 22.60 0.15 0.00 0.00 1.95
- ---------------------------------------------------------------------------------------
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 $0.15 $0.16 $0.00
=======================================================================================
<CAPTION>
=======================================================================================
Historical Performance -- Class L Shares(2)
=======================================================================================
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>
10/31/98 $22.62 $16.03 $0.00 $0.16 $0.00 (28.54)%
- ---------------------------------------------------------------------------------------
10/31/97 22.32 22.62 0.15 0.00 0.00 2.04
- ---------------------------------------------------------------------------------------
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 $0.15 $0.16 $0.00
=======================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS AND CAPITAL GAINS, IF ANY,
ANNUALLY.
- --------------------------------------------------------------------------------
Smith Barney Natural Resources Fund Inc. 5
<PAGE>
================================================================================
Average Annual Total Returns
================================================================================
Without Sales Charges(1)
--------------------------------------------
Class A Class B Class L(2)
================================================================================
Year Ended 10/31/98 (28.13)% (28.61)% (28.54)%
- --------------------------------------------------------------------------------
Five Years Ended 10/31/98 (2.16) (2.83) N/A
- --------------------------------------------------------------------------------
Ten Years Ended 10/31/98 0.55 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 10/31/98 1.49 3.33 (5.78)
================================================================================
With Sales Charges(3)
--------------------------------------------
Class A Class B Class L(2)
================================================================================
Year Ended 10/31/98 (31.72)% (32.15)% (29.25)%
- --------------------------------------------------------------------------------
Five Years Ended 10/31/98 (3.16) (3.02) N/A
- --------------------------------------------------------------------------------
Ten Years Ended 10/31/98 0.04 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 10/31/98 1.06 3.33 (5.78)
================================================================================
================================================================================
Cumulative Total Returns
================================================================================
Without Sales Charges(1)
================================================================================
Class A (10/31/88 through 10/31/98) 5.64%
- --------------------------------------------------------------------------------
Class B (Inception* through 10/31/98) 21.69
- --------------------------------------------------------------------------------
Class L (Inception* through 10/31/98)(2) (21.11)
================================================================================
(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 and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to Class
B and L shares.
(2) On June 12, 1998, Class C shares were renamed Class L shares.
(3) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 5.00% and 1.00%,
respectively; 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 L
shares also reflect the deduction of a 1.00% CDSC, which applies if shares
are redeemed within the first year of purchase.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception dates for Class A, B and L shares are November 24, 1986, November
6, 1992 and November 7, 1994, respectively.
- --------------------------------------------------------------------------------
6 1998 Annual Report to Shareholders
<PAGE>
================================================================================
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+
- --------------------------------------------------------------------------------
October 1988 -- October 1998
[LINE GRAPH]
Smith Barney Standard & Poors
Natural Resources MSCI World Index 500 Index
- ---------------------------------------------------------------------------
10/88 $ 9,503 $10,000 $10,000
10/89 9,809 11,402 12,636
10/90 8,026 10,174 11,690
10/91 8,202 11,845 15,596
10/92 7,867 11,291 17,148
10/93 11,198 14,417 19,704
10/94 12,710 15,595 20,465
10/95 9,781 17,159 25,870
10/96 13,605 20,048 32,102
10/97 13,968 23,507 42,407
10/98 10,038 27,194 51,741
+ Hypothetical illustration of $10,000 invested in Class A shares on October
31, 1988, 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, 1998. The Morgan Stanley Capital
International World Index ("MSCI World Index") is an arithmetic 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 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 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.
- --------------------------------------------------------------------------------
Smith Barney Natural Resources Fund Inc. 7
<PAGE>
================================================================================
Portfolio Highlights (unaudited) October 31, 1998
================================================================================
Portfolio Breakdown*
[PIE CHART]
Repurchase Agreement 9.9%
Aluminum 5.8%
Base Metals 11.1%
Chemicals 3.8%
Energy Service & Equipment 4.1%
Oil Exploration & Products 25.5%
Industrial Controls 1.3%
Gold 6.7%
Miscellaneous 4.4%
Paper Products 13.8%
Oil & Gas 2.4%
Steel 10.1%
Refining & Marketing 1.1%
Percentage of
Exposure by Country Total Investments
- --------------------------------------------------------------------------------
United States 86.0%
Canada 5.2
United Kingdom 4.2
Australia 4.1
Indonesia 0.5
Percentage of
Top Ten Common Stock Holdings Total Investments
- --------------------------------------------------------------------------------
Georgia Pacific Corp. 3.7%
Louis Dreyfus Natural Gas Corp. 3.6
Aluminum Co. of America 3.4
Rio Tinto PLC 3.3
Ocean Energy Inc. 3.2
E.I. du Pont de Nemours & Co. 3.1
Oregon Steel Mills Industries, Inc., Class A Shares 3.1
Sons of Gwalia Ltd. 3.0
Burlington Resources Inc. 2.6
Halliburton Co. 2.6
* Percentage of total investments.
- --------------------------------------------------------------------------------
8 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Schedule of Investments October 31, 1998
================================================================================
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 88.7%
Aluminum -- 5.8%
24,000 Aluminum Co. of America $1,902,000
110,000 Billiton PLC 265,733
100,000 Kaiser Aluminum Corp.(a) 631,250
7,000 Reynolds Metals Co. 419,562
- --------------------------------------------------------------------------------
3,218,545
- --------------------------------------------------------------------------------
Base Metals -- 11.0%
50,000 Freeport McMoRan, Copper & Gold Inc., Class B Shares 615,625
11,000 Phelps Dodge Corp. 633,875
90,000 RTI Titanium Co.(a)(b) 1,338,750
150,000 Rio Tinto PLC 1,827,522
75,000 Titanium Metals Corp.(b) 787,500
45,000 Wolverine Tube, Inc. 953,437
- --------------------------------------------------------------------------------
6,156,709
- --------------------------------------------------------------------------------
Chemicals -- 3.8%
30,000 E.I. du Pont de Nemours and Co. 1,725,000
10,000 Union Carbide Corp. 385,000
- --------------------------------------------------------------------------------
2,110,000
- --------------------------------------------------------------------------------
Energy Service & Equipment -- 4.1%
65,000 Baker Hughes Inc. 1,434,062
50,000 Noble Drilling Corp.(a) 859,375
- --------------------------------------------------------------------------------
2,293,437
- --------------------------------------------------------------------------------
Gold -- 6.7%
60,000 Barrick Gold Corp.(b) 1,282,500
280,000 Crown Resources Corp.(a)(b) 700,000
212,212 Normandy Mining Ltd. Warrants, Expire 4/30/01(a) 17,828
250,000 Ourominas Minerals Inc. Warrants, Expire 2/14/99(a) 0
530,551 Sons of Gwalia Ltd. 1,648,500
2,017,666 Tanami Gold NL(a) 107,981
- --------------------------------------------------------------------------------
3,756,809
- --------------------------------------------------------------------------------
Miscellaneous -- 4.4%
50,000 Advanced Polymer Systems Inc.(a) 225,000
50,000 Archer-Daniels-Midland Co. 834,375
3,300,000 Austral Coal Ltd. 308,048
70,000 United Road Services Inc.(a) 1,120,000
- --------------------------------------------------------------------------------
2,487,423
- --------------------------------------------------------------------------------
Oil & Gas -- 2.4%
25,000 Conoco Inc., Class A Shares(a) 621,875
20,000 Pennzoil Co. 717,500
- --------------------------------------------------------------------------------
1,339,375
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Natural Resources Fund Inc. 9
<PAGE>
================================================================================
Schedule of Investments (continued) October 31, 1998
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================================
<S> <C>
Oil Exploration & Products -- 25.5%
1,450,000 Abacan Resource Corp.(a) $ 453,125
26,000 Abacan Resource Corp. Canada(a) 7,226
30,000 Apache Corp. 849,375
8,000 Atlantic Richfield Co. 551,000
35,000 Burlington Resources Inc. 1,441,562
6,000 Chevron Corp. 489,000
40,000 Cooper Cameron Corp.(a) 1,390,000
10,000 EEX Corp.(a) 38,750
40,000 Halliburton Co. 1,437,500
55,000 Imperial Oil Ltd. 871,040
15,000 K N Energy, Inc. 745,312
139,000 Louis Dreyfus Natural Gas Corp. 2,024,187
145,000 Ocean Energy Inc.(a)(b) 1,812,500
20,000 Schlumberger Ltd. 1,050,000
15,000 Smith International, Inc.(a) 539,062
15,000 Transocean Offshore Inc. 554,062
- ------------------------------------------------------------------------------------------------
14,253,701
- ------------------------------------------------------------------------------------------------
Paper Products -- 13.8%
475,000 Asia Pacific Resources International Holdings Ltd., Class A Shares(a) 237,500
30,000 Champion International Corp. 958,125
40,000 Georgia Pacific Group 2,070,000
95,000 Jefferson Smurfit Corp.(a)(b) 1,086,562
20,000 Mead Corp. 632,500
30,000 Union Camp Corp. 1,290,000
21,000 Weyerhaeuser Co. 983,062
15,000 Willamette Industries, Inc. 465,000
- ------------------------------------------------------------------------------------------------
7,722,749
- ------------------------------------------------------------------------------------------------
Refining & Marketing -- 1.1%
25,000 Valero Energy Corp. 625,000
- ------------------------------------------------------------------------------------------------
Steel -- 10.1%
150,000 The LTV Corp.(b) 918,750
15,000 Nucor Corp. 679,687
140,000 Oregon Steel Mills Industries, Inc., Class A Shares 1,715,000
70,000 Schnitzer Steel Industries, Inc., Class A Shares 1,085,000
55,000 USX-US Steel Group 1,278,750
- ------------------------------------------------------------------------------------------------
5,677,187
- ------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $58,361,293) 49,640,935
================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Schedule of Investments (continued) October 31, 1998
================================================================================
SHARES SECURITY VALUE
================================================================================
PUT OPTION -- 0.1%
Base Metals -- 0.1%
50,000 Freeport-McMoRan Copper & Gold, Inc., Class B Shares,
$10, Expire 5/22/99 (Cost -- $64,000) $ 59,375
================================================================================
CONVERTIBLE PREFERRED STOCK -- 1.3%
Industrial Controls -- 1.3%
20,000 Cyprus Amax Minerals Co. (Cost -- $735,000) 735,000
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENT -- 9.9%
$5,540,000 CIBC Wood Gundy Securities Inc., 5.250% due 11/2/98;
Proceeds at maturity -- $5,542,424; (Fully
collateralized by U.S. Treasury Notes, 6.375%
due 5/15/99; Market value -- $5,651,017)
(Cost -- $5,540,000) 5,540,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $64,700,293*) $55,975,310
================================================================================
(a) Non-income producing security.
(b) All or a portion of this security is on loan (See Note 6).
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Natural Resources Fund Inc. 11
<PAGE>
================================================================================
Statement of Assets and Liabilities October 31, 1998
================================================================================
ASSETS:
Investments, at value (Cost -- $64,700,293) $ 55,975,310
Cash 41,789
Collateral for securities loaned (Note 6) 4,872,190
Receivable for Fund shares sold 3,677,977
Dividends and interest receivable 1,281
- --------------------------------------------------------------------------------
Total Assets 64,568,547
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities loaned (Note 6) 4,872,190
Payable for Fund shares purchased 38,290
Management fees payable 22,172
Distribution fees payable 9,010
Accrued expenses 74,849
- --------------------------------------------------------------------------------
Total Liabilities 5,016,511
- --------------------------------------------------------------------------------
Total Net Assets $ 59,552,036
================================================================================
NET ASSETS:
Par value of capital shares $ 3,664
Capital paid in excess of par value 84,285,806
Overdistributed net investment income (6,373)
Accumulated net realized loss from security
transactions and options (16,006,078)
Net unrealized depreciation of investments (8,724,983)
- --------------------------------------------------------------------------------
Total Net Assets $ 59,552,036
================================================================================
Shares Outstanding:
Class A 1,639,534
- --------------------------------------------------------------------------------
Class B 1,831,371
- --------------------------------------------------------------------------------
Class L 193,162
- --------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $16.56
- --------------------------------------------------------------------------------
Class B* $16.00
- --------------------------------------------------------------------------------
Class L* $16.03
- --------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 5.26% of net asset value per share) $17.43
- --------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $16.19
================================================================================
* 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 L shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Statement of Operations For the Year Ended October 31, 1998
================================================================================
INVESTMENT INCOME:
Dividends $ 908,505
Interest 346,555
Less: Foreign withholding tax (22,528)
- --------------------------------------------------------------------------------
Total Investment Income 1,232,532
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 607,349
Distribution fees (Note 2) 563,085
Shareholder and system servicing fees 210,116
Registration fees 65,638
Audit and legal 47,151
Custody 40,138
Shareholder communications 29,207
Directors' fees 20,847
Other 2,065
- --------------------------------------------------------------------------------
Total Expenses 1,585,596
- --------------------------------------------------------------------------------
Net Investment Loss (353,064)
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS,
OPTIONS AND FOREIGN CURRENCIES
(NOTES 3 AND 5):
Realized Loss From:
Security transactions (excluding short-term securities) (13,171,938)
Options written (197,090)
Foreign currency transactions (106,627)
- --------------------------------------------------------------------------------
Net Realized Loss (13,475,655)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
(Depreciation) of Investments:
Beginning of year 5,525,267
End of year (8,724,983)
- --------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (14,250,250)
- --------------------------------------------------------------------------------
Net Loss on Investments, Options and Foreign Currencies (27,725,905)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Operations $(28,078,969)
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Natural Resources Fund Inc. 13
<PAGE>
================================================================================
Statements of Changes in Net Assets For the Years Ended October 31,
================================================================================
<TABLE>
<CAPTION>
1998 1997
=======================================================================================
<S> <C> <C>
OPERATIONS:
Net investment loss $ (353,064) $ (969,805)
Net realized gain (loss) (13,475,655) 11,756,075
Increase in net unrealized depreciation 14,250,250) (7,149,300)
- ---------------------------------------------------------------------------------------
Increase (Decrease) in Net
Assets From Operations (28,078,969) 3,636,970
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income -- (1,377,238)
Net realized gain (770,167) --
- ---------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (770,167) (1,377,238)
- ---------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sale of shares 279,084,458 351,964,263
Net asset value of shares issued for
reinvestment of dividends 732,813 1,321,529
Cost of shares reacquired (310,116,382) (368,936,754)
- ---------------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (30,299,111) (15,650,962)
- ---------------------------------------------------------------------------------------
Decrease in Net Assets (59,148,247) (13,391,230)
NET ASSETS:
Beginning of year 118,700,283 132,091,513
- ---------------------------------------------------------------------------------------
End of year(*) $ 59,552,036 $ 118,700,283
=======================================================================================
* Includes overdistributed net investment income of: $ (6,373) $ (329,174)
=======================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1998 Annual Report to Shareholders
<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 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 for which market quotations are not available will be valued in
good faith at fair market value by or under the direction of the Board of
Trustees; (d) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, which approximates value; (e) the
accounting records of the Fund 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; (f)
interest income, adjusted for amortization of premium and accretion of discount,
is recorded on an accrual basis; (g) 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; (h) dividends and distributions to
shareholders are recorded on the ex-dividend date; (i) gains or losses on the
sale of securities are calculated by using the specific identification method;
(j) direct expenses are charged to each class; management fees and general
expenses are allocated on the basis of relative net assets; (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. At
October 31, 1998, 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
overdistributed net investment income amounting to $459,457 and accumulated net
realized gain of $14 was reclassified
- --------------------------------------------------------------------------------
Smith Barney Natural Resources Fund Inc. 15
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
to paid-in capital. Net investment income, net realized gains and net assets
were not affected by this adjustment; (l) 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 (m) 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
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings
Inc. ("SSBH"), acts as investment manager to the Fund. The Fund pays MMC 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.
On October 8, 1998, CFBDS, Inc. became the Fund's distributor. Prior to that
date Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Fund's distributor. SSB (as well as certain other broker-dealers) continues to
sell Fund shares to the public as a member of the selling group.
SSB acts as the primary broker for its portfolio agency transactions. For the
year ended October 31, 1998, SSB received brokerage commissions of $14,131.
On June 12, 1998, the Fund's existing Class C shares were renamed Class L
shares. Effective June 15, 1998, Class L shares are being sold at net asset
value plus a maximum initial sales charge of 1.00%. Class L shares also have a
1.00% contingent deferred sales charge ("CDSC"), which applies if redemption
occurs within the first year of purchase.
There is also a 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.
- --------------------------------------------------------------------------------
16 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
For the year ended October 31, 1998, CDSC's paid to SSB and sales charges
received by SSB were approximately:
Class A Class B Class L
================================================================================
CDSCs -- $242,000 $1,000
- --------------------------------------------------------------------------------
Sales Charges $27,000 -- 2,000
================================================================================
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
Class A, B and L shares calculated at an 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 L 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, 1998, total Distribution Plan fees incurred were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $82,238 $438,557 $42,290
================================================================================
All officers and one Director of the Fund are employees of SSB.
3. Investments
During the year ended October 31, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $115,121,956
- --------------------------------------------------------------------------------
Sales 155,723,201
================================================================================
At October 31, 1998, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 3,432,575
Gross unrealized depreciation (12,157,558)
- --------------------------------------------------------------------------------
Net unrealized depreciation $ (8,724,983)
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Natural Resources Fund Inc. 17
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
4. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized
as assets. Securities equal to the initial margin amount are segregated by the
custodian in the name of the broker. Additional securities are also segregated
up to the current market value of the futures contract. 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 received or made 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).
At October 31, 1998, 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.
At October 31, 1998, the Fund had no open purchased call option contracts and
one open purchased put option with a total cost of $64,000.
- --------------------------------------------------------------------------------
18 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
When the 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 depending upon whether
the cost of the closing transaction is greater or less than the premium
originally received, 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 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 loss if the market price of the
underlying security declines.
The following covered call option transactions occurred during the year ended
October 31, 1998:
Number of
Contracts Premium
================================================================================
Options written, outstanding at October 31, 1997 1,000 $ 210,992
Options written during the the year ended October 31, 1998 2,065 318,418
Options cancelled in closing purchase transactions (1,500) (189,243)
Options expired (1,300) (240,090)
Options exercised (265) (100,077)
- --------------------------------------------------------------------------------
Options written, outstanding at October 31, 1998 0 $ 0
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Natural Resources Fund Inc. 19
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
6. 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. Fees earned by the Fund on securities lending are recorded as
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 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 October 31, 1998, the Fund loaned common stock having a value of $4,636,144
and holds the following collateral for loaned securities:
Security Description Value
================================================================================
Time Deposits:
Banca Commerciale Italiano, London, 5.594% due 11/2/98 $ 244,125
Bank of Austria, 5.563% due 11/2/98 244,125
Banque Bruxelles Lambert, London, 5.563% due 11/2/98 244,125
Bayerische Landesbank, London, 5.563% due 11/2/98 244,125
Citibank, London, 5.783% due 11/2/98 244,125
Credit Commerciale, 5.563% due 11/2/98 244,125
Credit Communal De Belgique, G.C., 5.375% due 11/2/98 12,577
Credit Local De France, 5.625% due 11/2/98 244,125
Den Norske Bank, 5.563% due 11/2/98 244,125
Deutsche Bank, London, 5.500% due 11/2/98 244,125
Dresdner Bank, 5.563% due 11/2/98 244,125
Generale Bank, 5.563% due 11/2/98 244,125
Landesbank Hessen Thuringen, 5.625% due 11/2/98 244,124
Rabobank, London, 5.594% due 11/2/98 244,125
Commercial Paper:
Associates Corp. of North America, 5.723% due 11/2/98 244,008
Ford Motor Credit Corp., 5.693% due 11/2/98 244,009
General Electric Credit, 5.693% due 11/2/98 244,009
Goldman Sachs Group LP, 5.753% due 11/2/98 221,825
New Center Asset Trust, 5.723% due 11/2/98 244,008
Trident Capital Finance Inc., 5.803% due 11/2/98 244,006
Loan Participation:
J&H Marsh & McLennan Inc., 5.850% due 11/2/98 244,124
- --------------------------------------------------------------------------------
Total $4,872,190
================================================================================
Interest income earned from securities lending for the year ended October 31,
1998 was $16,402.
- --------------------------------------------------------------------------------
20 1998 Annual Report to Shareholders
<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. 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.
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.
9. Capital Loss Carryforward
At October 31, 1998, the Fund had, for Federal income tax purposes,
approximately $15,192,000 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:
10/31/99 10/31/00 10/31/06
================================================================================
Carryforward Amounts $1,000,000 $1,320,000 $12,872,000
================================================================================
10. Capital Shares
At October 31, 1998, 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.
Effective June 12, 1998, the Fund adopted the renaming of existing Class C
shares as Class L shares.
- --------------------------------------------------------------------------------
Smith Barney Natural Resources Fund Inc. 21
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
At October 31, 1998, total paid-in capital amounted to the following for each
class:
Class A Class B Class L
================================================================================
Total Paid-in Capital $49,042,708 $31,366,148 $3,880,614
================================================================================
Transactions in shares of each class were as follows:
Year Ended Year Ended
October 31, 1998 October 31, 1997
-------------------------- -----------------------------
Shares Amount Shares Amount
================================================================================
Class A
Shares sold 12,798,401 $ 253,356,342 12,511,559 $ 290,617,251
Shares issued on
reinvestment 14,116 279,913 32,875 752,525
Shares redeemed (13,131,266) (261,226,158) (12,787,207) (297,753,915)
- --------------------------------------------------------------------------------
Net Decrease (318,749) $ (7,589,903) (242,773) $ (6,384,139)
================================================================================
Class B
Shares sold 1,175,562 $ 22,620,288 2,489,353 $ 56,140,451
Shares issued on
reinvestment 21,547 415,220 22,934 513,732
Shares redeemed (2,322,354) (43,993,495) (2,869,859) (64,659,897)
- --------------------------------------------------------------------------------
Net Decrease (1,125,245) $ (20,957,987) (357,572) $ (8,005,714)
================================================================================
Class L*
Shares sold 157,951 $ 3,107,828 230,260 $ 5,206,561
Shares issued on
reinvestment 1,953 37,680 2,466 55,272
Shares redeemed (249,370) (4,896,729) (290,629) (6,522,942)
- --------------------------------------------------------------------------------
Net Decrease (89,466) $ (1,751,221) (57,903) $ (1,261,109)
================================================================================
* On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
22 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each year
ended October 31:
<TABLE>
<CAPTION>
Class A Shares 1998(1) 1997 1996(1) 1995 1994
=============================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $23.23 $22.95 $16.50 $21.44 $18.89
- ---------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss) (0.01) (0.12) 0.08 (0.23)(*) (0.06)
Net realized and unrealized gain (loss) (6.50) 0.73 6.37 (4.71) 2.61
- ---------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (6.51) 0.61 6.45 (4.94) 2.55
- ---------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- (0.33) -- -- --
Net realized gain (0.16) -- -- -- --
- ---------------------------------------------------------------------------------------------
Total Distributions (0.16) (0.33) -- -- --
- ---------------------------------------------------------------------------------------------
Net Asset Value, End of Year $16.56 $23.23 $22.95 $16.50 $21.44
- ---------------------------------------------------------------------------------------------
Total Return (28.13)% 2.67% 39.09% (23.04)% 13.50%
- ---------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $27,147 $45,488 $50,521 $27,884 $41,370
- ---------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.57% 1.51% 1.62% 1.99% 1.81%
Net investment income (loss) (0.05) (0.32) 0.15 (1.46) (0.34)
- ---------------------------------------------------------------------------------------------
Portfolio Turnover Rate 151% 101% 120% 40% 50%
=============================================================================================
<CAPTION>
Class B Shares 1998(1) 1997 1996(1) 1995 1994
==============================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $22.60 $22.32 $16.15 $21.14 $18.75
- ----------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.13) (0.27) (0.09) (0.22)* (0.33)
Net realized and unrealized gain (loss) (6.31) 0.70 6.26 (4.77) 2.72
- ----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (6.44) 0.43 6.17 (4.99) 2.39
- ----------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- (0.15) -- -- --
Net realized gain (0.16) -- -- -- --
- ----------------------------------------------------------------------------------------------
Total Distributions (0.16) (0.15) -- -- --
- ----------------------------------------------------------------------------------------------
Net Asset Value, End of Year $16.00 $22.60 $22.32 $16.15 $21.14
- ----------------------------------------------------------------------------------------------
Total Return (28.61)% 1.95% 38.20% (23.60)% 12.75%
- ----------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $29,309 $66,819 $73,969 $25,747 $37,704
- ----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 2.23% 2.18% 2.29% 2.62% 2.54%
Net investment loss (0.71) (0.99) (0.83) (2.11) (1.06)
- ----------------------------------------------------------------------------------------------
Portfolio Turnover Rate 151% 101% 120% 40% 50%
==============================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
* Includes realized gains and losses from foreign currency transactions.
- --------------------------------------------------------------------------------
Smith Barney Natural Resources Fund Inc. 23
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year
ended October 31:
<TABLE>
<CAPTION>
Class L Shares(1) 1998(2) 1997 1996(2) 1995(3)
===============================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $22.62 $22.32 $16.16 $20.63
- -----------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss) (0.12) (0.23) 0.05 (0.29)*
Net realized and unrealized gain (loss) (6.31) 0.68 6.11 (4.18)
- -----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (6.43) 0.45 6.16 (4.47)
- -----------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- (0.15) -- --
Net realized gain (0.16) -- -- --
- -----------------------------------------------------------------------------------------------
Total Distributions (0.16) (0.15) -- --
- -----------------------------------------------------------------------------------------------
Net Asset Value, End of Year $16.03 $22.62 $22.32 $16.16
- -----------------------------------------------------------------------------------------------
Total Return (28.54)% 2.04% 38.12% (21.67)%++
- -----------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $3,096 $6,393 $7,602 $572
- -----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 2.17% 2.12% 2.25% 2.69%+
Net investment loss (0.63) (0.92) (0.21) (1.97)+
- -----------------------------------------------------------------------------------------------
Portfolio Turnover Rate 151% 101% 120% 40%
===============================================================================================
</TABLE>
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) For the period from November 7, 1994 (inception date) to October 31, 1995.
* 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.
================================================================================
Tax Information (unaudited)
================================================================================
For Federal tax purposes the Fund hereby designates for the fiscal year ended
October 31, 1998:
o Long-term capital gain distributions paid of $770,181.
- --------------------------------------------------------------------------------
24 1998 Annual Report to Shareholders
<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, 1998, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the two-
year period then ended, and the financial highlights for each of the years in
the four-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 the year 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, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Smith
Barney Natural Resources Fund Inc. as of October 31, 1998, and the results of
its operations for the year then ended, the changes in its net assets for each
of the years in the two-year period then ended, and the financial highlights for
each of the years in the four-year period then ended, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
December 14, 1998
- --------------------------------------------------------------------------------
Smith Barney Natural Resources Fund Inc. 25
<PAGE>
SALOMON SMITH BARNEY
---------------------------
A member of citigroup[LOGO]
Directors Investment Manager
and Administrator
Herbert Barg
Alfred J. Bianchetti Mutual Management Corp.
Martin Brody
Dwight B. Crane
Burt N. Dorsett Distributor
Elliot S. Jaffe
Stephen E. Kaufman CFBDS, Inc.
Joseph J. McCann
Heath B. McLendon, Chairman
Cornelius C. Rose, Jr. Custodian
James J. Crisona, Emeritus The Chase Manhattan Bank, N.A.
Officers Shareholder
Servicing Agent
Heath B. McLendon
President and First Data Investor Services Group, Inc.
Chief Executive Officer P.O. Box 9134
Boston, MA 02205-9134
Lewis E. Daidone
Senior Vice President
and Treasurer This report is submitted for the general
information of the shareholders of Smith
John G. Goode Barney Natural Resources Fund Inc. It is
Vice President and not authorized for distribution to
Investment Officer prospective investors unless accompanied
or preceded by a current Prospectus for
David Stadlin the Fund, which contains information
Investment Officer concerning the Fund's investment policies
and expenses as well as other pertinent
Irving P. David information.
Controller
Salomon Smith Barney is a service mark
Christina T. Sydor of Salomon Smith Barney Inc.
Secretary
Smith Barney
Natural Resources
Fund Inc.
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD01578 12/98
