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ANNUAL REPORT
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1996
1996
1996 [Stock Photography]
1996
1996
Smith Barney
World Funds, Inc.
Emerging Markets
Portfolio
-----------------------
October 31, 1996
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
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Emerging Markets Portfolio
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Dear Shareholder:
We are pleased to bring you the annual report of the Smith Barney World Funds,
Inc. -- Emerging Markets Portfolio, which covers the year ended October 31,
1996. In this report, we summarize the period's prevailing economic and market
conditions and outline our portfolio strategy. A detailed summary of performance
and current holdings can be found in the appropriate sections that follow in the
annual report.
Portfolio Performance Update
The Smith Barney World Funds -- Emerging Markets Portfolio seeks long-term
capital appreciation by investing primarily in the securities of emerging
countries issuers. For the year ended October 31, 1996, the Emerging Markets
Portfolio had a total return of 9.22% for Class A shares which compares with its
Lipper Analytical Services, Inc. peer group average of 9.11% for the same time
period. (Lipper Analytical Services, Inc. is a major fund tracking
organization.)
On October 31, 1996, 91.40% of the Portfolio's total net assets were invested in
stocks, with the remaining 8.60% invested in repurchase agreements. The
Portfolio's stock holdings were diversified across 21 markets, with no single
market accounting for more than 11.46% of total net assets.
Emerging Markets Overview
Two years after many of the financial markets of the developing countries
declined in the wake of the Mexican economic crisis, money managers are once
again looking towards the emerging markets for investment opportunities. So far
in 1996, many of these markets have enjoyed strong returns, rallying strongly at
the beginning of the year before consolidating in May and June. Although the
emerging markets have given back some of their gains in the third quarter, they
continue to perform well in 1996, with Hong Kong and a number of Latin American
markets performing exceptionally well. In fact, in response to renewed investor
interest in the markets of developing countries, the mutual fund industry has
introduced approximately 60 new emerging markets funds so far this year.
Portfolio's Investment Strategy
The Emerging Markets Portfolio follows an investment strategy involving broad
geographic diversification, careful individual stock selection and prudent
exposure to newly emerging markets with high growth potential.
1
<PAGE>
We view the term "emerging markets" broadly. In our view, "emerging markets"
include different countries at various stages of economic and political
development. As a general rule, the Emerging Markets Portfolio is anchored in
relatively more developed emerging markets with established economies such as
Hong Kong, Singapore and Malaysia. A smaller portion of the Portfolio's assets
are usually invested in less developed emerging markets such as Brazil that are
rapidly becoming established markets through privatizations and prudent
governmental policies. Lastly, because the best return potential has
historically come from markets in their early stages of development, the
Emerging Markets Portfolio also invests a portion of its assets in important
emerging markets such as India and China, countries that have relatively stable
economies and are committed to free market reforms.
The Portfolio follows a combination of "top-down" and "bottom-up" investing. Our
"top-down" approach means we first look closely at a particular country's
economic and political conditions. As a general rule, the Portfolio favors
countries with thriving capital markets. Then other considerations come into
play such as a country's infrastructural needs, cost of labor and whether its
living standards are rising. Our "bottom-up" analysis involves looking at
individual companies. The Portfolio's typical candidates are growth companies
that have benefited from the rapid social, economic and political changes that
have swept through the world's developing countries. The Portfolio tends to
focus on companies that are poised for significant growth in earnings and
revenues or can maintain their existing earnings power over the long term.
As of October 31, 1996, the Emerging Markets Portfolio had 27.15% of its assets
invested in Latin America companies, 49.69% invested in Asian and Pacific Rim
companies and 18.34% in European and African companies. The following chart
shows where the Emerging Market Portfolio's assets were invested by country as
of October 31, 1996 and October 31, 1995:
Where the Emerging Markets Portfolio's Is Invested
(As a Percentage of Total Investments)
10/31/96 10/31/95
================================================================================
Latin America
Argentina 4.10% 1.76%
Brazil 11.94 8.94
Chile 2.77 3.41
Colombia -- 1.15
Mexico 7.01 4.96
Peru 1.33 4.56
Ecuador -- 1.22
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Total 27.15% 26.00%
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2
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10/31/96 10/31/95
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Asia/Pacific Rim
China/Hong Kong 1.45% 4.10%
Hong Kong 8.09 10.98
India 3.86 --
Indonesia 6.33 6.47
Malaysia 10.62 5.15
Pakistan -- 1.12
Philippines 2.90 5.21
Singapore 4.44 4.20
South Korea 6.39 7.35
Sri Lanka 1.77 3.16
Taiwan -- 1.52
Thailand 3.84 3.30
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Total 49.69 52.56
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Europe
Hungary 4.34 --
Poland 4.95 5.59
Turkey 2.34 2.98
Greece -- 1.90
Austria -- 0.66
Czech Republic 2.41 --
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Total 14.04 11.13
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Other
Russia 3.04 1.82
South Africa 1.26 5.72
Morocco -- 0.94
Zimbabwe -- 1.83
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Total 4.30 10.31
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Repurchase Agreements 4.82 --
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Total 100.00% 100.00
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Latin America
From October 31, 1995 through October 31, 1996, the percentage of total assets
invested by the Emerging Markets Portfolio in Latin America increased from
approximately 26% to 27%.
The markets of Latin America have put the Mexican peso crisis of 1995 solidly
behind them and are enjoying a renewal of investor confidence. In 1996, the
major markets of Mexico and Brazil have staged a comeback. Recent economic data
from Mexico has been uniformly positive, from narrow measures such as industrial
production and job growth to broader indicators such as higher Gross Domestic
Product (GDP) and lower inflation. During the reporting period, the Emerging
Markets Portfolio's exposure in Mexico increased from 3.41% to 7.01% because we
expect a continuation of economic growth in Mexico with moderate inflation.
3
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After bringing down its astronomical annual rate of inflation through a strict
monetary policy to manageable levels in 1995, Brazil has been successful in
keeping inflation down in 1996 and investors have responded favorably. Over the
past year, the Portfolio's holdings in Brazil increased from 8.94% to 11.94%
because inflation appears to be under control and the accelerating trend of
privatizations. We added Telebras, Electrobras (a holding company for electrical
generation and transmission) and Petrobas (the state holding company for oil and
related products), all candidates for privatization.
To capitalize on investment opportunities in the other major Latin American
markets such as Argentina and Brazil, we reallocated assets from Peru and put
them into those markets. In addition, the Portfolio's exposure in Argentina rose
from 1.76% to 4.10% because of Latin America's improving economic outlook.
Asia and Pacific Rim
During the reporting period, the Emerging Markets Portfolio decreased its
weighting in Asia and Pacific Rim countries from 52.56% of total investments to
49.69%. Three of the region's markets -- China, Hong Kong and India -- exerted
the greatest influence on Asia over the past twelve months. China's economy, the
main future driver of corporate earnings growth in the region, has begun to
recover as strong government measures taken in 1995 to reduce inflation have
paid off and may cause its three-year austerity program to end. (The annual rate
of inflation in China has fallen from more than 15% in late 1995 to 7% in
October 1996.) In addition, improving investor sentiment towards China's
expanding and more liquid economy helped propel Hong Kong's market to record
levels. For example, during the past year, Hong Kong stocks performed well and
economists are forecasting a 6% rise in GDP growth in 1997. Moreover, since real
estate is one of the most important industries in Hong Kong's economy, rising
property values have also caused the share prices of many Hong Kong companies to
rise.
A major event in 1997 that will fuel investor sentiment in the region is China's
takeover of Hong Kong. We believe that investors will react positively to this
change in leadership. China needs to maintain the status quo in Hong Kong
because the country is a vital conduit for trade, a source of financing for
future massive Chinese infrastructural projects, and a technology center that
will enable mainland Chinese companies to become more efficient. In addition,
during the past twelve months, the Emerging Markets Portfolio attempted to take
advantage of China's improving economy by investing in select "red chips," which
are Hong Kong companies that have significant exposure in China.
4
<PAGE>
In India, another large and increasingly important Asian market, the
Presidential elections held in April 1996 ushered in a new, more leftist-leaning
government which heightened investor concerns about that country. At the start
of the reporting period, the Emerging Markets Portfolio had no investments in
India. However, at the end of October, the Portfolio had 3.86% of its total
investments in India. We increased our weighting in India shortly after its
Presidential elections because we believed the new government would not be
radically different from the previous one and would continue reform efforts and
aggressively court foreign investment.
Europe and Russia
During the past twelve months, the Emerging Markets Portfolio increased its
weighting in Europe. This increase in our European weighting, particularly in
Eastern Europe, helped drive the return of the Portfolio during the year.
In our opinion, the overriding issues that affected Eastern Europe during the
reporting period were Poland's economic recovery, the Russian elections and
Russian Federation President Boris Yeltsin's health. During the past year,
Poland and Hungary were two of the best performing markets in the world. In
November 1995, Polish voters elected former Communist Aleksander Kwasniewski
President, which kept many investors away from this market. Since that time,
President Kwasniewski has continued free-market policies and many investors in
the first quarter of 1996 began to look beyond the political issues and focused
on the strong growth prospects and low values of many Polish companies. These
investors were attracted to companies that were poised for 15% to 20% future
earnings growth and yet were trading at single-digit earnings multiples.
Russia was greatly influenced by Presidential elections that pitted incumbent,
President Boris Yeltsin, against former Communist Ganady Zugaynov. After a
bitter and hotly contested election, Yeltsin was re-elected in July which caused
the market to rise. However, the post-election market euphoria in Russia was
short-lived as Yeltsin's health began to deteriorate. (Yeltsin has since
received heart surgery and appears to be on the road to recovery.) With Russia
successfully navigating through some difficult political challenges and Poland
and Hungary registering strong gains, Eastern Europe was a key emerging markets
region in 1995 and 1996.
Emerging Markets Outlook
Because of the vast economic potential of large and strategically important
countries such as Poland, China, Brazil and Mexico, we remain bullish on the
emerging markets. We believe that recent signs indicate that the asset category
of emerging markets has gained legitimacy in the investment community. If the
5
<PAGE>
economies of these growing, heavily populated and critical countries continue to
perform well, more investors will be attracted to these markets and that should
help them post significant gains. In addition, because the global economy is
expected to perform much better in 1997, we believe the emerging markets will
get an additional boost. Stronger global growth would lead to higher export
earnings from many low-cost emerging markets and export-driven Asia would be one
of the biggest beneficiaries.
Yet because the emerging markets are considerably more volatile than those of
more developed countries, broad portfolio diversification by countries,
industries and companies is essential. Moreover, in order to succeed in the
emerging markets, investors need to have a long-term investment horizon, stay
patient and have a high tolerance for investment risk.
In closing, thank you for investing in the Smith Barney World Funds, Inc. --
Emerging Market Portfolio. We look forward to helping you to achieve your
financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Donald Elefson
Heath B. McLendon Donald Elefson
Chairman and Vice President
Chief Executive Officer
December 2, 1996
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Announcing a New Systematic Investment Program Minimum
If you are a shareholder purchasing shares of the Emerging Markets Portfolio
through Smith Barney's Systematic Investment Program on a monthly basis or if
you plan to do so in the future, the minimum initial 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.
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6
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Historical Performance -- Class A Shares
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Net Asset Value
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Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
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10/31/96 $11.06 $12.08 $0.00 9.22%
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Inception*-10/31/95 12.00 11.06 0.00 (7.83)+
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Total $0.00
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Historical Performance -- Class B Shares
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Net Asset Value
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Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
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10/31/96 $11.02 $11.95 $0.00 8.44%
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Inception*-10/31/95 12.00 11.02 0.00 (8.17)+
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Total $0.00
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Historical Performance -- Class C Shares
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Net Asset Value
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Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
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10/31/96 $11.02 $11.95 $0.00 8.44%
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Inception*-10/31/95 12.00 11.02 0.00 (8.17)+
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Total $0.00
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It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
7
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Average Annual Total Return
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Without Sales Charge(1)
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Class A Class B Class C
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Year Ended 10/31/96 9.22% 8.44% 8.44%
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Inception* through 10/31/96 0.45 (0.28) (0.28)
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With Sales Charge(2)
--------------------------------------------
Class A Class B Class C
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Year Ended 10/31/96 3.78% 3.44% 7.44%
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Inception* through 10/31/96 (2.97) (3.00) (0.28)
================================================================================
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Cumulative Total Return
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Without Sales Charge(1)
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Class A (Inception* through 10/31/96) 0.67%
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Class B (Inception* through 10/31/96) (0.42)
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Class C (Inception* through 10/31/96) (0.42)
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(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.
+ 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 C shares are May 12, 1995.
8
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Historical Performance (unaudited)
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Growth of $10,000 Invested in Class A Shares of
the Emerging Markets Portfolio vs.
MSCI Free World Index+
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May 1995 -- October 1996
[The following table was represented as a line graph in the printed material.]
Emerging MSCI
-------- ----
5/12/95 9,501.20 10,000.00
10/95 8,757.00 10,497.00
4/96 9,850.00 11,928.00
10/31/96 9,565.00 12,264.00
+ Hypothetical illustration of $10,000 invested in Class A shares at
inception on May 12, 1995, 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 (MSCI) Free World Index measures
performance for a diverse range of global stock markets, including the
United States, Canada, Europe, Australia, New Zealand and the Far East and
excludes shares which are not readily purchased by non-local investors. The
index is unmanaged and is not subject to the same management and trading
expenses of a mutual fund. The performance of the Portfolio'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.
9
<PAGE>
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Schedule of Investments October 31, 1996
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SHARES SECURITY VALUE
================================================================================
STOCKS -- 95.2%
Argentina -- 4.1%
460,000 Acindar Industria Argentina de Aceros S.A.* $ 443,945
460,000 Acindar Industria Argentina de Aceros S.A. Rights* 460
11,900 Banco de Galicia y Bueno ADR 215,688
1,628 Banco de Galicia y Bueno Rights 0
16,500 Disco Aires S.A. de C.V. ADR 371,250
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1,031,343
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Brazil -- 11.9%
32,000 Aracruz Celulose S.A. ADR 256,000
23,500 Centrais Electricas Brasileiras S.A. ADR Preferred 381,875
500,000 Cia Cervejaria Brahma Preferred* 309,520
13,300,000 Cia Siderurgica Nacional 330,105
700,000 Cia Tecidos Norte de Mina -- Coteminas 235,059
16,500 Cia Vale Do Rio Doce ADR 348,563
2,600,000 Petroleo Brasileiro S.A. Preferred 332,782
94,800,000 Refrigeracao Parana S.A. Preferred* 226,989
3,500 Sade Vigesa S.A. Preferred* 13,967
286,100 Tectoy Industria Brinqued Preferred* 55,695
5,000 Telecomunicacoes Brasileiras S.A. -- Telebras ADR 372,500
436,646 Telecomunicacoes de Brazilia S.A. Preferred 140,250
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3,003,305
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Chile -- 2.8%
5,800 Sociedad Quimica Y Minera de Chile S.A. ADR 333,500
18,200 Vina Concha Y Toro S.A. ADR 364,000
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697,500
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China -- 1.5%
1,095,000 Shanghai Jintai Co. Ltd. Class B Shares 122,640
790,000 Tientsin Marine Shipping Co. Ltd. Class B Shares* 241,740
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364,380
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Czech Republic -- 2.4%
1,901 Ceska Zbrojovka A.S.* 107,285
8,000 Skoda Plzen A.S.* 255,060
2,275 SPT Telekom A.S.* 243,665
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606,010
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Hong Kong -- 8.1%
68,000 Citic Pacific Ltd. 330,665
370,000 Cosco Pacific Ltd. 354,099
1,828,000 Harbin Power Equipment Co. Ltd. 243,503
14,700 Hong Kong & China Gas Warrants, Expire 9/30/97* 5,418
200,000 Lai Sun Development Co. Ltd. 258,655
60,000 New World Development Co. Ltd. 349,185
See Notes to Financial Statements.
10
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Schedule of Investments (continued) October 31, 1996
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SHARES SECURITY VALUE
================================================================================
Hong Kong -- 8.1% (continued)
144,000 Shanghai Industrial Holdings Ltd.* $ 326,837
590,000 Shenzhen North Jianshe Motorcycle Co. Ltd.
Class B Shares 167,867
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2,036,229
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Hungary -- 4.4%
17,000 BorsodChem Rt GDR 344,250
9,900 Danubius Hotel and Spa Rt* 202,125
5,218 Graboplast Rt 159,970
6,208 Pannonplast Rt 203,115
3,400 Richter Gedeon Rt 182,958
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1,092,418
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India -- 3.9%
15,000 BSES Ltd. GDR 285,000
10,500 Hindalco Industries Ltd. GDR* 192,990
10,000 Indian Hotels Co. Ltd. GDR* 237,500
17,000 Larsen & Toubro Ltd. GDR* 255,000
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970,490
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Indonesia -- 6.3%
312,000 PT Aneka Kimia Raya Foreign 177,539
240,000 PT Ciputra Development 175,220
240,000 PT Ciputra Development Rights* 12,111
280,000 PT Davomas Abadi Foreign 258,536
427,140 PT Indal Indah Kiat Pulp & Paper Corp. 334,778
109,660 PT Steady Safe Transportation Foreign 107,140
110,000 PT Tempo Scan Pacific Foreign 181,877
186,000 PT United Tractors Foreign 345,480
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1,592,681
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Malaysia -- 10.6%
80,000 Chemical Co. of Malaysia Berhad 245,379
15,000 Chemical Co. of Malaysia Berhad Warrants,
Expire 11/7/00* 17,276
183,000 Kumpulan Guthrie Berhad 282,463
250,000 Metroplex Berhad 287,925
196,000 Multi-Purpose Holdings Berhad 335,109
60,200 Oriental Holdings Berhad 409,799
185,000 Oriental Interest Berhad 273,835
109,333 Public Bank Berhad 205,105
60,000 Sungei Way Holdings Berhad 341,948
31,000 Telekom Malaysia Berhad 273,598
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2,672,437
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Mexico -- 7.0%
46,603 ALFA S.A. de C.V. Class A Shares 192,830
10,400 Bufete Industrial S.A. Sponsored ADR 169,000
See Notes to Financial Statements.
11
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Schedule of Investments (continued) October 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Mexico -- 7.0% (continued)
70,000 Cemex S.A. de C.V. Class B Shares $ 252,730
35,160 Corporacion GEO S.A. de C.V. Series B 157,042
13,000 Empresas ICA Sociedad Controladora S.A. de C.V. ADR* 169,000
50,000 Empresas La Moderna S.A. de C.V. 220,844
506,400 Grupo Posadas S.A. Series L* 211,733
8,600 Hylsamex S.A. GDR* 189,200
18,200 Tubos de Acero de Mexico S.A.* 200,516
- --------------------------------------------------------------------------------
1,762,895
- --------------------------------------------------------------------------------
Peru -- 1.3%
334,769 Ferreyros S.A. 331,312
16,285 Fima S.A. Trabajo 2,728
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334,040
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Philippines -- 2.9%
330,000 Fil-Estate Land Inc. 307,648
140,000 La Tondena Distillers Inc. 303,653
1,661,000 Steniel Manufacturing Corp. 118,823
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730,124
- --------------------------------------------------------------------------------
Poland -- 5.0%
9,100 Agros Holdings S.A.* 234,703
2,760 Bank Slaski S.A. W Katowicach 255,283
8,000 Debica S.A. * 162,220
4,200 E. Wedel S.A. 209,178
29,200 Elektrim Spolka Akcyjna S.A. 244,112
56,100 Swarzedzkie Fabryk Mebli S.A.* 139,701
- --------------------------------------------------------------------------------
1,245,197
- --------------------------------------------------------------------------------
Russia -- 3.0%
10,000 Gazprom ADR*+ 187,500
6,715 Lukoil Holding ADR*+ 263,564
6,000 Lukoil Holding ADR 235,500
8,000 Sun Brewing Ltd. GDR* 79,000
- --------------------------------------------------------------------------------
765,564
- --------------------------------------------------------------------------------
Singapore -- 4.4%
30,000 Cerebos Pacific Ltd. 232,079
101,000 Clipsal Industries Ltd. 323,200
107,000 GP Batteries International Ltd. 310,300
14,250 GP Batteries International Ltd. Warrants,
Expire 11/15/00 10,688
65,000 Van Der Horst Ltd. 239,886
- --------------------------------------------------------------------------------
1,116,153
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South Africa -- 1.3%
26,000 Sasol Ltd. 317,175
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See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) October 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
South Korea -- 6.4%
4,300 Dongah Tire Industry Co.* $ 332,749
19,867 Donghae Pulp Co.* 307,475
16,190 Dongkuk Steel Mill Co.* 322,997
400 Korea Housing & Commercial Bank 9,094
11,800 Rifa Industrial Co.* 279,645
530 Seah Steel Corp. 14,739
5,400 Woong Jin Publishing Co. 341,302
- --------------------------------------------------------------------------------
1,608,001
- --------------------------------------------------------------------------------
Sri Lanka -- 1.8%
677,507 Blue Diamond Jewelery Worldwide Ltd.* 151,415
59,885 John Keells Holdings Ltd.* 191,044
234,600 Lanka Walltile Ltd.* 103,833
- --------------------------------------------------------------------------------
446,292
- --------------------------------------------------------------------------------
Thailand -- 3.8%
72,000 Central Pattana Public Co. Ltd. 287,944
2,600 Precious Shipping Public Co. Ltd. 5,454
31,000 Precious Shipping Public Co. Ltd. Foreign 65,026
181,000 Sahaviriya Steel Industries Public Co. Ltd.* 68,837
58,700 Siam Makro Public Co. Ltd. 250,864
8,400 Siam Makro Public Co. Ltd. Foreign 35,240
30,000 Thai Engine Manufacturing Public Co. Ltd. 251,715
- --------------------------------------------------------------------------------
965,080
- --------------------------------------------------------------------------------
Turkey -- 2.3%
2,100,000 Eregli Demir Ve Celik Fabrikalari T.A.S. 245,378
2,500,000 Tat Konserve Sanayii A.S. 344,049
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589,427
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TOTAL STOCKS
(Cost -- $23,405,019) 23,946,741
================================================================================
See Notes to Financial Statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) October 31, 1996
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENT -- 4.8%
$1,214,000 CS First Boston Corp., 5.470% due 11/1/96;
Proceeds at maturity -- $1,214,184;
(Fully collateralized by U.S. Treasury Bills due
3/27/97; Market value -- $1,239,321)
(Cost -- $1,214,000) $ 1,214,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $24,619,019**) $25,160,741
================================================================================
+ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions that are exempt from
registration, generally to qualified institutional buyers.
* Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
14
<PAGE>
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Statement of Assets and Liabilities October 31, 1996
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $24,619,019) $25,160,741
Cash 99,867
Receivable for securities sold 1,381,438
Receivable for Fund shares sold 43,986
Dividends and interest receivable 15,689
Receivable for open forward foreign currency contracts (Note 5) 90
Receivable from manager 42,752
- --------------------------------------------------------------------------------
Total Assets 26,744,563
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 339,147
Payable to bank 125,461
Payable for Fund shares purchased 15,894
Management fees payable 13,968
Distribution fees payable 7,062
Payable for open forward foreign currency contracts (Note 5) 70
Accrued expenses 42,500
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Total Liabilities 544,102
- --------------------------------------------------------------------------------
Total Net Assets $26,200,461
================================================================================
NET ASSETS:
Par value of capital shares $ 2,183
Capital paid in excess of par value 25,679,786
Accumulated net investment loss (5,529)
Accumulated net realized loss on investments (45,652)
Net unrealized appreciation of investments and foreign
currencies 569,673
- --------------------------------------------------------------------------------
Total Net Assets $26,200,461
================================================================================
Shares Outstanding:
Class A 884,763
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Class B 1,093,363
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Class C 204,867
-----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $12.08
-----------------------------------------------------------------------------
Class B* $11.95
-----------------------------------------------------------------------------
Class C** $11.95
-----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $12.72
================================================================================
* 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.
15
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended October 31, 1996
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 451,925
Interest 57,892
Less: Foreign withholding tax (52,895)
- --------------------------------------------------------------------------------
Total Investment Income 456,922
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 227,869
Distribution fees (Note 2) 157,892
Custody 71,682
Registration fees 52,442
Shareholder and system servicing fees 48,882
Shareholder communications 27,440
Audit and legal 18,469
Directors' fees 4,100
Other 12,404
- --------------------------------------------------------------------------------
Total Expenses 621,180
Less: Custody earnings credit (Note 2) (21,053)
- --------------------------------------------------------------------------------
Net Expenses 600,127
- --------------------------------------------------------------------------------
Net Investment Loss (143,205)
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES (NOTES 3 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 180,618
Foreign currency transactions (127,862)
- --------------------------------------------------------------------------------
Net Realized Gain 52,756
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments and Foreign Currencies:
Beginning of year (1,045,348)
End of year 569,673
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 1,615,021
- --------------------------------------------------------------------------------
Net Gain on Investments and Foreign Currencies 1,667,777
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $1,524,572
================================================================================
See Notes to Financial Statements.
16
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended October 31,
- --------------------------------------------------------------------------------
1996 1995(a)
================================================================================
OPERATIONS:
Net investment loss $ (143,205) $ (78,792)
Net realized gain (loss) 52,756 (215,580)
Increase (decrease) in net unrealized
appreciation 1,615,021 (1,045,348)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Operations 1,524,572 (1,339,720)
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- --
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders -- --
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares 20,033,650 18,878,056
Cost of shares reacquired (11,661,068) (1,235,029)
- --------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 8,372,582 17,643,027
- --------------------------------------------------------------------------------
Increase in Net Assets 9,897,154 16,303,307
NET ASSETS:
Beginning of year 16,303,307 --
- --------------------------------------------------------------------------------
End of year* $ 26,200,461 $16,303,307
- --------------------------------------------------------------------------------
* Includes accumulated net investment loss of: $ (5,529) --
- --------------------------------------------------------------------------------
(a) For the period from May 12, 1995 (commencement of operations) to October 31,
1995.
See Notes to Financial Statements.
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Emerging Markets Portfolio ("Portfolio") is a separate investment
portfolio of the Smith Barney World Funds, Inc. ("Fund"). The Fund, a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended,
as a non-diversified open-end investment management company and consists of this
Portfolio and five other separate investment portfolios: European, Global
Government Bond, International Balanced, International Equity and Pacific
Portfolios. The financial statements and financial highlights for the other
portfolios are presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolio
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; (c) securities maturing within 60
days are valued at cost plus accreted discount, or minus amortized premium which
approximates market value; (d) gains or losses on the sale of securities are
calculated by using the specific identification method; (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) direct expenses are
charged to each class; management fees and general expenses are allocated on the
basis of relative net assets; (i) 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 evaluation. 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; (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,
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
reclassifications were made to the capital accounts to reflect permanent
book/tax differences and income and gains available for distributions under
income tax regulations. Accordingly, a portion of net investment loss amounting
to $245,422 was reclassified to paid-in capital. Net investment income, net
realized gains and net assets were not affected by this change; (k) the
Portfolio intends to comply with the applicable provisions of the Internal
Revenue Code of 1986, as amended, pertaining to regulated investment companies
and to make distributions of taxable income sufficient to relieve it from
substantially all Federal income and excise taxes; 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 Portfolio 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 of the Portfolio. The
Portfolio pays SBMFM a management fee calculated at the annual rate of 1.00% of
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 Portfolio's shares. For the year ended October 31, 1996, SB received sales
charges of approximately $100,000 on sales of the Portfolio's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase and 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 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
19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
aggregate. These purchases do not incur an initial sales charge. For the year
ended October 31, 1996, CDSCs paid to SB were:
Class A Class B Class C
================================================================================
CDSCs $1,000 $31,000 $7,000
================================================================================
Pursuant to a Distribution Plan, the Portfolio pays a service fee with
respect to Class A, B and C shares calculated at the annual rate of 0.25% of the
average daily net assets for each class. In addition, the Portfolio pays a
distribution fee with respect to its Class B and C shares calculated at the
annual rate of 0.75% of the average daily net assets for each class. For the
year ended October 31, 1996, total Distribution Plan fees incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $23,462 $111,672 $22,758
================================================================================
All officers and three Directors of the Fund are employees of SB.
The Portfolio has an agreement with its custodian, The Bank of New York,
whereby it earns custody credits on available cash balances. These credits
offset custody fees which may be charged to the Portfolio during the current
year. These credits totaled $21,053 for the year ended October 31, 1996.
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:
================================================================================
Purchases $ 25,200,200
- --------------------------------------------------------------------------------
Sales 16,937,256
================================================================================
At October 31, 1996, aggregate gross unrealized appreciation and
depreciation of investments were as follows:
================================================================================
Gross unrealized appreciation $ 2,957,850*
Gross unrealized depreciation (2,416,128)*
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 541,722*
================================================================================
* Substantially the same for Federal income tax purposes.
20
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
4. CAPITAL LOSS CARRYFORWARDS
At October 31, 1996, the Fund had, for Federal income tax purposes,
approximately $46,000 of unused capital loss carryforwards, available to offset
future realized capital gains which expire on October 31, 2003. 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.
5. FORWARD FOREIGN CURRENCY CONTRACTS
At October 31, 1996, the Portfolio had open forward foreign currency
contracts as described below. The Portfolio bears the market risk that arises
from changes in foreign currency exchange rates. The unrealized gain (loss) on
the contracts is as follows:
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
================================================================================
To Sell:
Hong Kong Dollar 1,768,848 $228,760 11/4/96 $ (8)
Malaysia Ringgit 575,970 227,899 11/5/96 (62)
Portuguese Escudo 31,869,222 208,281 11/6/96 90
- --------------------------------------------------------------------------------
Total Unrealized Gain
on Forward Foreign
Currency Contracts $ 20
================================================================================
6. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. During the period the futures contract is
open, changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Fund's basis in the contract. The Fund enters into such contracts to hedge a
portion of its portfolio. The Fund bears the market risk that arises from
changes in the value of the financial instruments and securities indices
(futures contracts) and the credit risk should a counterparty fail to perform
under such contracts.
As of October 31, 1996, the Fund had no open futures contracts.
21
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
7. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily. 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 had no open purchased call or put options
contracts.
8. PORTFOLIO CONCENTRATION
The Portfolio'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 the investments and earnings of the Portfolio. Foreign investments may also
subject the Portfolio 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 counter-
parties to meet the terms of their contracts.
9. CAPITAL SHARES
At October 31, 1996, the Fund had one billion shares of capital stock
authorized with a par value of $0.001 per share. The Portfolio has the ability
to issue multiple classes of shares. Each share of a class represents an
identical legal interest in the Portfolio 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:
Class A Class B Class C
================================================================================
Total Paid-in Capital $10,438,121 $12,855,332 $2,388,516
================================================================================
22
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
Year Ended Period Ended
October 31, 1996 October 31, 1995*
------------------- -------------------
Shares Amount Shares Amount
================================================================================
Class A
Shares sold 845,973 $10,156,535 703,658 $8,405,032
Shares redeemed (600,551) (7,224,148) (64,317) (773,612)
- --------------------------------------------------------------------------------
Net Increase 245,422 $ 2,932,387 639,341 $7,631,420
================================================================================
Class B
Shares sold 701,375 $ 8,323,429 730,233 $8,719,543
Shares redeemed (300,425) (3,574,650) (37,820) (438,631)
- --------------------------------------------------------------------------------
Net Increase 400,950 $ 4,748,779 692,413 $8,280,912
================================================================================
Class C
Shares sold 130,701 $ 1,553,686 147,507 $1,753,481
Shares redeemed (71,401) (862,270) (1,940) (22,786)
- --------------------------------------------------------------------------------
Net Increase 59,300 $ 691,416 145,567 $1,730,695
================================================================================
* For the period from May 12, 1995 (inception date) to October 31, 1995.
23
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
Class A Shares 1996 1995(1)
================================================================================
Net Asset Value, Beginning of Year $11.06 $12.00
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss(2) (0.02) (0.05)#
Net realized and unrealized gain (loss) 1.04 (0.89)
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.02 (0.94)
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- --
- --------------------------------------------------------------------------------
Total Distributions -- --
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $12.08 $11.06
- --------------------------------------------------------------------------------
Total Return 9.22% (7.83)%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $10,691 $7,069
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 2.25% 1.45%+
Net investment loss (0.19) (0.63)+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 78% 17%
- --------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $0.00* $0.00*
================================================================================
(1) For the period from May 12, 1995 (inception date) to October 31, 1995.
(2) The Manager waived all or part of its fees for the period ended October 31,
1995. If such fees were not waived, the per share effect on net investment
loss and the expense ratios would have been as follows:
Per Share Increases to Expense Ratios
Net Investment Loss Without Fee Waivers
--------------------- ------------------
1995 1995
---- ----
Class A $0.05 2.12%+
In addition, during the year ended October 31, 1996 and the period ended
October 31, 1995, the Portfolio has earned credits from the custodian which
reduced service fees incurred. If the credits are taken into consideration,
the ratios of expenses to average net assets for Class A would be 2.16% and
1.20% (annualized), respectively.
(3) As of September 1995, the SEC instituted new guidelines, requiring the
disclosure of average commissions per share.
# Includes realized gains and losses on foreign currency transactions.
* Amount represented less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
24
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
Class B Shares 1996 1995(1)
================================================================================
Net Asset Value, Beginning of Year $11.02 $12.00
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss(2) (0.10) (0.09)#
Net realized and unrealized gain (loss) 1.03 (0.89)
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.93 (0.98)
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- --
- --------------------------------------------------------------------------------
Total Distributions -- --
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $11.95 $11.02
- --------------------------------------------------------------------------------
Total Return 8.44% (8.17)%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $13,062 $7,630
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 3.06% 2.00%+
Net investment loss (0.94) (1.17)+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 78% 17%
- --------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $0.00* $0.00*
================================================================================
(1) For the period from May 12, 1995 (inception date) to October 31, 1995.
(2) The Manager waived all or part of its fees for the period ended October 31,
1995. If such fees were not waived, the per share effect on net investment
loss and the expense ratios would have been as follows:
Per Share Increases to Expense Ratios
Net Investment Loss Without Fee Waivers
--------------------- ------------------
1995 1995
---- ----
Class B $0.05 2.68%+
In addition, during the year ended October 31, 1996 and the period ended
October 31, 1995, the Portfolio has earned credits from the custodian which
reduced service fees incurred. If the credits are taken into consideration,
the ratios of expenses to average net assets for Class B would be 2.97% and
1.74% (annualized), respectively.
(3) As of September 1995, the SEC instituted new guidelines, requiring the
disclosure of average commissions per share.
# Includes realized gains and losses on foreign currency transactions.
* Amount represented less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
25
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
Class C Shares 1996 1995(1)
================================================================================
Net Asset Value, Beginning of Year $11.02 $12.00
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss(2) (0.10) (0.08)#
Net realized and unrealized gain (loss) 1.03 (0.90)
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.93 (0.98)
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- --
- --------------------------------------------------------------------------------
Total Distributions -- --
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $11.95 $11.02
- --------------------------------------------------------------------------------
Total Return 8.44% (8.17)%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $2,448 $1,604
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 3.02% 1.95%+
Net investment loss (0.92) (1.08)+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 78% 17%
- --------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $0.00* $0.00*
================================================================================
(1) For the period from May 12, 1995 (inception date) to October 31, 1995.
(2) The Manager waived all or part of its fees for the period ended October 31,
1995. If such fees were not waived, the per share effect on net investment
loss and the expense ratios would have been as follows:
Per Share Increases to Expense Ratios
Net Investment Loss Without Fee Waivers
--------------------- ------------------
1995 1995
---- ----
Class C $0.05 2.61%+
In addition, during the year ended October 31, 1996 and the period ended
October 31, 1995, the Portfolio has earned credits from the custodian which
reduce service fees incurred. If the credits are taken into consideration,
the ratios of expenses to average net assets for Class C would be 2.92% and
1.70% (annualized), respectively.
(3) As of September 1995, the SEC instituted new guidelines, requiring the
disclosure of average commissions per share.
# Includes realized gains and losses on foreign currency transactions.
* Amount represented less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
26
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
Smith Barney World Funds, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Emerging Markets Portfolio of
Smith Barney World Funds, 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 the year then ended and for the period from May 12,
1995 (commencement of operations) to October 31, 1995. 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.
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 the
Emerging Markets Portfolio of Smith Barney World Funds, 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 the year then ended and for the
period from May 12, 1995 to October 31, 1995, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
December 20, 1996
27
<PAGE>
(This page intentionally left blank.)
<PAGE>
Smith Barney SMITH BARNEY
World Funds, Inc. ------------
A Member of TravelersGroup [Logo]
Directors
Victor Atkins
Jessica M. Bibliowicz
Alger B. Chapman
Robert A. Frankel
Rainer Greeven
Susan M. Heilbron
Heath B. McLendon, Chairman
Bruce D. Sargent
James M. Shuart
Officers
Maurits E. Edersheim
Chairman of the Fund
& Advisory Director
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
James B. Conheady
Vice President
Victor S. Filatov
Vice President
Simon R. Hildreth
Vice President
Denis P. Mangan
Vice President
Jeffrey J. Russell
Vice President
Bruce D. Sargent
Vice President
Rein W. van der Does
Vice President
Irving P. David
Controller
Christina T. Sydor
Secretary
Investment Manager
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 World Funds, Inc. --
Emerging Markets Portfolio. It is not
authorized for distribution to prospective
investors unless accompanied or preceded
by a current Prospectus for the Portfolio,
which contains information concerning
the Portfolio's investment policies and
expenses as well as other pertinent
information.
Smith Barney
World Funds, Inc.
388 Greenwich Street
New York, New York 10013
FD01044 12/96
[FRONT COVER]
ANNUAL REPORT
1996
1996
1996
1996
1996
Smith Barney
World Funds, Inc.
International Equity
Portfolio
October 31, 1996
[Smith Barney logo]
Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
International Equity Portfolio
Dear Shareholder:
We are pleased to provide you with the annual report for the Smith Barney
World Funds - International Equity Portfolio for the year ended October 31,
1996. In this report, we have summarized the period's prevailing economic and
market conditions and outlined the investment strategy employed by the
Portfolio during this time. A detailed summary of the Portfolio's performance
and current holdings can be found in the appropriate sections that follow in
the annual report.
Portfolio Performance and Investment Strategy
During the year ended October 31, 1996, the Class A shares of the Smith
Barney World Funds, Inc. - International Equity Portfolio generated a total
return of 9.78%, slightly underperforming its Lipper Analytical Services Inc.
peer group average total return of 10.73% for the same period. (Lipper is an
independent fund tracking organization.) At October 31, 1996, the Portfolio
owned securities of 111 issuers in 28 countries, consistent with its broadly
diversified approach that seeks to minimize portfolio risk.
The International Equity Portfolio invests in equities outside of the United
States. A key element of the Portfolio's investment strategy is a "bottom-up"
approach to equity investing -- looking at companies and industry sectors. We
seek companies growing at a premium rate to that of their local country. At
the same time, we aim to maintain a risk level no higher than that of the
overall international equity market through broad diversification in a
variety of markets. Potential countries for investment are chosen largely
from the major markets of Europe and the Far East, which are tracked by
Morgan Stanley's EAFE Index. (The EAFE Index tracks stock performance in
Europe, Australia and the Far East, and is used as a benchmark for
international equity investments.) In addition, because broad diversification
is a key component of our investment strategy, a portion of the International
Equity Portfolio is invested in emerging markets that meet our criteria for
political and economic stability and market liquidity.
Market and Portfolio Update
The backdrop of international affairs during much of the twelve-month period
covered by this report has been marked by political and economic
uncertainties. Sluggish conditions persist in several of the major European,
Asian and Latin American economies in which we invest. Moreover, there has
been a litany of negative news during the past fiscal year, such as the
Chinese aggression
1
<PAGE>
toward Taiwan, the indictment of various business leaders in Korea, civil
unrest in Indonesia and the recurrence of violence in Northern Ireland. Yet
the international equity markets have provided solid investment returns
during the period covered by this report, supported by favorable corporate
developments and a hospitable level of interest rates and inflation.
Europe
The International Equity Portfolio's largest holdings are concentrated in
Europe at 60% of total assets. We have increased the European allocation by
approximately 10% during the past year. In our view, Europe is undergoing
profound structural change, driven by the recognition that "business as
usual" is no longer affordable or desirable. Many European corporations have
embarked on U.S.-style restructuring programs to improve corporate
profitability, sharpen their company focus and ultimately enhance shareholder
value. In order to become more competitive, many European corporations have
narrowed their strategic focus to core businesses, and are spinning off
low-margin and unproductive assets. At the same time, there has also been a
tremendous increase in merger and acquisition activity in Europe. In
particular, there has been an increase in mergers within the financial
services industry, as well as in the pharmaceutical industry. Two large Swiss
drug companies, Ciba Geigy (one of the Portfolio's top holdings) and Sandoz
have agreed to merge to form Novartis, which will be the second-largest drug
company in the world. Companies continue to build economies of scale across
an increasingly unified Europe, which should contribute to a higher long-term
earnings outlook. We believe this is an important underpinning of the
European markets' recent strength.
In addition, one of the significant long-term attractions in Europe is that
corporations are becoming more "shareholder friendly." Many European
companies are moving toward international accounting standards and are now
disclosing more financial information than they had in the past. Many
countries have recently or are in the process of authorizing corporate share
repurchases, and stock splits are now occurring for the first time in history
in countries such as Germany and Switzerland.
Moreover, European governments are striving toward a monetary union in 1999,
which has important macroeconomic implications. Budget deficits must be
reduced and inflation contained, which suggests continued fiscal restraint.
As a result, many European governments introduced austere budget plans this
Fall. Monetary conditions are positive for European stocks, with interest
rates at relatively modest levels. In our view, stable interest rates are
likely to remain for the foreseeable future.
2
<PAGE>
Our major European holdings are concentrated in Sweden (9.5%), Ireland
(8.4%), the United Kingdom (7.8%) and the Netherlands (7.1%). Many of the
companies whose stocks we own are major multinationals which derive a modest
portion of their earnings from their domestic market. During the reporting
period, we also made our first Eastern European investments in Poland (2.5%).
Recent purchases in the International Equity Portfolio include U.K.-based
Compass Group, the leading global contract caterer for educational, health
care and corporate facilities. We believe the institutional food industry is
capable of sustained high growth as companies trim back the breadth of their
activities to core operations. Outsourcing food service to efficient
institutional operators is a natural progression in many companies. Another
recent addition to the Portfolio is the Norwegian capital goods supplier
Tomra, the European leader in "reverse vending" machines which accept back
food and beverage containers from customers in return for deposit
reimbursement. Tomra is expanding rapidly throughout Europe and also
throughout the United States where, in selected geographic areas, the company
serves as a service and materials handling agent. Our investment in both of
these companies illustrate our commitment to progressive industry leaders in
rapidly growing businesses.
In 1995, we invested a significant portion of the Portfolio's assets in the
European temporary employment industry because of increasing liberalization
of labor regulations and the desire of corporations to limit fixed costs. In
1996, however, we sold those investments. French temporary employment company
Ecco, agreed to merge with its Swiss competitor, Adia. Our investment in the
Dutch employment agency Randstad, in our view, became fully valued, so we
sold it and realized a substantial profit.
Asia/Pacific
At present, we have 31% of the Portfolio invested in the markets of the
Pacific Rim. The performance of these equity markets have been disappointing
in the past twelve months, with the exception of Hong Kong and Malaysia. The
largest Pacific market, Japan (10%) has been a relative laggard for much of
the past fiscal year. The stock market in Japan has traded in a narrow range
over the past three to four months. Despite a materially weakened currency
versus its major trading partners (which has improved its export
competitiveness), as well as low interest rates, economic recovery in Japan
remains problematic.
We continue to find greater investment opportunities in Southeast Asia. In
our opinion, the July 1, 1997 transition of Hong Kong from British to Chinese
rule could lead to a favorable upward revaluation of that market, a process
which in fact has already begun. Residential property prices in Hong Kong,
3
<PAGE>
an important barometer of local sentiment, have firmed considerably in the
past year. While the long-term implications of the transition are less
certain, we believe an overweight position at 6.5% of Portfolio assets in
Hong Kong is prudent.
The Pacific Rim is also home to many laggard markets over the past year, such
as Korea, Thailand and those of the sub-Continent. Each of these markets had
fundamental factors at work which led to their decline. For example, there is
political uncertainty in Thailand and Indonesia, and Singapore and South
Korea have lowered economic-growth projections. We are diligently searching
for new opportunities in some of these lagging Pacific Rim markets. In our
view, the strong underlying growth rate of the Pacific Rim economies
continues to justify committing a significant portion of the Portfolio's
assets to the region.
Other Markets
The remaining 10% of the Portfolio is invested in the Americas, South Africa
and Israel. The Latin American markets have performed well in the past year
with clear signs that Mexico is on the mend -- interest rates have declined
and consumer spending has picked up, which have helped to drive the economy
higher. However, we believe that significant risks still exist in Mexico.
Given the superior opportunities elsewhere, our Latin American exposure is
currently lower than it has been in past years.
The International Equity Portfolio's Top Ten holdings as of October 31, 1996
are:
<TABLE>
<CAPTION>
Company Country Industry
- ---------------------- ---------------- -------------------------
<S> <C> <C>
Ericsson Sweden Telecommunications
Ciba Geigy Switzerland Pharmaceuticals
Independent News Ireland Media
Coca Cola Amatil Australia Consumer Nondurable
Nokia Finland Telecommunications
Wolters Kluwer Netherlands Media
Autoliv Sweden Capital Goods
SGL Carbon Germany Engineering
Astra Sweden Pharmaceuticals
IHC Caland Netherlands Oil Services
</TABLE>
4
<PAGE>
In closing, thank you for investing in the Smith Barney World Funds -
International Equity Portfolio. We look forward to continuing to help you
reach your financial goals.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman and
Chief Executive Officer
/s/ James B. Conheady
James B. Conheady
Vice President
/s/ Jeffrey J. Russell
Jeffrey J. Russell
Vice President
November 25, 1996
Announcing a New Systematic Investment Program Monthly Minimum
If you are a shareholder purchasing shares of the International Equity
Portfolio through Smith Barney's Systematic Investment Program on a monthly
basis or if you plan to do so in the future, the minimum investment for Class
A, Class B and Class C shares is now $25. If you are purchasing shares on a
quarterly basis, the minimum investment 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.
5
<PAGE>
Asset Allocation (unaudited)
(As a Percentage of Total Investments)
<TABLE>
<CAPTION>
International Equity Portfolio EAFE Index
-------------------------------- --------------
10/31/96 10/31/95 10/31/96
- ------------------------ ---------------- ---------------------------------
<S> <C> <C> <C>
Europe 59.88% 51.63% 53.70%
Austria 2.19 5.76 0.40
Belgium 1.11 0.33 1.20
Croatia 0.09 -- --
Denmark -- 0.10 0.90
Finland 2.12 3.15 0.60
France 4.34 2.92 6.80
Germany 3.20 3.16 7.30
Greece -- 0.19 --
Ireland 8.41 7.42 0.30
Italy 5.24 4.79 2.70
Netherlands 7.13 4.05 4.50
Norway 2.61 0.83 0.50
Poland 2.50 -- --
Spain -- 1.88 2.00
Sweden 9.47 9.20 2.40
Switzerland 3.66 2.38 5.90
United Kingdom 7.81 5.47 18.20
- ------------------------ ---------------- ---------------------------------
Asia/Pacific 30.58% 34.94% 46.30%
Australia 2.26 2.13 3.00
Hong Kong 6.52 5.13 3.60
India 2.58 1.57 --
Indonesia -- 0.48 --
Japan 9.94 9.03 35.40
Korea 1.56 2.95 --
Malaysia 2.56 4.37 2.60
New Zealand -- -- 0.40
Philippines -- 0.14 --
Singapore 2.99 6.43 1.30
Taiwan -- 0.40 --
Thailand 2.17 2.31 --
- ------------------------ ---------------- ---------------------------------
The Americas 4.47% 7.86% --
Argentina 0.65 0.63 --
Canada -- 1.64 --
Chile 1.85 2.74 --
Mexico 0.93 2.33 --
Panama 1.04 0.52 --
- ------------------------ ---------------- ---------------------------------
Other 5.07% 5.57% --
Israel 2.15 1.70 --
South Africa 2.04 3.30 --
Turkey -- 0.57 --
Repurchase Agreements 0.88 -- --
- ------------------------ ---------------- ---------------------------------
Total 100.00% 100.00% 100.00%
- ------------------------ ---------------- ---------------------------------
</TABLE>
6
<PAGE>
Historical Performance -- Class A Shares
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
- --------------------- ----------- --------------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
10/31/96 $17.15 $18.64 $0.17 $0.00 9.78%
- --------------------- ----------- --------------------- ---------------- -----------
10/31/95 18.79 17.15 0.12 0.10 (7.44)
- --------------------- ----------- --------------------- ---------------- -----------
10/31/94++ 18.71 18.79 0.00 0.00 0.43+
- --------------------- ----------- --------------------- ---------------- -----------
12/31/93 12.35 18.71 0.00 0.16 52.78
- --------------------- ----------- --------------------- ---------------- -----------
12/31/92 12.31 12.35 0.02 0.00 0.49
- --------------------- ----------- --------------------- ---------------- -----------
Inception*-12/31/91 11.94 12.31 0.00 0.00 3.10+
- --------------------- ----------- --------------------- ---------------- -----------
Total $0.31 $0.26
- --------------------- ----------- --------------------- ---------------- -----------
</TABLE>
Historical Performance -- Class B Shares
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
- --------------------- ----------- --------------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
10/31/96 $17.17 $18.65 $0.04 $0.00 8.89%
- --------------------- ----------- --------------------- ---------------- -----------
Inception*-10/31/95 18.38 17.17 0.00 0.10 (6.00)+
- --------------------- ----------- --------------------- ---------------- -----------
Total $0.04 $0.10
- --------------------- ----------- --------------------- ---------------- -----------
</TABLE>
Historical Performance -- Class C Shares
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
- --------------------- ----------- --------------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
10/31/96 $16.93 $18.38 $0.04 $0.00 8.85%
- --------------------- ----------- --------------------- ---------------- -----------
10/31/95 18.54 16.93 0.00 0.10 (8.11)
- --------------------- ----------- --------------------- ---------------- -----------
10/31/94++ 18.58 18.54 0.00 0.00 (0.22)+
- --------------------- ----------- --------------------- ---------------- -----------
Inception*-12/31/93 12.35 18.58 0.00 0.16 51.73+
- --------------------- ----------- --------------------- ---------------- -----------
Total $0.04 $0.26
- --------------------- ----------- --------------------- ----------------
</TABLE>
7
<PAGE>
Historical Performance -- Class Y Shares
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
- ---------------------- ----------- --------------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
10/31/96 $17.13 $18.64 $0.21 $0.00 10.19%
- ---------------------- ----------- --------------------- ---------------- -----------
10/31/95 18.80 17.13 0.17 0.10 (7.11)
- ---------------------- ----------- --------------------- ---------------- -----------
Inception*-10/31/94++ 17.64 18.80 0.00 0.00 (6.58)+
- ---------------------- ----------- --------------------- ---------------- -----------
Total $0.38 $0.10
- ---------------------- ----------- --------------------- ---------------- -----------
</TABLE>
Historical Performance -- Class Z Shares
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
- --------------------- ----------- --------------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
10/31/96 $17.12 $18.62 $0.21 $0.00 10.13%
- --------------------- ----------- --------------------- ---------------- -----------
Inception*-10/31/95 18.38 17.12 0.17 0.10 (5.01)+
- --------------------- ----------- --------------------- ---------------- -----------
Total $0.38 $0.10
- --------------------- ----------- --------------------- ---------------- -----------
</TABLE>
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
Average Annual Total Return
<TABLE>
<CAPTION>
Without Sales Charge(1)
-----------------------------------------------------
Class A Class B Class C Class Y Class Z
----------------------------- --------- --------- --------- -------------------
<S> <C> <C> <C> <C> <C>
Year Ended 10/31/96 9.78% 8.89% 8.85% 10.19% 10.13%
----------------------------- --------- --------- --------- -------------------
Five Years Ended 10/31/96 10.08 N/A N/A N/A N/A
----------------------------- --------- --------- --------- -------------------
Ten Years Ended 10/31/96 10.73 N/A N/A N/A N/A
----------------------------- --------- --------- --------- -------------------
Inception* through 10/31/96 10.16 1.18 11.46 3.72 10.24
----------------------------- --------- --------- --------- -------------------
</TABLE>
<TABLE>
<CAPTION>
With Sales Charge(2)
-----------------------------------------------------
Class A Class B Class C Class Y Class Z
----------------------------- --------- --------- --------- -------------------
<S> <C> <C> <C> <C> <C>
Year Ended 10/31/96 4.31% 3.89% 7.85% 10.19% 10.13%
----------------------------- --------- --------- --------- -------------------
Five Years Ended 10/31/96 8.96 N/A N/A N/A N/A
----------------------------- --------- --------- --------- -------------------
Ten Years Ended 10/31/96 10.16 N/A N/A N/A N/A
----------------------------- --------- --------- --------- -------------------
Inception* through 10/31/96 11.10 (0.83) 11.46 3.72 10.24
----------------------------- --------- --------- --------- -------------------
</TABLE>
8
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Without
Sales Charge(1)
- ---------------------------------------- ----------------
<S> <C>
Class A (10/31/86 through 10/31/96) 177.19%
- ---------------------------------------- ----------------
Class B (Inception* through 10/31/96) 2.35
- ---------------------------------------- ----------------
Class C (Inception* through 10/31/96) 51.44
- ---------------------------------------- ----------------
Class Y (Inception* through 10/31/96) 9.08
- ---------------------------------------- ----------------
Class Z (Inception* through 10/31/96) 4.59
- ---------------------------------------- ----------------
</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 charge with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the
deduction of the maximum initial sales charge of 5.00%; Class B shares
reflect the deduction of a 5.00% CDSC, which applies if shares are
redeemed 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.
++ For the period from January 1, 1994 to October 31, 1994, which reflects a
change in the fiscal year end of the Portfolio.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception dates for Class A, B, C, Y and Z shares are November 22, 1991,
November 7, 1994, January 4, 1993, June 16, 1994 and November 7, 1994,
respectively. Average Annual Total Returns and Cumulative Total Returns for
Class A shares include the returns of the Fenimore International Fund whose
management was assumed by the Portfolio on November 22, 1991. Fenimore
International Fund began operation on February 18, 1986.
9
<PAGE>
Historical Performance (unaudited)
Growth of $10,000 Invested in Class A Shares of
the International Equity Portfolio vs.
MSCI EAFE-GDP Weighted Index+
October 1986 -- October 1996
[Line Chart]
9497 10000
12181 13856
9439 11930
10623 13646
10571 14726
11265 15778
12378 16526
13174 16783
12601 16172
14045 16478
16286 16758
17909 16202
18570 15577
18567 19162
23561 21312
24726 23316
25926 23600
22820 24195
23999 23815
26558 26963
26346 26467
International Equity Portfolio
MSCI EAFE-GDP Weighted Index
+ Hypothetical illustration of $10,000 invested in Class A shares on October
31, 1986, assuming deduction of the maximum 4.50% 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 EAFE-GDP Weighted Index is a composite portfolio consisting
of equity total returns for the countries of Europe, Australia, New Zealand
and countries in the Far East, weighted based on each country's gross
domestic product. The index is unmanaged and is not subject to the same
management and trading expenses of a mutual fund. The performance of the
Portfolio'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.
10
<PAGE>
Schedule of Investments October 31, 1996
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
-------------- -------------------------------------------------------------- ----------------
<S> <C> <C>
STOCKS -- 99.1%
Argentina -- 0.6%
30,500 Quilmes Industrial S.A. ADR $ 312,625
750,000 Quilmes Industrial S.A. Preferred ADR 7,875,000
-------------- -------------------------------------------------------------- ----------------
8,187,625
-------------- -------------------------------------------------------------- ----------------
Australia -- 2.3%
2,070,815 Coca-Cola Amatil Ltd. 28,494,893
-------------- -------------------------------------------------------------- ----------------
Austria -- 2.2%
200,000 Baumax Aktiengesellschaft AG Preferred 6,010,744
60,000 VA Technologie AG 8,396,258
37,833 VAE Eisenbahnsysteme AG 3,371,982
75,000 Wolford AG 9,896,597
-------------- -------------------------------------------------------------- ----------------
27,675,581
-------------- -------------------------------------------------------------- ----------------
Belgium -- 1.1%
85,000 Barco Industries N.V. (a) 13,980,442
-------------- -------------------------------------------------------------- ----------------
Chile -- 1.9%
350,000 Embotelladora Andina S.A. ADR 12,075,000
400,000 Santa Isabel S.A. ADR 11,250,000
-------------- -------------------------------------------------------------- ----------------
23,325,000
-------------- -------------------------------------------------------------- ----------------
Croatia -- 0.1%
25,000 Pliva D.D. GDR (a) 1,218,750
-------------- -------------------------------------------------------------- ----------------
Finland -- 2.1%
80,000 Nokia Corp., Class A Shares ADR 3,710,000
500,000 Nokia OY AB Class A Shares 23,080,558
-------------- -------------------------------------------------------------- ----------------
26,790,558
-------------- -------------------------------------------------------------- ----------------
France -- 4.3%
35,000 Carrefour Supermarche S.A. 19,438,354
67,599 Castorama Dubois Investisse 11,579,250
113,105 Group Axime (a) 11,757,323
80,000 Incom Ltd. (a)(b) 1,299,871
160,000 Sidel S.A. 10,683,998
-------------- -------------------------------------------------------------- ----------------
54,758,796
-------------- -------------------------------------------------------------- ----------------
Germany -- 3.2%
225,000 SGL Carbon AG 24,950,436
17,000 Systeme Anwendungen Produkte in der Datenverarbeitung AG 2,286,215
200,000 Systeme Anwendungen Produkte in der Datenverarbeitung AG
Preferred Non-Voting Shares (c) 8,725,000
33,000 Systeme Anwendungen Produkte in der Datenverarbeitung AG
Preferred Voting Shares 4,444,489
-------------- -------------------------------------------------------------- ----------------
40,406,140
-------------- -------------------------------------------------------------- ----------------
See Notes to Financial Statements.
11
<PAGE>
Schedule of Investments (continued) October 31, 1996
SHARES SECURITY VALUE
-------------- -------------------------------------------------------------- ----------------
Hong Kong -- 6.5%
2,000,000 Cheung Kong Holdings Ltd. $ 16,036,626
2,500,000 Guoco Group Ltd. 13,223,750
8,400,000 Hong Kong & China Gas Co. Ltd. 14,774,388
700,000 Hong Kong & China Gas Co. Ltd. Warrants, Expire 9/30/97 (a) 258,009
3,000,000 Hutchinson Whampoa Ltd. 20,951,075
1,500,000 Sun Hung Kai Properties Ltd. 17,071,247
-------------- -------------------------------------------------------------- ----------------
82,315,095
-------------- -------------------------------------------------------------- ----------------
India -- 2.6%
350,000 BSES Ltd. GDR (a) 6,650,000
900,000 Larsen & Toubro Ltd. GDR 13,500,000
166,667 Mahindra & Mahindra Ltd. GDR (a) 1,666,670
990,877 Mahindra & Mahindra Ltd. GDR (a)(c) 9,908,770
20,000 The India Magnum Fund N.V. Class B Shares (b) 870,000
-------------- -------------------------------------------------------------- ----------------
32,595,440
-------------- -------------------------------------------------------------- ----------------
Ireland -- 8.4%
2,067,277 Bank of Ireland 17,096,894
1,527,557 CRH PLC 15,816,463
1,383,342 Grafton Group PLC 15,426,769
3,020,682 Greencore Group PLC 17,605,277
5,483,227 Independent Newspapers PLC 29,234,951
1,557,284 Irish Continental Group PLC 11,028,385
-------------- -------------------------------------------------------------- ----------------
106,208,739
-------------- -------------------------------------------------------------- ----------------
Israel -- 2.1%
1,036,722 Blue Square Chain Stores Properties & Investments 8,238,305
450,000 Teva Pharmaceutical Industries Ltd. ADR 18,843,750
-------------- -------------------------------------------------------------- ----------------
27,082,055
-------------- -------------------------------------------------------------- ----------------
Italy -- 5.3%
235,000 Gucci Group N.V. NY Registered Shares 16,215,000
861,500 Industria Macchine Automatiche 3,420,206
300,000 Industrie Natuzzi S.p.A. ADR 13,612,500
200,000 Luxottica Group S.p.A. ADR 12,700,000
293,000 Safilo S.p.A. 5,207,085
1,095,000 Societa Trenno S.p.A. 2,151,944
6,250,000 Telecom Italia Mobile S.p.A. 12,892,802
-------------- -------------------------------------------------------------- ----------------
66,199,537
-------------- -------------------------------------------------------------- ----------------
Japan -- 10.0%
500 Bank of Tokyo-Mitsubishi 10,199
194,300 Bunkyodo Co. Ltd. 3,331,150
671,000 Canon Inc. 12,860,735
146,300 H.I.S. Co. Ltd. 7,769,052
1,040,000 Hitachi Ltd. 9,235,098
1,666,000 Itochu Corp. 10,062,792
110,000 Japan Associated Finance Co. Ltd. 9,061,896
See Notes to Financial Statements.
12
<PAGE>
Schedule of Investments (continued) October 31, 1996
SHARES SECURITY VALUE
-------------- -------------------------------------------------------------- ----------------
Japan -- 10.0% (continued)
1,120,000 Kajima Corp. $ 9,640,232
642,000 Matsushita Electric Industrial Co. Ltd. 10,272,903
2,800 NIC Corp. 39,388
800 Nippon Denwa Shisetsu Co. Ltd. 8,722
612,000 Nomura Securities Co. Ltd. 10,115,702
257,000 Noritsu Koki Co. Ltd. 13,444,259
350 NTT Data Communications Systems Co. 10,370,142
258,951 Sato Corp. 5,236,393
67,000 Shohkoh Fund 14,078,600
-------------- -------------------------------------------------------------- ----------------
125,537,263
-------------- -------------------------------------------------------------- ----------------
Korea -- 1.6%
98,730 Daehan City Gas Co. 8,117,575
4,460 Hung Chang Products Co. (a) 341,598
365,400 Korea Electric Power Corp. 10,736,014
5,000 Samchully Co. 410,797
130 Samsung Fire & Marine Insurance 68,686
-------------- -------------------------------------------------------------- ----------------
19,674,670
-------------- -------------------------------------------------------------- ----------------
Malaysia -- 2.6%
3,750,000 Metroplex Berhad 4,318,874
6,000,000 Renong Berhad 9,451,063
1,200,000 Renong Berhad - 4% ICULS Rights (a) 439,308
750,000 Renong Berhad - Warrants, Expire 11/21/00 (a) 305,735
3,000,000 Sungei Way Holdings Berhad 17,097,400
250,000 Sungei Way Holdings Berhad Warrants, Expire 6/29/99 (a) 766,810
-------------- -------------------------------------------------------------- ----------------
32,379,190
-------------- -------------------------------------------------------------- ----------------
Mexico -- 0.9%
2,382,438 Gruma S.A. de C.V. Class B Shares 11,793,955
-------------- -------------------------------------------------------------- ----------------
Netherlands -- 7.1%
400,000 Elsag Bailey Process Automation N.V. (a) 6,850,000
107,500 Heineken N.V. 20,315,909
150,000 Hunter Douglas N.V. 10,613,833
400,000 IHC Caland N.V. 22,336,223
9,725 Royal Dutch Petroleum Co. 1,606,784
15,275 Royal Dutch Petroleum Co. ADR 2,524,194
200,631 Wolters Kluwer N.V. 25,802,005
-------------- -------------------------------------------------------------- ----------------
90,048,948
-------------- -------------------------------------------------------------- ----------------
Norway -- 2.6%
1,222,500 Schibsted A.S.A. Group 18,696,472
1,000,000 Tomra Systems A.S.A. 14,195,633
-------------- -------------------------------------------------------------- ----------------
32,892,105
-------------- -------------------------------------------------------------- ----------------
Panama -- 1.0%
300,000 Panamerican Beverages Inc. ADR 13,087,500
-------------- -------------------------------------------------------------- ----------------
See Notes to Financial Statements.
13
<PAGE>
Schedule of Investments (continued) October 31, 1996
SHARES SECURITY VALUE
-------------- -------------------------------------------------------------- ----------------
Poland -- 2.5%
150,000 Bank Slaski S.A. Katowicach $ 13,874,066
254,408 Debica S.A. (a) 5,158,753
1,500,000 Elektrim Spolka Akcyjna S.A. 12,540,021
-------------- -------------------------------------------------------------- ----------------
31,572,840
-------------- -------------------------------------------------------------- ----------------
Singapore -- 3.0%
2,100,000 Cerebos Pacific Ltd. 16,245,564
5,000,000 DBS Land Ltd. 15,755,855
601,800 Fraser & Neave Ltd. 2,797,580
986,000 Sembawang Maritime Ltd. 2,603,208
-------------- -------------------------------------------------------------- ----------------
37,402,207
-------------- -------------------------------------------------------------- ----------------
South Africa -- 2.0%
1,250,000 Barlow Ltd. 10,893,885
90,000 Investec Bank Ltd. 2,119,114
568,000 Investec Holdings Ltd. 11,558,490
100,000 Metro Cash & Carry Ltd. GDR 1,188,000
-------------- -------------------------------------------------------------- ----------------
25,759,489
-------------- -------------------------------------------------------------- ----------------
Sweden -- 9.5%
503,570 Astra AB A Shares 23,166,751
600,000 Autoliv AB 25,500,800
675,000 Getinge Industrier AB Class B Shares 12,339,097
500,000 Iro AB 5,712,545
1,000,000 Nobel Biocare AB 16,909,132
1,144,000 Telefonaktiebolaget LM Ericsson Class B Shares 4,862,000
176,000 Telefonaktiebolaget LM Ericsson Class B Shares ADR 31,020,184
-------------- -------------------------------------------------------------- ----------------
119,510,509
-------------- -------------------------------------------------------------- ----------------
Switzerland -- 3.7%
25,000 Ciba-Geigy AG 30,924,764
2,000 Roche Holdings AG 15,190,276
2,000 Roche Holdings AG Warrants, Expire 5/5/98 (a) 53,230
-------------- -------------------------------------------------------------- ----------------
46,168,270
-------------- -------------------------------------------------------------- ----------------
Thailand -- 2.1%
6,342,423 Bangkok Metropolitan Bank Public Co. Ltd. 3,232,758
750,000 Central Pattana Public Co. Ltd. 2,999,412
1,307,800 Finance One Public Co. Ltd. 3,691,888
36,360 Finance One Public Co. Ltd. Warrants, Expire 3/15/99 (a) 64,152
2,500,000 Krung Thai Bank Public Co. Ltd. 6,763,380
31 Saha Pathana International Holding Public Co. Ltd. 83
1,500,000 Total Access Communication Public Co. Ltd. 10,350,000
-------------- -------------------------------------------------------------- ----------------
27,101,673
-------------- -------------------------------------------------------------- ----------------
See Notes to Financial Statements.
14
<PAGE>
Schedule of Investments (continued) October 31, 1996
SHARES SECURITY VALUE
-------------- -------------------------------------------------------------- ----------------
United Kingdom -- 7.8%
1,000,000 Compass Group PLC $ 9,933,236
2,000,000 Dixons Group PLC 17,863,540
1,013,859 Misys PLC 14,982,528
3,000,000 Rentokil Group PLC 20,151,441
300,000 Reuters Holdings PLC ADR 22,312,500
1,300,000 Serco Group PLC 13,410,682
3 SmithKline Beecham 37
-------------- -------------------------------------------------------------- ----------------
98,653,964
-------------- -------------------------------------------------------------- ----------------
TOTAL STOCKS
(Cost -- $1,014,270,083) 1,250,821,234
-------------- -------------------------------------------------------------- ----------------
FACE
AMOUNT+ SECURITY VALUE
-------------- -------------------------------------------------------------- ----------------
BONDS -- 0.1%
Singapore -- 0.1%
500,000 Sembawang Maritime Ltd. ICULS, 1.500% due 10/25/98 432,931
-------------- -------------------------------------------------------------- ----------------
Thailand -- 0.0%
3,636,000 Finance One Public Co. Ltd., Unsecured Debt,
3.750% due 3/15/01 142,560
-------------- -------------------------------------------------------------- ----------------
TOTAL BONDS
(Cost -- $457,737) 575,491
-------------- -------------------------------------------------------------- ----------------
REPURCHASE AGREEMENT -- 0.8%
$11,127,000 CS First Boston Corp., 5.470% due 11/1/96; Proceeds at
maturity -- $11,128,691; (Fully collateralized by
U.S. Treasury Bill due 3/27/97; Market value -- $11,354,723)
(Cost -- $11,127,000) 11,127,000
-------------- -------------------------------------------------------------- ----------------
TOTAL INVESTMENTS -- 100%
(Cost -- $1,025,854,820*) $1,262,523,725
-------------- -------------------------------------------------------------- ----------------
</TABLE>
(a) Non-income producing security.
(b) Restricted security (See Note 9).
(c) Security exempt from registration under Rule 144A of Securities Act of
1933. These securities may be resold in transactions that are exempt from
registration, generally to qualified institutional buyers.
+ Represents local currency.
* Aggregate cost for Federal income tax purposes is $1,041,449,361.
See Notes to Financial Statements.
15
<PAGE>
Statement of Assets and Liabilities October 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (Cost -- $1,025,854,820) $1,262,523,725
Cash 851,422
Receivable for Fund shares sold 17,586,638
Receivable for securities sold 2,949,090
Dividends and interest receivable 1,099,282
Receivable for open forward foreign currency contracts (Note 5) 30,038
Other assets 195,580
------------------------------------------------------------------------ ---------------
Total Assets 1,285,235,775
------------------------------------------------------------------------ ---------------
LIABILITIES:
Payable to bank 4,663,957
Payable for securities purchased 2,404,439
Management fees payable 930,942
Payable for Fund shares purchased 557,955
Distribution fees payable 216,201
Payable for open forward foreign currency contracts (Note 5) 13,814
Accrued expenses 935,841
------------------------------------------------------------------------ ---------------
Total Liabilities 9,723,149
------------------------------------------------------------------------ ---------------
Total Net Assets $1,275,512,626
------------------------------------------------------------------------ ---------------
NET ASSETS:
Par value of capital shares $ 68,596
Capital paid in excess of par value 1,127,327,882
Accumulated net investment loss (14,136,552)
Accumulated net realized loss on investments and foreign currencies (74,031,916)
Net unrealized appreciation of investments and foreign currencies 236,284,616
------------------------------------------------------------------------ ---------------
Total Net Assets $1,275,512,626
------------------------------------------------------------------------ ---------------
Shares Outstanding:
Class A 27,562,420
------------------------------------------------------------------------ ---------------
Class B 11,382,540
------------------------------------------------------------------------ ---------------
Class C 12,486,216
------------------------------------------------------------------------ ---------------
Class Y 10,753,262
------------------------------------------------------------------------ ---------------
Class Z 6,411,931
------------------------------------------------------------------------ ---------------
Net Asset Value:
Class A (and redemption price) $18.64
------------------------------------------------------------------------ ---------------
Class B * $18.65
------------------------------------------------------------------------ ---------------
Class C ** $18.38
------------------------------------------------------------------------ ---------------
Class Y (and redemption price) $18.64
------------------------------------------------------------------------ ---------------
Class Z (and redemption price) $18.62
------------------------------------------------------------------------ ---------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $19.62
------------------------------------------------------------------------ ---------------
</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 Note 2).
See Notes to Financial Statements.
16
<PAGE>
Statement of Operations For the Year Ended October 31, 1996
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Dividends $ 17,143,102
Interest 1,781,301
Less: Foreign withholding tax (1,659,602)
------------------------------------------------------------ --------------
Total Investment Income 17,264,801
------------------------------------------------------------ --------------
EXPENSES:
Management fees (Note 2) 10,047,384
Distribution fees (Note 2) 5,466,532
Shareholder and system servicing fees 1,133,895
Custody 1,011,600
Registration fees 242,821
Shareholder communications 99,999
Directors' fees 85,000
Audit and legal 72,000
Other 95,570
------------------------------------------------------------ --------------
Total Expenses 18,254,801
Less: Custody earning credits (Note 2) (720,826)
------------------------------------------------------------ --------------
Net Expenses 17,533,975
------------------------------------------------------------ --------------
Net Investment Loss (269,174)
------------------------------------------------------------ --------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 7,174,734
Foreign currency transactions (1,046,113)
------------------------------------------------------------ --------------
Net Realized Gain 6,128,621
------------------------------------------------------------ --------------
Change in Net Unrealized Appreciation
of Investments and Foreign Currencies:
Beginning of year 137,475,608
End of year 236,284,616
------------------------------------------------------------ --------------
Increase in Net Unrealized Appreciation 98,809,008
------------------------------------------------------------ --------------
Net Gain on Investments and Foreign Currencies 104,937,629
------------------------------------------------------------ --------------
Increase in Net Assets From Operations $104,668,455
------------------------------------------------------------ --------------
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
Statements of Changes in Net Assets For the Years Ended October 31,
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------- --------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss)+ $ (269,174) $ 3,962,208
Net realized gain (loss) 6,128,621 (80,001,326)
Increase in net unrealized appreciation 98,809,008 13,107,470
- ------------------------------------------------- --------------- ---------------
Increase (Decrease) in
Net Assets From Operations 104,668,455 (62,931,648)
- ------------------------------------------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (8,277,473) (5,701,557)
Net realized gains -- (5,853,998)
- ------------------------------------------------- --------------- ---------------
Decrease in Net Assets From
Distributions to Shareholders (8,277,473) (11,555,555)
- ------------------------------------------------- --------------- ---------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 947,882,501 839,540,327
Net asset value of shares issued
for reinvestment of dividends 7,626,220 93,380,401
Net asset value of shares issued
in connection with the transfer of
the Smith Barney Global Opportunities
Fund's net assets (Note 10) -- 11,124,277
Cost of shares reacquired (823,699,952) (750,066,019)
- ------------------------------------------------- --------------- ---------------
Increase in Net Assets From
Fund Share Transactions 131,808,769 193,978,986
- ------------------------------------------------- --------------- ---------------
Increase in Net Assets 228,199,751 119,491,783
NET ASSETS:
Beginning of year 1,047,312,875 927,821,092
- ------------------------------------------------- --------------- ---------------
End of year* $1,275,512,626 $1,047,312,875
- ------------------------------------------------- --------------- ---------------
* Includes accumulated net investment loss of: $ (14,726,422) $ (5,133,662)
- ------------------------------------------------- --------------- ---------------
</TABLE>
+ For the years ended October 31, 1996 and 1995, net investment income for
Federal income tax purposes are $1,483,342 and $7,433,801, respectively.
See Notes to Financial Statements.
18
<PAGE>
Notes to Financial Statements
1. Significant Accounting Policies
The International Equity Portfolio ("Portfolio") is a separate investment
portfolio of the Smith Barney World Funds, Inc. ("Fund"). The Fund, a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end investment management company and consists of this
Portfolio and five other separate investment portfolios: European, Pacific,
International Balanced, Global Government Bond and Emerging Markets Portfolios.
The financial statements and financial highlights for the other portfolios are
presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolio
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; (c) securities maturing within 60
days are valued at cost plus accreted discount, or minus amortized premium,
which approximates market value; (d) gains or losses on the sale of securities
are calculated by using the specific identification method; (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) direct expenses are charged to each
portfolio and class; management fees and general expenses are allocated on the
basis of relative net assets; (h) dividends and distributions to shareholders
are recorded on the ex-dividend date; (i) the accounting records are maintained
in U.S. dollars. All assets and liabilities denominated in foreign currencies
are translated into U.S. dollars based on the rate of exchange of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, and income and expenses are translated at the rate of exchange
quoted on the respective date that such transactions are recorded. Differences
between income and expense amounts recorded and collected or paid are adjusted
when reported by the custodian bank; (j) the Portfolio intends to comply with
the applicable provisions of the Internal Revenue Code of 1986, as amended,
pertaining to regulated
19
<PAGE>
Notes to Financial Statements (continued)
investment companies and make distributions of taxable income sufficient to
relieve it from substantially all Federal income and excise taxes; and (k)
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 Portfolio 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 of the Fund. The
Portfolio pays SBMFM a management fee calculated at the annual rate of 0.85% of
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 Portfolio's shares and as such received sales charges of approximately
$1,248,000 on sales of the Portfolio's Class A shares for the year ended October
31, 1996. In addition, SB received brokerage commissions of $31,532.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase and 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 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 $18,000 $390,000 $22,000
- -------- --------- ----------- ----------
</TABLE>
20
<PAGE>
Notes to Financial Statements (continued)
Pursuant to a Distribution Plan, the Portfolio 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' shares. The Portfolio also pays a
distribution fee with respect to Class B and C shares calculated at the annual
rate of 0.75% of the average daily net assets for each respective class. 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 $1,284,971 $1,811,343 $2,370,218
- ------------------------ ------------- ------------- ------------
</TABLE>
All officers and three Directors of the Fund are employees of SB.
The Portfolio has an arrangement with its custodian, The Bank of New York,
whereby it earns custody earnings credits on available cash balances. These
credits offset custody fees which may be charged to the Portfolio during the
current year. These credits totalled $720,826 for the year ended October 31,
1996.
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>
<CAPTION>
<S> <C>
----------------------------
Purchases $626,828,494
------------ ---------------
Sales 531,543,470
------------ ---------------
</TABLE>
At October 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were as follows:
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------
Gross unrealized appreciation $285,172,156
Gross unrealized depreciation (64,097,792)
------------------------------- ---------------
Net unrealized appreciation $221,074,364
------------------------------- ---------------
</TABLE>
4. Capital Loss Carryforward
At October 31, 1996, the Fund had, for Federal income tax purposes,
approximately $73,454,000 of capital loss carryforwards, available to offset
future realized capital gains through 2003. To the extent that these capital
loss carryforwards can be used to offset net realized capital gains, if any,
such gains will not be distributed.
21
<PAGE>
Notes to Financial Statements (continued)
5. Forward Foreign Currency Contracts
At October 31, 1996, the International Equity Portfolio had open forward
foreign currency contracts as described below. The Portfolio bears the market
risk that arises from changes in foreign currency exchange rates. The unrealized
gain (loss) of the contracts is reflected in the accompanying financial
statements as follows:
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
- ---------------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
To Sell:
Singapore Dollar 1,544,607 $1,096,329 11/2/96 $ (5,351)
Singapore Dollar 1,426,504 1,012,621 11/5/96 (6,197)
Singapore Dollar 862,870 612,543 11/6/96 (2,266)
- ---------------------- ------------- ------------- ------------ ------------
2,721,493 (13,814)
- ---------------------- ------------- ------------- ------------ ------------
To Buy:
Austrian Schilling 7,246,926 680,769 11/4/96 1,314
Belgian Franc 52,148,021 1,672,009 11/6/96 28,724
- ---------------------- ------------- ------------- ------------ ------------
2,352,778 30,038
- ---------------------- ------------- ------------- ------------ ------------
Total Unrealized Gain
on Forward Foreign
Currency Contracts $ 16,224
- ---------------------- ------------- ------------- ------------ ------------
</TABLE>
6. Option Contracts
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily. 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, 1996, the Portfolio had no open purchased call or put option
contracts.
7. Portfolio Concentration
The Portfolio'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
22
<PAGE>
Notes to Financial Statements (continued)
these foreign currencies to the U.S. dollar can significantly affect the
value of the investments and earnings of the Portfolio. Foreign investments
may also subject the Portfolio 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 counter-parties
to meet the terms of their contracts.
8. Capital Shares
At October 31, 1996, the Fund had one billion shares of $0.001 par value
capital stock authorized. The Portfolio has the ability to issue multiple
classes of shares. Each share of a class represents an identical legal interest
in the Portfolio and has the same rights, except that each class bears certain
expenses specifically related to the distribution of its shares. Effective
November 7, 1994, the Portfolio adopted a new class structure, renaming the
existing Class B and D shares as Class C and Y shares, respectively.
At October 31, 1996, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y Class Z
- ----------------------- --------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Total Paid-in Capital $404,656,739 $195,070,413 $219,917,758 $196,228,679 $111,522,889
- ----------------------- --------------- --------------- --------------- --------------- --------------
</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 29,809,743 $ 540,225,017 27,052,101 $ 456,819,952
Shares issued on
reinvestment 270,352 4,617,617 381,728 6,459,617
Net asset value of shares
issued in connection with
the transfer of the Smith
Barney Global
Opportunities Fund's
net assets (Note 10) -- -- 2,644,564 42,841,936
Shares redeemed (31,054,593) (565,101,407) (33,032,842) (563,944,315)
------------------------------------------ ---------------- --------------- ----------------
Net Decrease (974,498) $ (20,258,773) (2,954,449) $ (57,822,810)
------------------------------------------ ---------------- --------------- ----------------
23
<PAGE>
Year Ended Year Ended
October 31, 1996 October 31, 1995
-------------------------------- --------------------------------
Shares Amount Shares Amount
------------------------------------------ ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Class B
Shares sold 12,723,350 $ 229,942,996 8,253,070 $141,165,360
Shares issued on
reinvestment 19,196 330,185 10,057 170,775
Net asset value of shares
issued in connection with
the transfer of the Smith
Barney Global
Opportunities Fund's
net assets (Note 10) -- -- 2,530,152 41,165,567
Shares redeemed (8,709,898) (158,190,577) (3,443,387) (58,904,930)
------------------------------------------ ---------------- --------------- ----------------
Net Increase 4,032,648 $ 72,082,604 7,349,892 $123,596,772
------------------------------------------ ---------------- --------------- ----------------
Class C+++
Shares sold 2,740,842 $ 48,948,469 4,075,720 $ 68,114,061
Shares issued on
reinvestment 34,000 576,308 95,745 1,596,967
Net asset value of shares
issued in connection with
the transfer of the Smith
Barney Global
Opportunities Fund's
net assets (Note 10) -- -- 45,583 731,143
Shares redeemed (4,471,834) (79,543,267) (5,541,907) (92,568,298)
------------------------------------------ ---------------- --------------- ----------------
Net Decrease (1,696,992) $ (30,018,490) (1,324,859) $(22,126,127)
------------------------------------------ ---------------- --------------- ----------------
Class Y++
Shares sold 5,706,318 $ 105,704,162 4,490,914 $ 78,396,629
Shares issued on
reinvestment 54,561 928,635 90,293 1,615,451
Shares redeemed (676,092) (12,631,569) (1,506,764) (25,329,659)
------------------------------------------ ---------------- --------------- ----------------
Net Increase 5,084,787 $ 94,001,228 3,074,443 $ 54,682,421
------------------------------------------ ---------------- --------------- ----------------
Class Z
Shares sold 1,285,495 $ 23,061,857 5,456,298 $ 95,044,325
Shares issued on
reinvestment 68,987 1,173,475 74,959 1,281,467
Net asset value of shares
issued in connection with
the transfer of the Smith
Barney Global
Opportunities Fund's
net assets (Note 10) -- -- 534,101 8,641,755
Shares redeemed (455,720) (8,233,132) (552,189) (9,318,817)
------------------------------------------ ---------------- --------------- ----------------
Net Increase 898,762 $ 16,002,200 5,513,169 $ 95,648,730
------------------------------------------ ---------------- --------------- ----------------
</TABLE>
* For Class B and Z shares, transactions are for the period from November 7,
1994 (inception date) to October 31, 1995.
+ On October 10, 1994, the former Class C shares were exchanged into Class A
shares.
+++ On November 7, 1994, the former Class B shares were renamed Class C shares.
++ On November 7, 1994, the former Class D shares were renamed Class Y shares.
24
<PAGE>
Notes to Financial Statements (continued)
9. Restricted Securities
The Portfolio's investment in the following security is restricted as to
resale and is valued under the direction of the Portfolio's Board of Directors
in good faith, at fair value, taking into consideration the appropriate
economic, financial and other pertinent available information pertaining to
restricted securities. At October 31, 1996, the Portfolio held the following
restricted security:
<TABLE>
<CAPTION>
Acquisition % of
Security Date Shares Price Net Assets
-------------------------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Incom Inc. 5/13/86 80,000 83.0 FF* 0.10%
-------------------------- -------- ----------- -------------
</TABLE>
*FF = French Franc
10. Transfer of Net Assets
On April 21, 1995, the Portfolio acquired the assets and certain liabilities
of the Smith Barney Global Opportunities Fund Inc. ("SBGO"), pursuant to a plan
of reorganization approved by SBGO shareholders on April 20, 1995. Total shares
issued by the Portfolio and the total net assets of SBGO and the Portfolio on
the date of the transfer were as follows:
<TABLE>
<CAPTION>
Shares Total Net Total Net
Acquired Issued by Assets of Assets of
Fund the Portfolio SBGO the Portfolio
- ---------- ---------------- -------------- ----------------
<S> <C> <C> <C>
SBGO 5,754,400 $93,380,401 $914,449,443
- ---------- ---------------- -------------- ----------------
</TABLE>
The total net assets of SBGO before acquisition included unrealized
appreciation of $1,382,587. The total net assets of the Portfolio immediately
after the acquisition were $1,007,829,844. The transaction was structured for
tax purposes to qualify as a tax-free reorganization under the Internal Revenue
Code.
25
<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(2)(3) 1993 1992
- ------------------------------------- ----------- ----------- ---------------------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $17.15 $18.79 $18.71 $12.35 $12.31
- ------------------------------------- ----------- ----------- ---------------------- -----------
Income (Loss) From Operations:
Net investment income (loss) 0.01 0.08* (0.01) (0.01) 0.02
Net realized and
unrealized gain (loss) 1.65 (1.50) 0.09 6.53 0.04
- ------------------------------------- ----------- ----------- ---------------------- -----------
Total Income (Loss) From Operations 1.66 (1.42) 0.08 6.52 0.06
- ------------------------------------- ----------- ----------- ---------------------- -----------
Less Distributions From:
Net investment income (0.17) (0.12) -- -- (0.02)
Net realized gains(4) -- (0.10) -- (0.16) --
- ------------------------------------- ----------- ----------- ---------------------- -----------
Total Distributions (0.17) (0.22) -- (0.16) (0.02)
- ------------------------------------- ----------- ----------- ---------------------- -----------
Net Asset Value, End of Year $18.64 $17.15 $18.79 $18.71 $12.35
- ------------------------------------- ----------- ----------- ---------------------- -----------
Total Return 9.78% (7.44)% 0.43%++ 52.78% 0.49%
- ------------------------------------- ----------- ----------- ---------------------- -----------
Net Assets, End of Year (000s) $513,870 $489,533 $591,598 $355,926 $122,605
- ------------------------------------- ----------- ----------- ---------------------- -----------
Ratios to Average Net Assets:
Expenses(5) 1.35% 1.36% 1.35%+ 1.35% 1.56%
Net investment income (loss) 0.17 0.50 (0.05)+ (0.10) 0.24
- ------------------------------------- ----------- ----------- ---------------------- -----------
Portfolio Turnover Rate 46% 42% 35% 27% 20%
- ------------------------------------- ----------- ----------- ---------------------- -----------
Average commissions per share paid on
equity transactions(6) $ 0.02 $ 0.01 -- -- --
- ------------------------------------- ----------- ----------- ---------------------- -----------
</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 January 1, 1994 to October 31, 1994.
(3) On October 10, 1994, the former Class C shares were exchanged into Class
A shares; therefore Class C share activity for the period from January 1,
1994 to October 10, 1994 is included with Class A share activity.
(4) Distributions from net investment income include short-term capital gains
for Federal income tax purposes, if any.
(5) During the years ended October 31, 1996 and October 31, 1995, the
Portfolio has earned credits from the custodian which reduce service fees
incurred. If the credits are taken into consideration, the ratio of
expenses to average net assets for Class A would be 1.29% and 1.28%,
respectively; prior year numbers have not been restated to reflect these
credits.
(6) 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.
26
<PAGE>
Financial Highlights (continued)
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class B Shares Class C Shares
---------------------- ----------------------------------------------
1996(1) 1995(2) 1996(1) 1995(3) 1994(4) 1993(5)
- ------------------------------- ---------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $17.17 $18.38 $16.93 $18.54 $18.58 $12.35
- ------------------------------- ---------------------- ----------- ----------- ----------- -----------
Income (Loss)
From Operations:
Net investment income (loss) 0.08) 0.06* (0.13) (0.06)* (0.11) 0.14
Net realized and unrealized
gain (loss) 1.60 (1.17) 1.62 (1.45) 0.07 6.25
- ------------------------------- ---------------------- ----------- ----------- ----------- -----------
Total Income (Loss)
From Operations 1.52 (1.11) 1.49 (1.51) (0.04) 6.39
- ------------------------------- ---------------------- ----------- ----------- ----------- -----------
Less Distributions From:
Net investment income (0.04) -- (0.04) -- -- --
Net realized gains(6) -- (0.10) -- (0.10) -- (0.16)
- ------------------------------- ---------------------- ----------- ----------- ----------- -----------
Total Distributions (0.04) (0.10) (0.04) (0.10) -- (0.16)
- ------------------------------- ---------------------- ----------- ----------- ----------- -----------
Net Asset Value, End of Year $18.65 $17.17 $18.38 $16.93 $18.54 $18.58
- ------------------------------- ---------------------- ----------- ----------- ----------- -----------
Total Return 8.89% (6.00)%++ 8.85% (8.11)% (0.22)%++ 51.73%++
- ------------------------------- ---------------------- ----------- ----------- ----------- -----------
Net Assets,
End of Year (000s) $212,294 $126,171 $229,514 $240,090 $287,458 $114,951
- ------------------------------- ---------------------- ----------- ----------- ----------- -----------
Ratios to Average Net Assets:
Expenses(7) 2.11% 2.13%+ 2.15% 2.16% 2.10%+ 2.14%+
Net investment income (loss) (0.58) 0.34+ (0.63) (0.34) (0.77)+ (1.08)+
- ------------------------------- ---------------------- ----------- ----------- ----------- -----------
Portfolio Turnover Rate 46% 42% 46% 42% 35% 27%
- ------------------------------- ---------------------- ----------- ----------- ----------- -----------
Average commissions per share
paid on equity transactions(8) $0.02 $0.01 $0.02 $0.01 -- --
- ------------------------------- ---------------------- ----------- ----------- ----------- -----------
</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) On November 7, 1994, the former Class B shares were renamed Class C
shares.
(4) For the period from January 1, 1994 to October 31, 1994.
(5) For the period from January 4, 1993 (inception date) to December 31,
1993.
(6) Distributions from net investment income include short-term capital gains
for Federal income tax purposes, if any.
(7) During the year ended October 31, 1996 and the period ended October 31,
1995, the Portfolio has earned credits from the custodian which reduce
service fees incurred. If the credits are taken into consideration, the
ratios of expenses to average net assets for Class B would be 2.04% and
2.04% (annualized) and for Class C would be 2.09% and 2.08%; prior year
numbers have not been restated to reflect these credits.
(8) 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.
27
<PAGE>
Financial Highlights (continued)
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class Y Shares Class Z Shares
--------------------------------------------------------
1996(1) 1995(2) 1994(3) 1996(1) 1995(4)
- ------------------------------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $17.13 $18.80 $17.64 $17.12 $18.38
- ------------------------------- ----------- --------- ----------- ----------- -----------
Income (Loss) From Operations:
Net investment income 0.18 0.10* 0.01 0.14 0.13*
Net realized and
unrealized gain (loss) 1.54 (1.50) 1.15 1.57 (1.12)
- ------------------------------- ----------- --------- ----------- ----------- -----------
Total Income (Loss) From
Operations 1.72 (1.40) 1.16 1.71 (0.99)
- ------------------------------- ----------- --------- ----------- ----------- -----------
Less Distributions From:
Net investment income (0.21) (0.17) -- (0.21) (0.17)
Net realized gains(5) -- (0.10) -- -- (0.10)
- ------------------------------- ----------- --------- ----------- ----------- -----------
Total Distributions (0.21) (0.27) -- (0.21) (0.27)
- ------------------------------- ----------- --------- ----------- ----------- -----------
Net Asset Value, End of Year $18.64 $17.13 $8.80 $18.62 $17.12
- ------------------------------- ----------- --------- ----------- ----------- -----------
Total Return 10.19% (7.11)% (6.58)%++ 10.13% (5.01)%++
- ------------------------------- ----------- --------- ----------- ----------- -----------
Net Assets, End of Year (000s) $200,427 $97,132 $48,765 $119,408 $94,387
- ------------------------------- ----------- --------- ----------- ----------- -----------
Ratios to Average Net Assets:
Expenses(6) 0.96% 1.06% 1.09%+ 0.97% 1.10%+
Net investment income 0.56 0.91 0.29+ 0.55 1.06+
- ------------------------------- ----------- --------- ----------- ----------- -----------
Portfolio Turnover Rate 46% 42% 35% 46% 42%
- ------------------------------- ----------- --------- ----------- ----------- -----------
Average commissions per share
paid on equity transactions(7) $0.02 $0.01 -- $0.02 $0.01
- ------------------------------- ----------- --------- ----------- ----------- -----------
</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) On November 7, 1994, the Class D shares were renamed Class Y shares.
(3) For the period from June 16, 1994 (inception date) to October 31, 1994.
(4) For the period from November 7, 1994 (inception date) to October 31,
1995.
(5) Distributions from net investment income include short-term capital gains
for Federal income tax purposes, if any.
(6) During the year ended October 31, 1996 and the period ended October 31,
1995, the Portfolio has earned credits from the custodian which reduce
service fees incurred. If the credits are taken into consideration, the
ratios of expenses to average net assets for Class Y would be 0.90% and
0.98% and for Class Z would be 0.91% and 1.02% (annualized); prior year
numbers have not been restated to reflect these credits.
(7) 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.
28
<PAGE>
Independent Auditors' Report
The Shareholders and Board of Directors of
Smith Barney World Funds, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the International Equity Portfolio
of Smith Barney World Funds, Inc. as of October 31, 1996, 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 two year period then ended,
the period from January 1, 1994 to October 31, 1994, and each of the years in
the two-year period ended October 31, 1993. 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.
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 and sold but not received and
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 the
International Equity Portfolio of Smith Barney World Funds, Inc. as of
October 31, 1996, the results of its operations for the year then ended, and
the statements of 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 two-year period then ended, the period from January 1, 1994 to
October 31, 1994, and each of the years in the two-year period ended October
31, 1993, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
December 19, 1996
29
<PAGE>
Tax Information (unaudited)
The following tax information represents fiscal year end disclosures of
various tax benefits passed through to shareholders for the current year end.
For the fiscal year ended October 31, 1996, the total amount of income
received by the Portfolio from sources within foreign countries and
possessions of the United States was $0.2907 per share (representing a total
of $19,940,381). The total amount of taxes paid by the Portfolio to such
countries was $0.0242 per share (representing a total of $1,659,602).
The above figures may differ from those cited elsewhere in this report due to
differences in the calculations of income and capital gains for Securities
and Exchange Commission (book) purposes and Internal Revenue Service (tax)
purposes.
30
<PAGE>
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<PAGE>
[This Page Intentionally Left Blank.]
<PAGE>
<PAGE>
[Back cover]
Smith Barney
World Funds, Inc. [SMITH BARNEY LOGO]
A Member of TravelersGroup [Umbrella Logo]
Directors
Victor Atkins
Jessica M. Bibliowicz
Alger B. Chapman
Robert A. Frankel
Rainer Greeven
Susan M. Heilbron
Heath B. McLendon, Chairman
Bruce D. Sargent
James J. Stuart
Officers
Maurits E. Edersheim
Chairman of the Fund
& Advisory Director
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
James B. Conheady
Vice President
Victor S. Filatov
Vice President
Simon R. Hildreth
Vice President
Denis P. Mangan
Vice President
Jeffrey J. Russell
Vice President
Bruce D. Sargent
Vice President
Rein W. van der Does
Vice President
Irving P. David
Controller
Christina T. Sydor
Secretary
Investment Manager
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 World Funds, Inc. International Equity Portfolio. It is not
authorized for distribution to prospective investors unless accompanied or
preceded by a current Prospectus for the Portfolio, which contains information
concerning the Portfolio's investment policies and expenses as well as other
pertinent information.
Smith Barney
World Funds, Inc.
388 Greenwich Street
New York, New York 10013
FD01047 12/96
A N N U A L R E P O R T
1996
1996
1996
1996
1996
SMITH BARNEY
WORLD FUNDS, INC.
GLOBAL GOVERNMENT
BOND PORTFOLIO
- ---------------------------------
October 31, 1996
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
GLOBAL GOVERNMENT BOND PORTFOLIO
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide you with the annual report for Smith Barney World
Funds -- Global Government Bond Portfolio for the year ended October 31, 1996.
In this report, we have summarized the period's prevailing economic and market
conditions and outlined the investment strategy employed by the Portfolio during
this time. A detailed summary of the Portfolio's performance and current
holdings can be found in the appropriate sections that follow in the annual
report.
Portfolio Performance and Investment Strategy
For the year ended October 31, 1996, the Global Government Bond Portfolio had a
total return of 9.41% for Class A shares. In comparison, the average return for
the same period for global income funds was 12.35%, as reported by Lipper
Analytical Services Inc. (Lipper is an independent fund tracking organization.)
At the beginning of 1996, the Portfolio had a high percentage (approximately
28%) of its assets invested in U.S. government bonds. Over the period covered by
this report, the U.S. government bond market has underperformed relative to the
European bond markets, as evidenced by the 5.12% total return for the Lehman
Brothers Government Bond Index. (The Lehman Brothers Government Bond Index is a
common benchmark used to measure the performance of long-term U.S. government
bonds.) These lackluster returns generated by the U.S. bond market, particularly
in the first half of 1996, significantly affected the Global Government Bond
Portfolio's performance.
The Global Government Bond Portfolio seeks as high a level of current income and
capital appreciation as is consistent with its policy of investing principally
in high quality bonds of the U.S. and foreign governments. The portfolio strives
to significantly outperform the U.S. government bond market with no more risk
than investing solely in U.S. government bonds. Since our last shareholder
letter dated April 30, 1996, the Global Government Bond Portfolio's duration (a
common measure of a bond's price volatility relative to changes in interest
rates) has been extended from 4.2 years to 5.2 years as of October 31, 1996. The
extension of the Portfolio's duration reflects our positive outlook for the bond
markets over the near term, particularly in the peripheral, high-yielding
markets such as Spain, Italy and Sweden. During the period covered by this
report, 100% of the Global Government Bond Portfolio's foreign assets were
hedged back into U.S. dollars. The hedging strategy employed involves buying
U.S. dollar forward contracts in order to
1
<PAGE>
protect the dollar value of our foreign investments. We will continue to follow
this hedging strategy, as the U.S. dollar remains strong versus major foreign
currencies.
North America
The U.S. economy has enjoyed a healthy recovery over the last three years. The
unemployment rate has fallen from around 7.50% in 1992, to just over 5.00% in
1996. Consumer price inflation has remained almost flat since the end of 1991,
and producer prices still appear to be declining on a long-term basis. Although
there were few signs of inflation in 1996, the strength of the U.S. economy,
particularly during the first two quarters of 1996, prompted inflation fears to
rise among many investors throughout much of the year. As a result, a debate
over whether or not the Federal Reserve Board would raise interest rates
continued to linger over the U.S. bond markets, which added to bond market
volatility between April and September. However, during the third quarter of
1996, U.S. economic growth moderated, fears of inflation subsided, and interest
rates have broken out of their six-month trading range of 6.75% to 7.20%. As of
October 31, 1996 the yield on the 30-year Treasury was 6.66%
As we previously stated, the Global Government Bond Portfolio had approximately
28.00% of its assets in U.S. bonds at the beginning of 1996. Throughout the
year, we reduced the Portfolio's U.S. bond holdings to an underweighted position
relative to the J.P. Morgan Government Bond Index ("Index"), as the U.S. bond
market significantly underperformed the European bond markets. (The J.P. Morgan
Government Bond Index is a common benchmark that measures performance and
quantifies risk across diverse international fixed income markets.) More
recently, we have repositioned the Portfolio to more closely mirror the Index's
allocation to the U.S. As of October 31, 1996, we had about 23% invested in U.S.
government bonds. As a result, the Portfolio has participated in the U.S. bond
market rally that began at the end of September.
During the period covered by this report, the Canadian government bond market
has performed well, particularly during the past three months. The market's
climb was propelled by Canada's very favorable economic climate, which has
benefited from a strong growth of trade across the border and from trade
liberalization in the post-NAFTA period. At the same time, higher unemployment
levels than in the U.S. have restrained inflationary pressures. However, a solid
economy and strong currency have allowed the Bank of Canada to pursue an
independent policy that has caused interest rates, which have been higher, to
fall substantially relative to the U.S. In our opinion, the outlook for Canada
remains favorable, and we expect to continue earning attractive total returns
from this market. Therefore, we believe that as the U.S. bond market continues
to rally, the Canadian market will do even better, and we expect this trend to
continue into the first quarter of 1997.
2
<PAGE>
Europe
Foreign bond markets, especially in Europe, followed the U.S. in posting
declines during the first quarter of 1996. However, the decline in core European
countries, such as France, Germany and Belgium, was not as severe as in the
U.S., and they recovered from their downturn relatively quickly. In contrast,
the higher-yielding bond markets, such as Spain, Italy and Sweden, significantly
outperformed their core European counterparts, posting gains both in local
currency and U.S. dollar terms. Despite the fact that the U.S. bond market has
recently broken out of its six-month trading range, the European bond markets,
particularly the high-yielding markets, continued to outperform the U.S. bond
market throughout the year. In our view, there are two primary reasons for the
European bond markets' outperformance relative to the U.S. The first reason is
that economic growth throughout Europe is slow relative to the U.S. The second
is the increased likelihood that the European Monetary Union (EMU) will be
achieved in 1999.
Throughout Europe, economic growth has continued to remain sluggish.
Unemployment is high across the continent, and countries such as Italy, Germany
and France are operating near recessionary levels. Because economic growth has
been stagnant, central banks in Europe have been cutting interest rates
throughout the year, which has caused the bond markets to rally. The Portfolio's
10% overweighted position in Europe throughout the year versus the Index,
relative to our 5% underweighted position in the U.S. and Canada, allowed us to
benefit from the better performance of most European markets.
As the year progressed, a significant new factor materialized, which provided a
boost to the Portfolio's return. Confidence in the eventual success of EMU has
produced spectacular returns in the higher-yielding markets this year. In
particular, the likelihood that the peripheral European countries such as Spain,
Sweden and Italy would be willing and able to qualify for the first round of
membership in 1999, has generated strong rallies in those countries' bond
markets. Despite stagnant economic activity and double-digit unemployment
throughout Europe, policy makers across the continent continue to adopt tight
fiscal and monetary policies in order realize monetary unification by 1999. Both
the French and Italian governments have recently announced budget proposals
which, in theory, will bring their respective deficits in line with the
Maastrict criteria (budget deficit ceiling of 3% of GDP), and Sweden has seen
considerable improvement in its overall financial position in 1996.
Entering the first quarter of 1996, the Global Government Bond Portfolio was 16%
overweighted in Europe versus the Index. Our overall position in Europe was
subsequently reduced to 10% overweighted during the first quarter of 1996,
reflecting the sell-off in the European bond markets. However, beginning
3
<PAGE>
in July, we increased our overweighted position in Spain, Italy, Finland and
Sweden, relative to the Index from 7% to 17%. As of October 31, 1996, the Global
Government Bond Portfolio had approximately 28% of its total assets invested in
these peripheral markets. In addition, the outperformance of the core European
bond markets, due to a series of interest rate cuts led by the German
Bundesbank, continued throughout the summer months, and we correspondingly
increased our total overweighted position in those markets relative to the
Index, from 3% to 14%, which brings our asset allocation in core Europe to about
46% as of October 31, 1996.
Overall, our outlook for the European bond markets remains favorable. Although
economic growth has picked up slightly in Germany, especially in manufacturing,
low inflation levels are expected to continue over the next several years. We
therefore believe it is highly unlikely that the Bundesbank will see the need to
raise interest rates anytime soon. Another important factor favoring Europe is
that other central banks in Europe have not yet completed easing monetary
policy. Central banks in Sweden, Spain and Italy are, in our opinion, all likely
to continue cutting rates. In our view, the prospects for stable, or lower
short-term interest rates in core Europe should provide attractive investment
opportunities. In addition, EMU optimism should rise as the Dublin European
Summit approaches in December. This gathering is expected to provide
confirmation of commitment to the EMU.
Japan
The performance of the Japanese government bond market has confounded many
investors during the twelve-month period covered by this report. The fundamental
outlook for the Japanese economy has been clouded by many uncertainties. Because
Japan's debt-to-GDP ratio has surged to over 80%, leaving little room for fiscal
stimulus without re-igniting inflationary concerns, monetary policy is still in
charge of assuring recovery. While consumer prices are no longer falling, and in
fact have been steadily rising for the past year, high unemployment and ample
excess capacity should help to keep inflation in check in Japan for the rest of
1996 and into 1997. We believe today's level of interest rates in Japan (which
are below 1%) are unlikely to rise any time soon. However, as the current stage
of the economic cycle advances, interest rates will have to rise enough to ward
off any chance of inflation, without disrupting the financial markets.
Three years ago, U.S. and Japanese short-term rates were almost equal at 3%.
Since then, U.S. rates have risen 2.5% while Japan's have fallen by the same
amount. We believe that Japanese bond yields are quite vulnerable to rise,
especially if near-term election pressures force the government to scale back
plans for fiscal tightening. We therefore plan on continuing to avoid Japanese
government bonds in the near term.
4
<PAGE>
Special Shareholder Notice
Effective October 14, 1996, the Board of Directors of Smith Barney World Funds
has approved permitting the Portfolio to invest up to 10% of its assets in the
government securities of less developed countries that are rated below
investment grade. Prior to this, the Portfolio was only permitted to invest up
to 10% of its assets in investment grade bonds of less developed countries. We
believe that the ability to invest in higher-yielding emerging markets, which
are among the top-performing bond markets so far in 1996, will help to enhance
both the yield and total return potential of the Global Government Bond
Portfolio.
In closing, thank you for investing in the Smith Barney World Funds -- Global
Government Bond Portfolio. We look forward to continuing to help you achieve
your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Victor S. Filatov
Heath B. McLendon Victor S. Filatov
Chairman and Vice President
Chief Executive Officer
November 19, 1996
ANNOUNCING A NEW SYSTEMATIC INVESTMENT PROGRAM MONTHLY MINIMUM
If you are a shareholder purchasing shares of the Global Government Bond
Portfolio through Smith Barney's Systematic Investment Program on a monthly
basis or if you plan to do so in the future, the minimum investment for Class A,
Class B and Class C shares is now $25. If you are purchasing shares on a
quarterly basis, the minimum investment 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.
5
<PAGE>
An Interview with Portfolio Managers
Victor Filatov and Denis Mangan
Victor Filatov is a Managing Director of Smith Barney and is the lead portfolio
manager of the Smith Barney World Funds --Global Government Bond Portfolio. He
joined Smith Barney in 1993 from J.P. Morgan where, as head of the Bond Index
Group, he was responsible for international fixed income and currency research
and for developing the J.P. Morgan Government Bond Index. He has published
numerous articles and is a member of the Fixed Income Analysts Society, U.K.
Bond Commission and the Global FX Standards Board. Mr. Filatov has a BA in Math
and Economics from Clark University and an MA in Economics from the University
of Pennsylvania.
Denis Mangan, who is one of the portfolio managers for the Global Government
Bond Portfolio, is a Director at Smith Barney's London-based Global Capital
Management Group. He joined Smith Barney in 1994 from J.P. Morgan, where he was
a trader on its Proprietary and Multicurrency Desk, and Researcher of
European/Canada/Far East Debt Options and Trading. Mr. Mangan graduated with
honors from Trinity College, Dublin, holds an MA in Mathematics from Columbia
University, and a PhD in Financial Economics from Columbia University.
Q. How would you describe the investment philosophy behind the Global Government
Bond Portfolio?
VF: The Portfolio's investment philosophy is a combination of top-down
fundamental analysis and risk control. What I mean by top-down fundamental
analysis is that we have an investment committee that gives us their outlook on
interest rates and currencies, across all markets that we invest in. We then
take that outlook, which is developed on a monthly basis, and using our asset
allocation model, develop a well-diversified portfolio that also has limited
downside risk. Our parameter for risk is that the funds we manage should not be
any more volatile that a U.S. government bond fund. Our overall objective
normally, is to significantly outperform the U.S. bond market with no more risk
than investing in the U.S. bond market. As a result, we tend to invest primarily
in the government bonds of foreign markets. However, even though we participate
in foreign markets, we hedge most of the currency risk. We do that because if
you assume too much currency risk, you end up having much more volatility
compared to the U.S. bond market. So we generally manage what is called a
fully-hedged portfolio, meaning we take no currency risk. This is a very
important concept, because if you look at all of the different kinds of global
bond funds out there, they are all different. Some are unhedged; some are
hedged; some invest in the U.S.; some do not invest in the U.S. The Global
6
<PAGE>
Government Bond Portfolio invests in U.S. government bonds, as opposed to being
purely international.
Q. Could you further elaborate on the effects of hedging the currency risk
associated with investing in foreign markets?
VF: If you assume a lot of currency exposure, you usually increase the
volatility in the portfolio. Therefore, by hedging, and not taking on the
currency exposure, you help to keep the level of risk down. Actually, currency
hedging this year has been, and should continue to be, very attractive because
short-term interest rates on average, are currently higher in the U.S. than
interest rates in most other major markets. When you hedge, the cost of hedging
is equal to the interest rate differential; and if the currency you are hedging
into, which is the U.S. dollar, has a higher short-term interest rate than the
currency you are hedging out of, you actually are getting paid to hedge. For
example, hedging a German bond into the U.S. dollar will actually pay you about
2% per year right now. Hedging a Japanese position back into U.S. dollar will
currently pay about 5% per year. So, contrary to popular opinion, hedging in an
environment of higher short-term U.S. interest rates, doesn't cost anything. In
fact, by hedging, you reduce the volatility of your portfolio and increase your
return potential.
Q. Over the past twelve months, how did the global economy affect the
performance of the Global Government Bond Portfolio?
DM: I would say that there have been two major themes in the bond markets this
past year. One, the outperformance of the European bond markets in general,
versus the U.S. The primary reason for that being the strength of the U.S.
economy. Month after month, strong payroll data has continued to put pressure on
the U.S. bond market, which has taken place up until the end of October.
However, since that time, the U.S. bond market has rallied on data that showed a
much weaker U.S. economy. But, as far as the bulk of the year is concerned, the
U.S. bond market significantly underperformed the European bond markets. Europe
is in the depths of a recession, and there are few signs of it emerging from
that recession anytime soon. As a result, the European bond markets have
performed well. The other major theme in Europe this year, which started around
mid-summer, was that confidence among investors about prospects for European
Monetary Union (which is scheduled to take place on time in 1999), somewhat
coalesced. In particular, the high-yielding bond markets in Europe such as
Italy, Spain and Sweden benefited a lot from this. This outperformance by the
high-yielding markets accelerated toward the end of the summer and is continuing
at a pace that we believe should continue into the beginning of 1997.
7
<PAGE>
VF: I agree with everything that Denis has said. In simple terms, I would say
that the environment over the past year has been one where economic growth was
still pretty slow and we had benign inflation worldwide. However, central banks
were very concerned about inflation, and because of the points Denis made about
Europe, there was a lot of fiscal budgetary discipline. So, with economic growth
slowing down and a huge unemployment problem in Europe, the ability to reduce
unemployment and get growth going was not really possible in Europe by
traditional fiscal means. Instead, the main route that was open to Europe to
boost their economies was to cut interest rates. So basically in Europe it was a
slow growth, low inflation environment, where fiscal prudence was the dominant
theme. Therefore, what happened was that European central banks cut rates to
spur growth without having to worry about the inflationary consequences, while
the U.S. was experiencing higher interest rates. This helped the European
markets significantly outperform the U.S. markets over the last fiscal year.
Specifically, Sweden, Spain, Italy and Canada were the best-performing markets,
producing double-digit returns this year.
Q. The Board of Directors of Smith Barney World Funds recently approved
permitting the Global Government Bond Portfolio to invest in government
securities of less developed countries that are rated below investment grade.
Why was this change made and what impact will it have on the Portfolio?
VF: For several years the Portfolio has been permitted to invest in securities
of less developed countries so long as the securities were rated investment
grade (i.e. in the top 4 rating categories). However, this policy restricted us
to the larger, more developed markets, and we were unable to invest in many of
the markets that are currently very attractive, such as Russia. We recently
hired a new portfolio manager named Igor Ojereliev, so we could begin to take
advantage of what we believe are significant opportunities in emerging markets.
As it turns out, the average global bond fund has about 10% or more in emerging
market securities that may or may not be investment grade. We felt that the
Portfolio was at a disadvantage to some extent, given that emerging markets are
up about 30% so far this year. The best-performing world income funds are the
ones that have invested entirely in emerging markets. After further evaluation,
the Board of Directors agreed that we should be allowed to invest up to 10% in
emerging market debt that is rated below investment grade. We believe that with
good risk management, we can enhance the Portfolio's yield and total return
potential by investing in these markets. In addition, these emerging markets and
other foreign bond markets rarely move in tandem, so you get additional
diversification benefits as well, which also helps to reduce the Portfolio's
overall risk.
8
<PAGE>
================================================================================
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 $12.30 $12.55 $0.87 $0.00 $0.00 9.41%
- ----------------------------------------------------------------------------------------
10/31/95 11.68 12.30 0.78 0.00 0.00 12.40
- ----------------------------------------------------------------------------------------
10/31/94+++ 12.92 11.68 0.23 0.00 0.42 (4.64)+
- ----------------------------------------------------------------------------------------
12/31/93 11.84 12.92 0.52 0.59 0.00 19.13
- ----------------------------------------------------------------------------------------
12/31/92 12.90 11.84 0.97 0.19 0.00 0.93
- ----------------------------------------------------------------------------------------
Inception*-12/31/91 12.00 12.90 0.44 0.13 0.00 12.42+
========================================================================================
Total $3.81 $0.91 $0.42
========================================================================================
</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 $12.26 $12.50 $0.81 $0.00 $0.00 8.83%
- ----------------------------------------------------------------------------------------
Inception* - 10/31/95 11.57 12.26 0.66 0.00 0.00 11.97+
========================================================================================
Total $1.47 $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 $12.23 $12.47 $0.81 $0.00 $0.00 8.90%
- ----------------------------------------------------------------------------------------
10/31/95 11.68 12.23 0.72 0.00 0.00 11.25
- ----------------------------------------------------------------------------------------
10/31/94+++ 12.93 11.68 0.21 0.00 0.39 (5.09)+
- ----------------------------------------------------------------------------------------
Inception* - 12/31/93 11.83 12.93 0.47 0.59 0.00 18.89+
========================================================================================
Total $2.21 $0.59 $0.39
========================================================================================
</TABLE>
9
<PAGE>
================================================================================
Historical Performance -- Class Y 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 $12.14 $12.39 $0.90 $0.00 $0.00 9.82%
- ----------------------------------------------------------------------------------------
10/31/95 11.68 12.14 0.81 0.00 0.00 11.27
- ----------------------------------------------------------------------------------------
10/31/94+++ 12.93 11.68 0.23 0.00 0.43 (4.62)+
- ----------------------------------------------------------------------------------------
Inception* - 12/31/93 11.97 12.93 0.37 0.59 0.00 16.49+
========================================================================================
Total $2.31 $0.59 $0.43
========================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
================================================================================
Average Annual Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
----------------------------------------------
Class A Class B Class C Class Y
================================================================================
<S> <C> <C> <C> <C>
Year Ended 10/31/96 9.41% 8.83% 8.90% 9.82%
- --------------------------------------------------------------------------------
Five Years Ended 10/31/96 7.86 -- -- --
- --------------------------------------------------------------------------------
Inception* - 10/31/96 9.11 10.65 8.52 8.62
================================================================================
<CAPTION>
With Sales Charge(2)
----------------------------------------------
Class A Class B Class C Class Y
================================================================================
<S> <C> <C> <C> <C>
Year Ended 10/31/96 4.49% 4.33% 7.90% 9.82%
- --------------------------------------------------------------------------------
Five Years Ended 10/31/96 6.87 -- -- --
- --------------------------------------------------------------------------------
Inception* - 10/31/96 8.15 8.78 8.52 8.62
================================================================================
<CAPTION>
================================================================================
Cumulative Total Return
================================================================================
Without Sales Charge(1)
================================================================================
<S> <C>
Class A (Inception* through 10/31/96) 58.46%
- --------------------------------------------------------------------------------
Class B (Inception* through 10/31/96) 21.86
- --------------------------------------------------------------------------------
Class C (Inception* through 10/31/96) 36.71
- --------------------------------------------------------------------------------
Class Y (Inception* through 10/31/96) 35.76
================================================================================
</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 4.50%; Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed within one
year from initial purchase. This CDSC declines by 0.50% the first year
after purchase and 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.
+++ For the period from January 1, 1994 to October 31, 1994, which reflects a
change in the fiscal year end of the Portfolio.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception dates for Class A, B, C and Y shares are July 22, 1991, November
18, 1994, January 4, 1993 and February 19, 1993, respectively.
10
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of
the Global Government Bond Portfolio vs.
J.P. Morgan Global Bond Index+
- --------------------------------------------------------------------------------
July 1991 -- October 1996
[GRAPHIC CHART APPEARS HERE]
<TABLE>
<CAPTION>
Global Goverment JP Morgan Global JP Morgan Global
Date Bond Portfolio Bond Index-Hedged Bond-Unhedged
- ---- ----------------- ----------------- ------------------
<S> <C> <C> <C>
7/22/91 $ 10,000 $ 10,000
10/91 $ 10,790 10,786 11,407
10/92 10,889 11,504 11,927
10/93 12,972 12,903 13,390
10/94 12,341 12,609 13,740
10/95 13,903 15,048 15,319
10/31/96 15,203 16,566 16,254
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares at
inception on July 22, 1991, assuming deduction of the maximum 4.00% 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
J.P. Morgan Global Bond Index is a daily, market capitalization weighted
international fixed income index consisting of 13 countries. The index is
unmanaged and is not subject to the same management and trading expenses of
a mutual fund. The performance of the Portfolio'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.
11
<PAGE>
================================================================================
Schedule of Investments October 31, 1996
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT+ SECURITY VALUE
================================================================================
<S> <C> <C>
BONDS -- 100.0%
Argentina -- 3.0%
4,500,000 Gas Argentino S.A., 7.250% due 12/7/98 $ 4,379,085
- --------------------------------------------------------------------------------
Belgium -- 5.0%
200,000,000 Kingdom of Belgium, 9.000% due 6/27/01 7,475,472
- --------------------------------------------------------------------------------
Canada -- 5.4%
10,500,000 Government of Canada, 6.500% due 6/1/04 7,987,233
- --------------------------------------------------------------------------------
Denmark -- 4.1%
32,000,000 Kingdom of Denmark, 8.000% due 5/15/03 6,013,353
- --------------------------------------------------------------------------------
Finland -- 5.7%
32,000,000 Finland Government, 10.000% due 9/15/01 8,471,710
- --------------------------------------------------------------------------------
Germany-- 20.4%
45,000,000 Deutschland Republic, 6.250% due 4/26/06 30,267,645
- --------------------------------------------------------------------------------
Ireland -- 6.1%
5,200,000 Ireland Government, 8.000% due 10/18/00 8,982,011
- --------------------------------------------------------------------------------
Italy -- 10.4%
Buoni Poliennali Del Tesoro:
10,000,000,000 8.500% due 8/1/99 6,805,157
2,500,000,000 8.500% due 8/1/04 1,694,200
10,000,000,000 8.750% due 7/1/06 6,931,118
- --------------------------------------------------------------------------------
15,430,475
- --------------------------------------------------------------------------------
Spain -- 7.1%
1,200,000,000 Government of Spain, 10.100% due 2/28/01 10,473,583
- --------------------------------------------------------------------------------
Sweden -- 4.6%
40,000,000 Sweden Government, 10.250% due 5/5/00 6,883,693
- --------------------------------------------------------------------------------
United Kingdom -- 5.4%
5,000,000 United Kingdom Treasury, 7.500% due 12/7/06 8,070,754
- --------------------------------------------------------------------------------
United States -- 22.8%
10,000,000 U.S. Treasury Notes, 6.500% due 5/31/01 10,169,000
3,750,000 U.S. Treasury Notes, 5.625% due 2/15/06 3,568,537
6,250,000 U.S. Treasury Notes, 7.000% due 7/15/06 6,530,937
6,000,000 U.S. Treasury Notes, 6.500% due 10/15/06 6,060,900
5,000,000 U.S. Treasury Bonds, 7.625% due 2/15/25 5,575,600
2,000,000 International Bank of Reconstruction & Development,
5.875% due 7/16/97 2,010,000
- --------------------------------------------------------------------------------
33,914,974
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $144,550,728*) $148,349,988
================================================================================
</TABLE>
+ Represents local currency.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
12
<PAGE>
================================================================================
Statement of Assets and Liabilities October 31, 1996
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $144,550,728) $148,349,988
Foreign currency (Cost $666,729) 678,076
Cash 491,309
Receivable for Fund shares sold 197,596
Receivable for securities sold 12,821,792
Interest receivable 3,952,082
Other assets 873
- --------------------------------------------------------------------------------
Total Assets 166,491,716
================================================================================
LIABILITIES:
Payable for securities purchased 13,171,185
Payable for open forward foreign currency contracts (Note 4) 1,080,078
Management fees payable 97,209
Payable for Fund shares purchased 94,637
Distribution fees payable 16,900
Accrued expenses 424,748
Other liabilities 10,162
- --------------------------------------------------------------------------------
Total Liabilities 14,894,919
- --------------------------------------------------------------------------------
Total Net Assets $151,596,797
================================================================================
NET ASSETS:
Par value of capital shares $ 12,102
Capital paid in excess of par value 142,686,386
Undistributed net investment income 4,968,580
Accumulated net realized gain
from investments and foreign currencies 1,200,298
Net unrealized appreciation of investments and foreign currencies 2,729,431
================================================================================
Total Net Assets $151,596,797
================================================================================
Shares Outstanding:
Class A 8,486,010
------------------------------------------------------------------------------
Class B 2,077,619
------------------------------------------------------------------------------
Class C 319,537
------------------------------------------------------------------------------
Class Y 1,218,674
------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $12.55
------------------------------------------------------------------------------
Class B * $12.50
------------------------------------------------------------------------------
Class C ** $12.47
------------------------------------------------------------------------------
Class Y (and redemption price) $12.39
------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $13.14
================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if shares
are redeemed within one year from initial purchase (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.
13
<PAGE>
================================================================================
Statement of Operations For the Year Ended October 31, 1996
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 10,616,273
- -----------------------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 1,150,340
Distribution fees (Note 2) 539,519
Shareholder and system servicing fees 155,563
Registration fees 82,563
Custody 78,898
Shareholder communications 37,353
Audit and legal 29,500
Directors' fees 11,391
Other 9,909
- -----------------------------------------------------------------------------------------------
Total Expenses 2,095,036
Less: Custody earnings credit (Note 2) (38,539)
- -----------------------------------------------------------------------------------------------
Net Expenses 2,056,497
- -----------------------------------------------------------------------------------------------
Net Investment Income 8,559,776
- -----------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES (NOTES 3 AND 4):
Realized Gain From:
Security transactions (excluding short-term securities) 3,708,052
Foreign currency transactions 5,760,148
- -----------------------------------------------------------------------------------------------
Net Realized Gain 9,468,200
- -----------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
of Investments and Foreign Currencies:
Beginning of year 6,952,280
End of year 2,729,431
- -----------------------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (4,222,849)
- -----------------------------------------------------------------------------------------------
Net Gain on Investments and Foreign Currencies 5,245,351
- -----------------------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 13,805,127
===============================================================================================
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================
Statements of Changes in Net Assets For the Years Ended October 31,
==================================================================================================
1996 1995
==================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 8,559,776 $ 7,818,526
Net realized gain 9,468,200 3,330,901
Increase (decrease) in net unrealized appreciation (4,222,849) 2,239,433
- -------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 13,805,127 13,388,860
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (10,527,150) (7,461,526)
- -------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (10,527,150) (7,461,526)
- -------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sales of shares 22,772,237 6,240,071
Net asset value of shares issued in connection
with the transfer of the Smith Barney
Global Bond Fund's net assets (Note 9) -- 103,934,782
Net asset value of shares issued
for reinvestment of dividends 6,565,761 4,588,382
Cost of shares reacquired (44,297,898) (44,409,826)
- -------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
From Fund Share Transactions (14,959,900) 70,353,409
- -------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (11,681,923) 76,280,743
NET ASSETS:
Beginning of year 163,278,720 86,997,977
- -------------------------------------------------------------------------------------------------
End of year* $ 151,596,797 $ 163,278,720
=================================================================================================
* Includes undistributed net investment income of: $ 4,968,580 $ 1,350,890
=================================================================================================
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
The Global Government Bond Portfolio ("Portfolio") is a separate investment
portfolio of the Smith Barney World Funds, Inc. ("Fund"). The Fund, a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended,
as a non-diversified, open-end management investment company and consists of
this Portfolio and five other separate investment portfolios: Emerging Markets,
European, International Balanced, International Equity and Pacific Portfolios.
The financial statements and financial highlights for the other portfolios are
presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolio
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 securities; (c) securities maturing within 60 days are
valued at cost plus accreted discount, or minus amortized premium, which
approximates market value; (d) gains or losses on the sale of securities are
calculated by using the specific identification method; (e) interest income,
adjusted for amortization of premium and accretion of discount, is recorded on
the accrual basis; (f) direct expenses are charged to each class; management
fees and general expenses are allocated on the basis of relative net assets; (g)
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 gains amounting to $3,492,676 and a portion of
undistributed net investment income amounting to $175,084 was reclassified to
paid-in capital. Net investment income, net realized gains and net assets were
not affected by this change; (h) dividends and distributions to shareholders are
recorded on the ex-dividend date; (i) 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
16
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
valuation. Purchases and sales of securities, income and expenses are translated
at the rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are adjusted when reported by the custodian bank; (j) the Portfolio
intends to comply with the applicable provisions of the Internal Revenue Code of
1986, as amended, pertaining to regulated investment companies and to make
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes; and (k) 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 Portfolio 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 of the Fund. The
Portfolio pays SBMFM a fee calculated at the annual rate of 0.75% of its average
daily net assets. This fee is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares. For the year ended October 31, 1996, SB received sales charges of
approximately $20,000 on sales of the Portfolio's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B
shares, which applies if redemption occurs within one year from initial
purchase. This CDSC declines by 0.50% the first year after purchase and
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 have 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 share 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 for Class B shares were approximately $86,000.
17
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
Pursuant to a Distribution Plan, the Portfolio 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 Portfolio also pays a
distribution fee with respect to Class B and C shares calculated at the annual
rate of 0.50% and 0.45% of average daily net assets of each class, respectively.
For the year ended October 31, 1996, total Distribution Plan fees incurred were
as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $285,589 $226,135 $27,795
================================================================================
</TABLE>
All officers and three Directors of the Fund are employees of SB.
The Portfolio has an arrangement with its custodian, The Bank of New York,
where it earns custody credits on available cash balances. These credits offset
custody fees which may be charged to the Portfolio during the year. These
credits totalled $38,539 for the year ended October 31, 1996.
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 $191,316,724
- --------------------------------------------------------------------------------
Sales 192,729,405
================================================================================
</TABLE>
At October 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $4,158,880 *
Gross unrealized depreciation (359,620)*
- --------------------------------------------------------------------------------
Net unrealized appreciation $3,799,260 *
================================================================================
</TABLE>
* Substantially the same for Federal income tax purposes.
18
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
4. FORWARD FOREIGN CURRENCY CONTRACTS
At October 31, 1996, the Portfolio had open forward foreign currency
contracts as described below. The Portfolio bears the market risk that arises
from changes in foreign currency exchange rates. The unrealized gain (loss) on
the contracts is reflected as follows:
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Loss
================================================================================
<S> <C> <C> <C> <C>
To Sell:
Belgian Franc 236,800,000 $ 7,592,462 11/6/96 $ (11,829)
Canadian Dollar 10,420,000 7,772,488 11/6/96 (149,958)
Danish Krone 35,450,000 6,101,623 11/6/96 (31,833)
Dutch Gilder 11,040,000 6,512,314 11/6/96 (25,827)
Finnish Marka 38,360,000 8,468,122 11/6/96 (37,353)
German Deutschemark 46,740,000 30,899,660 11/6/96 (129,417)
Great Britian Pound 5,030,000 8,189,755 11/6/96 (347,985)
Irish Punt 5,860,000 9,539,499 11/6/96 (169,359)
Italian Lira 12,730,000,000 8,391,573 11/6/96 (44,853)
Spanish Peseta 1,380,000,000 10,822,723 11/6/96 (59,132)
Swedish Krona 46,310,000 7,055,343 11/6/96 (72,532)
- --------------------------------------------------------------------------------
Total Unrealized Loss on Forward
Foreign Currency Contracts $(1,080,078)
================================================================================
</TABLE>
5. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into closing sales transaction, the Fund will realize a gain or loss
depending on whether the sales 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 had no purchased call or put options.
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
written) without regard to any unrealized gain or loss on the underlying
19
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
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 received will reduce the cost of the security which the Fund
purchased upon exercise. When written index option is exercised, settlement is
made in cash. The risk associated with purchasing 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.
As of October 31, 1996, the Fund had no written call or put options.
6. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. During the period the futures contract is
open, changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Fund's basis in the contract. The Fund enters into such contracts to hedge a
portion of its portfolio. The Fund bears the market risk that arises from
changes in the value of the financial instruments and securities indices
(futures contracts) and the credit risk should a counterparty fail to perform
under such contracts.
As of October 31, 1996, the Fund had no open futures contracts.
7. PORTFOLIO CONCENTRATION
The Portfolio'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 the investments and earnings of the Portfolio. Foreign investments may
subject the Portfolio 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.
20
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
In addition to the risks described above, risks may arise from forward
currency contracts with respect to the potential inability of counterparties to
meet the terms of their contracts.
8. CAPITAL SHARES
At October 31, 1996, the Fund had one billion shares of capital stock
authorized with a par value of $0.001 per share. The Portfolio has the ability
to issue multiple classes of shares. Each share of a class represents an
identical legal interest in the Portfolio and has the same rights except that
each class bears certain expenses, including those specifically related to the
distribution of its shares. Effective November 7, 1994, the Portfolio adopted a
new Class structure renaming the existing Class B and C shares as Class C and Y
shares, respectively.
At October 31, 1996, total paid-in capital amounted to the following for
each class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
================================================================================
<S> <C> <C> <C> <C>
Total Paid-in Capital $99,753,227 $23,747,507 $4,150,871 $15,046,883
================================================================================
</TABLE>
21
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
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 489,319 $ 6,083,120 354,759 $ 4,360,838
Net asset value of shares issued in
connection with the transfer of
the Smith Barney Global Bond
Fund Inc.'s net assets (Note 9) -- -- 5,559,691 66,771,888
Shares issued on reinvestment 396,504 4,899,900 300,046 3,596,267
Shares redeemed (2,475,502) (30,710,185) (2,814,842) (33,525,776)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (1,589,679) $(19,727,165) 3,399,654 $ 41,203,217
======================================================================================================================
Class B
Shares sold 121,679 $ 1,505,000 128,260 $ 1,538,870
Net asset value of shares issued in
connection with the transfer of
the Smith Barney Global Bond
Fund Inc.'s net assets (Note 9) -- -- 3,101,368 37,123,375
Shares issued on reinvestment 117,711 1,449,119 56,123 679,411
Shares redeemed (1,030,724) (12,706,817) (416,798) (5,055,656)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (791,334) $ (9,752,698) 2,868,953 $ 34,286,000
======================================================================================================================
Class C+
Shares sold 33,934 $ 417,363 30,137 $ 340,363
Net asset value of shares issued in
connection with the transfer of
the Smith Barney Global Bond
Fund Inc.'s net assets (Note 9) -- -- 3,310 39,519
Shares issued on reinvestment 17,412 213,650 19,074 226,356
Shares redeemed (70,458) (867,055) (213,312) (2,514,987)
- ----------------------------------------------------------------------------------------------------------------------
Net Decrease (19,112) $ (236,042) (160,791) $ (1,908,749)
======================================================================================================================
Class Y+++
Shares sold 1,214,448 $ 14,766,754 -- $ --
Shares issued on reinvestment 253 3,092 9,906 86,348
Shares redeemed (1,138) (13,841) (278,894) (3,313,407)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) 1,213,563 $ 14,756,005 (268,988) $ (3,227,059)
======================================================================================================================
</TABLE>
* For Class B shares, transactions are for the period from November 18, 1994
(inception date) to October 31, 1995.
+ On November 7, 1994, the former Class B shares were renamed Class C shares.
+++ On November 7, 1994, the former Class C shares were renamed Class Y shares.
22
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
9. TRANSFER OF NET ASSETS
On May 19, 1995, the Portfolio acquired the assets and certain liabilities
of the Smith Barney Global Bond Fund Inc. ("SBGB"), pursuant to a plan of
reorganization approved by SBGB shareholders on May 11, 1995. Total shares
issued by the Portfolio and the total net assets of SBGB and the Portfolio on
the date of the transfer were as follows:
<TABLE>
<CAPTION>
Shares Total Net Total Net
Issued by Assets of Assets of
Acquired Fund the Portfolio SBGB the Portfolio
================================================================================
<S> <C> <C> <C>
SBGB 8,664,369 $103,934,782 $78,484,669
================================================================================
</TABLE>
The total net assets of SBGB before acquisition included unrealized
appreciation of $4,121,630. The total net assets of the Portfolio immediately
after the transfer were $182,419,451. The transaction was structured for tax
purposes to qualify as a tax-free reorganization under the Internal Revenue Code
of 1986, as amended.
23
<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(2) 1993 1992
==================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.30 $11.68 $12.92 $11.84 $12.90
- ------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.70 0.92* 0.69 0.83 1.00
Net realized and unrealized gain (loss) 0.42 0.48 (1.28) 1.36 (0.90)
- ------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.12 1.40 (0.59) 2.19 0.10
- ------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.87) (0.78) (0.23) (0.52) (0.97)
Net realized gains(3) -- -- -- (0.59) (0.19)
Capital -- -- (0.42) -- --
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (0.87) (0.78) (0.65) (1.11) (1.16)
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.55 $12.30 $11.68 $12.92 $11.84
- ------------------------------------------------------------------------------------------------------------------
Total Return 9.41% 12.40% (4.64)%+++ 19.13% 0.93%
- ------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $106,536 $123,917 $77,961 $107,415 $107,609
- ------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 1.26% 1.38% 1.32%+ 1.30% 1.36%
Net investment income 5.69 7.44 6.57+ 6.67 7.72
- ------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 133% 195% 179% 119% 177%
==================================================================================================================
Class B Shares 1996(1) 1995(5)
==================================================================================================================
Net Asset Value, Beginning of Year $12.26 $11.57
- ------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.63 0.78*
Net realized and unrealized gain 0.42 0.57
- ------------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.05 1.35
- ------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.81) (0.66)
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (0.81) (0.66)
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.50 $12.26
- ------------------------------------------------------------------------------------------------------------------
Total Return 8.83% 11.97%+++
- ------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $25,970 $35,159
- ------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 1.81% 1.92%+
Net investment income 5.15 6.65+
- ------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 133% 195%
==================================================================================================================
</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 January 1, 1994 to October 31, 1994.
(3) Distributions from net investment income include short-term capital gains
for Federal income tax purposes, if any.
(4) During the years ended October 31, 1996 and October 31, 1995, the Portfolio
has earned credits from the custodian which reduce service fees incurred.
If the credits are taken into consideration, the expense ratios for Class A
would be 1.24% and 1.32%, respectively; the expense ratios for Class B
would be 1.78% and 1.86% (annualized), respectively; prior year numbers
have not been restated to reflect these credits.
(5) For the period from November 18, 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.
24
<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) 1994(3) 1993(4)
=============================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 12.23 $ 11.68 $ 12.93 $ 11.83
- -----------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.64 0.85* 0.90 0.79
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 0.41 0.42 (1.55) 1.37
- -----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.05 1.27 (0.65) 2.16
- -----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.81) (0.72) (0.21) (0.47)
Net realized gains(5) -- -- -- (0.59)
Capital -- -- (0.39) --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.81) (0.72) (0.60) (1.06)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.47 $ 12.23 $ 11.68 $ 12.93
- -----------------------------------------------------------------------------------------------------------------------------
Total Return 8.90% 11.25% (5.09)%+++ 18.89%+++
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 3,986 $ 4,141 $ 5,835 $ 4,972
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(6) 1.74% 1.84% 1.80%+ 1.74%+
Net investment income 5.22 7.15 6.05+ 6.28+
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 133% 195% 179% 119%
=============================================================================================================================
</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) On November 7, 1994, the former Class B shares were renamed Class C shares.
(3) For the period from January 1, 1994 to October 31, 1994.
(4) For the period from January 4, 1993 (inception date) to December 31, 1993.
(5) Distributions from net investment income include short-term capital gains
for Federal income tax purposes, if any.
(6) During the years ended October 31, 1996 and October 31, 1995, the Portfolio
has earned credits from the custodian which reduce service fees incurred.
If the credits are taken into consideration, the expense ratios for Class C
would be 1.71% and 1.78%, respectively; prior year numbers have not been
restated to reflect these credits.
* 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.
25
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class Y Shares 1996(1) 1995(2) 1994(3) 1993(4)
========================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 12.14 $ 11.68 $ 12.93 $ 11.97
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.73 0.78* 0.76 0.69
Net realized and unrealized gain (loss) 0.42 0.49 (1.35) 1.23
- ------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.15 1.27 (0.59) 1.92
- ------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.90) (0.81) (0.23) (0.37)
Net realized gains(5) -- -- -- (0.59)
Capital -- -- (0.43) --
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.90) (0.81) (0.66) (0.96)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.39 $ 12.14 $ 11.68 $ 12.93
- ------------------------------------------------------------------------------------------------------------------------
Total Return 9.82% 11.27% (4.62)%+++ 16.49%+++
- ------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 15,105 $ 62 $ 3,202 $ 371
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(6) 0.84% 0.98% 1.23%+ 1.20%+
Net investment income 6.12 6.38 6.76+ 6.73+
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 133% 195% 179% 119%
========================================================================================================================
</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) On November 7, 1994 the former Class C shares were renamed Class Y shares.
(3) For the period from January 1, 1994 to October 31, 1994.
(4) For the period from February 19, 1993 (inception date) to December 31,
1993.
(5) Distributions from net investment include short-term capital gains for
Federal income tax purposes, if any.
(6) During the years ended October 31, 1996 and October 31, 1995, the Portfolio
has earned credits from the custodian which reduce service fees incurred.
If the credits are taken into consideration, the ratio of expenses to
average net assets for Class Y would be 0.81% and 0.93%, respectively;
prior year numbers have not been restated to reflect these credits.
* 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.
26
<PAGE>
================================================================================
Independent Auditors' Report
================================================================================
The Shareholders and Board of Directors of
Smith Barney World Funds, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Global Government Bond Portfolio of Smith
Barney World Funds, Inc. as of October 31, 1996, 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 two-year period then ended, the period from January
1, 1994 to October 31, 1994 and each of the years in the two-year period ended
December 31, 1993. 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.
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 include 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 the
Global Government Bond Portfolio of Smith Barney World Funds, Inc. as of October
31, 1996, 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 two-year period then ended,
the period from January 1, 1994 to October 31, 1994 and each of the years in the
two-year period ended December 31, 1993, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
New York, New York
December 20, 1996
27
<PAGE>
[This page intentionally left blank]
<PAGE>
SMITH BARNEY SMITH BARNEY
WORLD FUNDS, INC. ------------
A Member of TravelersGroup [LOGO]
Directors
Victor Atkins Investment Manager
Jessica M. Bibliowicz
Alger B. Chapman Smith Barney Mutual Funds
Robert A. Frankel Management Inc.
Rainer Greeven
Susan M. Heilbron
Heath B. McLendon, Chairman Distributor
Bruce D. Sargent
James M. Shuart Smith Barney Inc.
Officers Custodian
Maurits E. Edersheim The Bank of New York
Chairman of the Fund
& Advisory Director
Shareholder
Heath B. McLendon Servicing Agent
Chief Executive Officer
First Data Investor Services Group, Inc.
Jessica M. Bibliowicz P.O. Box 9134
President Boston, MA 02205-9134
Lewis E. Daidone
Senior Vice President This report is submitted for the general
and Treasurer information of the shareholders of Smith
Barney World Funds, Inc. -- Global
James B. Conheady Government Bond Portfolio. It is not
Vice President authorized for distribution to
prospective investors unless accompanied
Victor S. Filatov or preceded by a current Prospectus for
Vice President the Portfolio, which contains
information concerning the Portfolio's
Simon R. Hildreth investment policies and expenses as well
Vice President as other pertinent information.
Denis P. Mangan
Vice President SMITH BARNEY
WORLD FUNDS, INC.
Jeffrey J. Russell 388 Greenwich Street
Vice President New York, New York 10013
Bruce D. Sargent
Vice President FD01048 12/96
Rein W. van der Does
Vice President
Irving P. David
Controller
Christina T. Sydor
Secretary
ANNUAL REPORT
1996
1996
1996
1996
1996
[GRAPHIC]
SMITH BARNEY
WORLD FUNDS, INC.
EUROPEAN PORTFOLIO
PACIFIC PORTFOLIO
INTERNATIONAL
BALANCED PORTFOLIO
- ------------------
October 31, 1996
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
EUROPEAN, PACIFIC AND
INTERNATIONAL BALANCED PORTFOLIOS
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide you with the annual report for the Smith Barney World
Funds, Inc. -- European, Pacific and International Balanced Portfolios for the
year ended October 31, 1996. In this report, we have summarized the period's
prevailing economic and market conditions and outlined the investment strategy
employed by each of the Portfolios during this time. A detailed summary of each
Portfolio's performance and current holdings can be found in the appropriate
sections that follow in the annual report.
Portfolio Update
European Portfolio
The European Portfolio had a total return of 18.65% for Class A shares for the
year ended October 31, 1996. In comparison, the Portfolio's Lipper Analytical
Services, Inc. European equity fund peer group average generated a total return
of 17.03% for the same time period. (Lipper Analytical Services, Inc. is a major
fund tracking organization.)
European Markets Update
We continue to believe that investing in Europe's well-established exchanges
represents a conservative way for investors to participate in the exciting
growth potential of foreign stock markets. As we have stated in our last two
reports, the case for European investing is quite simple: the European economic
upturn, which has lagged the U.S. economic recovery by eighteen months, is
continuing. Combined with heavy corporate restructuring, the improved economic
environment in Europe should, in our view, result in excellent corporate
earnings for the remainder of this year and well into 1997.
Portfolio's Investment Strategy
The European Portfolio's investment strategy remains bottom-up. The Portfolio
invests in countries with mature economies -- similar to investing in U.S.
markets. Economic cycles are important when evaluating a company's outlook, but
it is the company itself that we evaluate. We continue to focus on promising
European companies with excellent growth prospects regardless of macroeconomic
conditions in Europe.
The most interesting phenomena in Europe are the changes that are taking place
within European companies themselves. In a trend similar to the U.S., European
companies have recently embraced the idea of enhancing shareholder value and are
restructuring, outsourcing, merging, and de-merging. In addition, many European
companies have focused renewed attention on their core
1
<PAGE>
businesses, changed their accounting systems to conform to international
accounting standards, undergone share splits, bought back their own shares and
issued stock options.
Moreover, equity ownership in Europe has been further stimulated through
privatizations and an increase in corporate listings on major exchanges such as
the New York Stock Exchange. After the recent privatization of Italy's giant,
diversified energy company Ente Nazionale Idrocarbu ($5 billion) and the
telecommunications company Deutsche Telecom ($12 billion) in Germany, a
shareholders' culture is finally being created in Europe. By the end of the
decade, privatizations in the European Union (EU) are expected to exceed $300
billion. This new culture in Europe has in turn increased corporate
restructurings and accelerated the trend of enhancing shareholder value.
Although the speed and scope of the job cuts have shocked many Europeans who
were used to cradle-to-grave security, the pressures of global competition have
made European corporate restructuring an economic necessity.
Another key reason why we are optimistic about investing in Europe is that stock
price values are less expensive than in the United States. For example, European
stocks are selling at 7.0x 1996 price/cash flow, while U.S. stocks are selling
at 10.5x 1996 price/cash flow. (The price/cash flow ratio is the price of a
stock divided by its cash flow per share.) In addition, Europe's average
dividend yield is approximately 3.1% versus only 2.1% in the U.S.
During the period covered by this report, the European Portfolio was heavily
underweighted in the U.K. relative to the MSCI European Index ("Index"). The
British economy is generally 12 months ahead of Continental Europe and we
believe corporate earnings may be more promising on the Continent versus the
U.K. in the months ahead. Another reason we are underweighting the U.K. is due
to the potential changes that could occur in Parliament. Currently, the
Conservative Party has a majority of only one vote in Parliament which could
very well result in a vote of no-confidence. After nearly twenty years of
Conservative rule, the Labor Party is expected to do well in coming general
elections, which are mandatory before May of 1997. The European Portfolio was
overweighted in Ireland relative to the Index because Ireland has exhibited
strong economic growth potential relative to that of the U.K. In addition, the
Portfolio has tended to be overweighted in Austria as a way to participate
conservatively in exciting new economic developments that are taking place in
Eastern Europe.
During the period covered by this report, the European Portfolio increased its
weighting in Germany as the trend of enhancing shareholder value has clearly
accelerated in that country. What distinguishes job cuts in Germany and other
European countries from U.S. job cuts is that the largest number have come
2
<PAGE>
through early retirement rather than by layoffs of younger workers. For example,
the average retirement age in Germany is now 57, down from roughly 60 a decade
ago.
We increased our weighting in select French companies over the past twelve
months due to the reasonably priced values of many French companies in
comparison to many of their German counterparts. In addition, the Portfolio was
overweighted in the Netherlands because of some unique and attractive investment
opportunities we believe exist in companies such as Randstad (a temporary
employment company), Ahrend (an office supply and furniture company) and Hunter
Douglas (a windows covering company).
The European Portfolio was underweighted in Switzerland because most Swiss
companies are export-related, and we expect the continued strength of the Swiss
franc could penalize their future earnings. During the last three months, the
Portfolio took profits in Repsol (a Spanish oil company), Nycomed (a medical
products company) and Hafslund (an energy company) in Norway, and CRH (an Irish
building materials company). New companies added to the European Portfolio
during the past twelve months include CAF (a capital equipment company) in
Spain, Schmalbach (a packaging company) in Germany, and Endemol (a media
company) in The Netherlands. During the period covered by this report, the
European Portfolio also added to its position in Tomra (a Norwegian capital
goods supplier).
In closing, due to the sweeping changes taking place in Europe, relatively
inexpensive share price values, and relative underperformance of many European
markets versus the U.S. stock market, we are very optimistic about investing in
Europe over the next few years.
Pacific Portfolio
During the year ended October 31, 1996, the Pacific Portfolio generated a total
return of 1.09%, and underperformed the Portfolio's Lipper Analytical Services
Inc. peer group average total return of 5.10%. (Lipper is an independent fund
tracking organization.) At October 31, 1996, the Portfolio owned securities of
41 issuers in 11 countries with the highest allocation (25%) in Hong Kong.
The backdrop of international affairs during much of the past twelve months has
been marked by political and economic uncertainties. Slowing export growth
throughout Asia, political trouble in Thailand and Indonesia, increasing tension
between North and South Korea and China's threatening posture toward Taiwan have
caused the markets of the Pacific Rim to be global laggards during the period
covered by this report.
3
<PAGE>
Japan, by far the largest Pacific Rim market, delivered very modest returns,
concentrated in the early part of 1996. Japanese stocks responded well in the
first quarter of 1996 to signs of macroeconomic resurgence, driven by government
spending initiatives and record low interest rates. Also, the concerted effort
to weaken the Japanese yen from its record highs versus major currencies,
particularly the U.S. dollar, in mid-1995, aided the prospects of key export
industries. (A weaker yen makes Japanese exports more competitive on a global
basis.)
Yet Japanese consumer spending remains muted and the condition of the financial
industry remains precarious, as witnessed by several recent sizable
bankruptcies. We foresee a widening of the Japanese trade surplus with the U.S.
in the coming year, which once again could strengthen the yen versus the U.S.
dollar. Overall, we remain cautious on the market and have concentrated on
selected high growth special situations such as Noritsu Koki, the global leader
in photographic minilab processing. The Portfolio had 16.6% of assets in Japan
as of October 31, 1996.
We continue to find greater investment merit in Southeast Asia. In our opinion,
the July 1, 1997 transition of Hong Kong from British to Chinese rule could lead
to a favorable upward revaluation of that market. In fact, this has already
begun. Residential property prices in Hong Kong, an important barometer of local
sentiment, have firmed considerably in the past year. The long-term implications
of the Hong Kong transition to Chinese rule are less certain, but for now we are
comfortable with an overweight position of 25% of Portfolio assets in Hong Kong.
We also maintain a very positive view on the Malaysian equity market at 13.1% of
the Portfolio's assets. The Malaysian economy continues to be one of the most
robust in Asia and our primary exposure is in companies in the construction and
infrastructure development businesses.
The Pacific Rim is also home to many other laggard markets over the past year,
such as Korea, Thailand and Singapore, and those of the subcontinent. Each of
these markets have had fundamental factors at work which led to their decline.
In our view, however, the strong underlying growth rate of the Pacific Rim
economies continues to justify committing a significant portion of the
Portfolio's assets to the region.
4
<PAGE>
The Pacific Portfolio's Top Ten Holdings as of October 31, 1996 are:
Company Country Industry
------- ------- --------
Coca Cola Amatil Australia Consumer Goods
Sun Hung Kai Properties Hong Kong Finance
HSBC Holdings Hong Kong Finance
Sungei Way Holdings Malaysia Materials
Siam Makro Thailand Services
Steamers Maritime Holdings Singapore Services
Hong Leong Credit Malaysia Finance
Larsen and Toubro India Capital Equipment
Sunway Building Tech. Malaysia Materials
Krung Thai Bank Thailand Finance
Please note that effective with the beginning of the new fiscal year, management
responsibility for the Pacific Basin Portfolio has been assumed by Smith Barney
Managing Director Scott Kalb and Vice President David Ishibashi. Both of these
investment professionals have been important contributors to the management of
the Portfolio over the past several years. Mr. Kalb was formerly director of
international equity research for Smith Barney and lived in Korea for over ten
years. Mr. Ishibashi has over fourteen years experience in the securities
industry, concentrated in the Japanese equity market.
International Balanced Portfolio
Portfolio's Performance
The Smith Barney World Funds, Inc. -- International Balanced Portfolio is
designed to seek long-term growth of capital and income through a balanced
investment in the equity and debt securities of non-U.S. issuers. The Portfolio
gives investors the opportunity to participate in potential profits worldwide
and to diversify assets over a number of countries' equity and fixed-income
markets. During the year ended October 31, 1996, the International Balanced
Portfolio generated a total return of 12.83%, and slightly underperformed the
Portfolio's Lipper Analytical Services Inc. peer group average total return of
13.60%. (Lipper is an independent fund tracking organization.)
Equity
The Portfolio's largest equity holdings are concentrated in Europe at 60% of
equity assets. Our major European holdings are concentrated in Sweden (4.0% of
assets), Ireland (4.0%), the United Kingdom (6.7%) and the Netherlands (5.6%).
Many of the companies whose stock we own are major multinationals, such as Ciba
Geigy, Nokia and Ericcson, which derive a modest portion of their earnings from
their domestic markets.
5
<PAGE>
In our view, Europe is undergoing profound structural change, driven by
recognition that "business as usual" is no longer affordable or desirable. Many
European corporations have embarked on U.S.-style restructuring programs to
improve corporate profitability, sharpen their company focus and ultimately
enhance shareholder value. Governments are actively stimulating equity ownership
in many countries, and improved market mechanics (i.e. accounting disclosure,
share splits, share repurchases and management options) are all favorable
long-term structural changes. In addition, the higher long-term earnings outlook
is an important underpinning of the European markets' recent strength.
At the same time, European governments are striving to achieve a monetary union
in 1999, which has important macroeconomic implications. Budget deficits must be
reduced and inflation contained, which suggests continued fiscal restraint. As a
result, many European governments introduced austere budget plans this Fall.
Monetary conditions are positive for European stocks, with interest rates at
relatively modest levels. In our view, stable European interest rates are likely
to remain for the foreseeable future.
At present, we have 30% of the equity portion of the Portfolio invested in the
markets of the Pacific Rim. These equity markets have disappointed in the past
twelve months, with the exception of Hong Kong and Malaysia. The largest Pacific
market, Japan (10% of equity assets), has been a relative laggard for much of
the past fiscal year. The stock market in Japan has traded in a narrow range
over the past three to four months. Despite a materially weakened currency
versus its major trading partners (which has improved its export
competitiveness), as well as low interest rates, economic recovery in Japan
remains problematic.
The equity portion of the International Balanced Portfolio continues to find
greater investment opportunities in Southeast Asia. In our opinion, the July 1,
1997 transition of Hong Kong from British to Chinese rule could lead to a
favorable upward revaluation of that market, a process which in fact has already
begun. Residential property prices in Hong Kong, an important barometer of local
sentiment, have firmed considerably in the past year. While the long-term
implications of the transition are less certain, we are overweighted versus the
Morgan Stanley EAFE Index, but still relatively conservative at 3.5% of
Portfolio equity assets in Hong Kong.
6
<PAGE>
The Pacific Rim is also home to many laggard markets over the past year, such as
Korea, Thailand and the sub-Continent. Each of these markets has had fundamental
factors at work which led to their decline. For example, there is political
uncertainty in Thailand and Indonesia, and Singapore and South Korea have
lowered economic-growth projections. We are diligently searching for new
opportunities in some of these lagging Pacific Rim markets. In our view, the
strong underlying growth rate of the Pacific Rim economies continues to justify
committing a significant portion of the Portfolio's assets to the region.
The remaining 10% of the Portfolio's equity assets is invested in the Americas,
South Africa and Israel. The Latin American markets have performed well in the
past year with clear signs that Mexico is on the mend -- interest rates have
declined and consumer spending has picked up, which have helped to drive the
economy higher. However, we believe that significant risks still exist in
Mexico. Given the superior opportunities elsewhere, our Latin American exposure
is currently lower than it has been in years past.
Recent purchases include U.K.-based Compass Group, the leading global contract
caterer for educational, health care and corporate facilities. We believe the
institutional food industry is capable of sustained high growth as companies
trim back the breadth of their activities to core operations. Outsourcing food
service to efficient institutional operators is a natural progression in many
companies. Another recent addition in the Portfolio is Norwegian capital goods
supplier Tomra, the European leader in "reverse vending" machines which accept
back food and beverage containers from customers in return for deposit
reimbursement. Tomra is expanding rapidly throughout Europe and also throughout
the United States where, in selected geographic areas, the company serves as a
service and materials handling agent. Both of these companies illustrate our
commitment to owning progressive industry leaders in rapidly growing businesses.
In 1995, we invested a significant portion of the Portfolio's assets in the
European temporary employment industry because of increasing liberalization of
labor regulations and the desire of corporations to limit fixed costs through
the use of temporary employees. In 1996, however, we sold those investments. The
French temporary employment company Ecco, agreed to merge with its Swiss
competitor, Adia. Our investment in the Dutch employment agency Randstad, in our
view, became fully valued, so we sold it and realized a substantial profit.
7
<PAGE>
Fixed Income
European bond markets in general, and the higher-yielding markets of Italy,
Spain and Ireland in particular, rallied significantly during recent months, in
anticipation of those countries qualifying for the first round of membership in
the European Monetary Union (EMU) in early 1999. Sweden performed almost as
well, even though the Swedes have decided not to join the EMU in its first
round. We expect the European markets, and the high-yielding markets in
particular, to continue to outperform through year-end, based both on continuing
optimism about the EMU, as well as the relative underperformance of European
economies versus the United States.
We increased our position in Spain, Italy, Finland and Sweden from being 7%
overweighted versus the JP Morgan Government Bond Index (the "Index"), to being
17% overweighted. In addition, the outperformance of the core European bond
markets, due to a series of interest rate cuts led by the German Bundesbank,
continued throughout the summer months. Because we expect this lower interest
rate environment to continue, we correspondingly increased our total overweight
position in those markets relative to the Index, from 3% to 14%.
The six-month long trading range in the U.S. market finally came to an end in
October, when the release of lower-than-expected employment cost data provided
the catalyst for a price breakout pushing long bond yields down to 6.5%. Rather
than add to our position in U.S. bonds, we chose to increase our position in the
Canadian market, due to the better monetary and budgetary fundamentals in that
market, and the shrinking spread between Canadian and U.S. government bonds. (A
yield spread is the difference in yield between various issues of securities.)
Government bond yields in Canada have been higher than yields on U.S.
Treasuries, but have been declining. Therefore, investing in the Canadian market
should prove to be profitable as yields on Canadian bonds decline. We continue
to believe that as the U.S. market rallies, the Canadian market will do better,
and we expect this trend to continue into 1997.
8
<PAGE>
In closing, thank you for investing in the Smith Barney World Funds, Inc. --
European, Pacific and International Balanced Portfolios. We look forward to
continuing to help you achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Denis P. Mangan
Heath B. McLendon Denis P. Mangan
Chairman and Vice President
Chief Executive Officer
/s/ James B. Conheady /s/ Victor S. Filatov
James B. Conheady Victor S. Filatov
Vice President Vice President
/s/ Jeffrey J. Russell /s/ Rein W. van der Does
Jeffrey J. Russell Rein W. van der Does
Vice President Vice President
December 3, 1996
- --------------------------------------------------------------------------------
ANNOUNCING A NEW SYSTEMATIC INVESTMENT PROGRAM
MONTHLY MINIMUM
If you are a shareholder purchasing shares of the European, Pacific or
International Balanced Portfolios through Smith Barney's Systematic Investment
Program on a monthly basis or if you plan to do so in the future, the minimum
investment for Class A, Class B and Class C shares is now $25. If you are
purchasing shares on a quarterly basis, the minimum investment 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.
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
European Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
10/31/96 $14.67 $17.25 $0.09 $0.04 18.65%
- --------------------------------------------------------------------------------
10/31/95 12.88 14.67 0.00 0.00 13.90
- --------------------------------------------------------------------------------
Inception*-10/31/94 12.50 12.88 0.00 0.00 3.04+
================================================================================
Total $0.09 $0.04
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
10/31/96 $14.56 $17.09 $0.00 $0.04 17.72%
- --------------------------------------------------------------------------------
Inception*-10/31/95 12.62 14.56 0.00 0.00 15.37+
================================================================================
Total $0.00 $0.04
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
10/31/96 $14.51 $17.04 $0.00 $0.04 17.78%
- --------------------------------------------------------------------------------
10/31/95 12.83 14.51 0.00 0.00 13.09
- --------------------------------------------------------------------------------
Inception*-10/31/94 12.48 12.83 0.00 0.00 2.80+
================================================================================
Total $0.00 $0.04
================================================================================
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS AND CAPITAL GAINS, IF ANY,
ANNUALLY.
10
<PAGE>
- --------------------------------------------------------------------------------
European Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
----------------------------------------
Class A Class B Class C
================================================================================
Year Ended 10/31/96 18.65% 17.72% 17.78%
- --------------------------------------------------------------------------------
Inception* through 10/31/96 12.89 16.96 12.29
================================================================================
With Sales Charge(2)
----------------------------------------
Class A Class B Class C
================================================================================
Year Ended 10/31/96 12.74% 12.72% 16.78%
- --------------------------------------------------------------------------------
Inception* through 10/31/96 10.78 14.94 12.29
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 10/31/96) 39.25%
- --------------------------------------------------------------------------------
Class B (Inception* through 10/31/96) 35.82
- --------------------------------------------------------------------------------
Class C (Inception* through 10/31/96) 36.94
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales 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 February 7, 1994, November
7, 1994 and February 14, 1994, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
11
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A
Shares of the European Portfolio vs.
MSCI European Index+
- --------------------------------------------------------------------------------
February 1994 -- October 1996
[GRAPHIC]
MSCI European
European Index Portfolio
-------------- ---------
2/7/94 $10,000 $ 9,549
10/94 10,859 9,840
10/95 11,256 11,207
10/31/96 13,285 13,298
+ Hypothetical illustration of $10,000 invested in Class A shares at
inception on February 7, 1994, assuming deduction of the maximum 4.50%
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 European Index is a composite
portfolio consisting of equity total returns for Europe. The index is
unmanaged and is not subject to the same management and trading expenses of
a mutual fund. The performance of the Portfolio'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.
12
<PAGE>
- --------------------------------------------------------------------------------
Pacific Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
================================================================================
10/31/96 $10.07 $10.18 $0.00 1.09%
- --------------------------------------------------------------------------------
10/31/95 12.92 10.07 0.00 (22.06)
- --------------------------------------------------------------------------------
Inception*-10/31/94 12.50 12.92 0.00 3.36+
================================================================================
Total $0.00
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
================================================================================
10/31/96 $ 9.99 $10.01 $0.00 0.20%
- --------------------------------------------------------------------------------
Inception*-10/31/95 12.64 9.99 0.00 (20.97)+
================================================================================
Total $0.00
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
================================================================================
10/31/96 $ 9.95 $ 9.98 $0.00 0.30%
- --------------------------------------------------------------------------------
10/31/95 12.86 9.95 0.00 (22.63)
- --------------------------------------------------------------------------------
Inception*-10/31/94 12.50 12.86 0.00 2.88+
================================================================================
Total $0.00
================================================================================
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS AND CAPITAL GAINS, IF ANY,
ANNUALLY.
13
<PAGE>
- --------------------------------------------------------------------------------
Pacific Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
-----------------------------------------
Class A Class B Class C
================================================================================
Year Ended 10/31/96 1.09% 0.20% 0.30%
- --------------------------------------------------------------------------------
Inception* through 10/31/96 (7.24) (11.10) (7.94)
================================================================================
With Sales Charge(2)
-----------------------------------------
Class A Class B Class C
================================================================================
Year Ended 10/31/96 (3.96)% (4.80)% (0.70)%
- --------------------------------------------------------------------------------
Inception* through 10/31/96 (8.97) (12.91) (7.94)
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 10/31/96) (18.56)%
- --------------------------------------------------------------------------------
Class B (Inception* through 10/31/96) (20.81)
- --------------------------------------------------------------------------------
Class C (Inception* through 10/31/96) (20.16)
================================================================================
(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 February 7, 1994, November
7, 1994 and February 11, 1994, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
14
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of
the Pacific Portfolio vs.
MSCI Pacific Index+
- --------------------------------------------------------------------------------
February 1994 -- October 1996
[GRAPHIC]
Pacific MSCI
Portfolio Pacific Index
--------- -------------
2/7/94 $9,549 $10,000
10/94 9,870 10,372
10/95 7,693 9,208
10/31/96 7,777 9,522
+ Hypothetical illustration of $10,000 invested in Class A shares at
inception on February 7, 1994, assuming deduction of the maximum 4.50%
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 Pacific Index is a composite portfolio
consisting of equity total returns for the countries of Australia, New
Zealand and countries in the Far East. The index is unmanaged and is not
subject to the same management and trading expenses of a mutual fund. The
performance of the Portfolio'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.
15
<PAGE>
- --------------------------------------------------------------------------------
International Balanced Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
================================================================================
10/31/96 $12.64 $13.90 $0.35 12.83%
- --------------------------------------------------------------------------------
10/31/95 12.20 12.64 0.39 7.05
- --------------------------------------------------------------------------------
Inception*-10/31/94 12.00 12.20 0.00 1.67+
================================================================================
Total $0.74
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
================================================================================
10/31/96 $12.65 $13.90 $0.26 12.05%
- --------------------------------------------------------------------------------
Inception*-10/31/95 12.08 12.65 0.29 7.33+
================================================================================
Total $0.55
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
================================================================================
10/31/96 $12.63 $13.87 $0.26 11.99%
- --------------------------------------------------------------------------------
10/31/95 12.18 12.63 0.29 6.29
- --------------------------------------------------------------------------------
Inception*-10/31/94 12.00 12.18 0.00 1.50+
================================================================================
Total $0.55
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
================================================================================
Inception*-10/31/96 $13.15 $13.93 $0.29 8.21%+
================================================================================
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS QUARTERLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
16
<PAGE>
- --------------------------------------------------------------------------------
International Balanced Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
----------------------------------------------
Class A Class B Class C Class Y
================================================================================
Year Ended 10/31/96 12.83% 12.05% 11.99% N/A
- --------------------------------------------------------------------------------
Inception* through 10/31/96 9.85 9.75 9.03 8.21%+
================================================================================
With Sales Charge(2)
----------------------------------------------
Class A Class B Class C Class Y
================================================================================
Year Ended 10/31/96 7.15% 7.05% 10.99% N/A
- --------------------------------------------------------------------------------
Inception* through 10/31/96 7.31 7.89 9.03 8.21%+
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 10/31/96) 22.79%
- --------------------------------------------------------------------------------
Class B (Inception* through 10/31/96) 20.26
- --------------------------------------------------------------------------------
Class C (Inception* through 10/31/96) 20.81
- --------------------------------------------------------------------------------
Class Y (Inception* through 10/31/96) 8.21+
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from initial purchase and declines thereafter by 1.00% per year until
no CDSC is incurred. Class C shares reflect the deduction of a 1.00% CDSC,
which applies if shares are redeemed within the first year of purchase.
* Inception dates for Class A, B, C and Y shares are August 25, 1994,
November 7, 1994, August 25, 1994 and February 7, 1996, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
17
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares
of the International Balanced Portfolio vs.
MSCI EAFE-GDP Weighted Index and
J.P. Morgan Global Bond Index+
- --------------------------------------------------------------------------------
August 1994 -- October 1996
[GRAPHIC]
MSCI International J.P. Morgan
EAFE-GDP Balanced Global
Weighted Index Portfolio Bond Index
-------------- --------- ----------
8/25/94 $10,000 $ 9,547 $10,000
10/94 9,960 9,706 10,262
10/95 9,563 10,390 12,111
10/31/96 10,607 11,73 12,850
+ Hypothetical illustration of $10,000 invested in Class A shares at
inception on August 25, 1994, assuming deduction of the maximum 4.50% 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 EAFE-GDP Weighted Index is a composite
portfolio consisting of equity total returns for the countries of Europe,
Australia, New Zealand and countries in the Far East, weighted based on
each country's gross domestic product. The J.P. Morgan Global Bond Index is
a daily, market capitalization weighted international fixed income index
consisting of 13 countries. The indexes are unmanaged and are not subject
to the same management and trading expenses of a mutual fund. The
performance of the Portfolio'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.
18
<PAGE>
- --------------------------------------------------------------------------------
Schedules of Investments October 31, 1996
- --------------------------------------------------------------------------------
EUROPEAN PORTFOLIO
SHARES SECURITY VALUE
================================================================================
STOCKS -- 97.3%
Austria -- 6.5%
26,000 Baumax Aktiengesellschaft Preferred $ 781,396
12,000 VA Technologie AG 1,679,252
- --------------------------------------------------------------------------------
2,460,648
- --------------------------------------------------------------------------------
Canada -- 0.1%
242,957 International UNP Holdings Ltd.(a) 56,160
- --------------------------------------------------------------------------------
Finland -- 5.9%
48,000 Nokia OY AB Class A Shares 2,215,734
- --------------------------------------------------------------------------------
France -- 21.9%
10,000 BIS S.A. 1,037,547
8,523 Castorama Dubois Investisse 1,459,933
10,000 Christian Dior S.A. 1,331,193
400,000 Euro Disney S.C.A.(a) 786,969
6,854 Group Axime(a) 712,476
10,123 Guilbert S.A. 1,611,135
17,029 Total S.A. Class B Shares 1,333,130
- --------------------------------------------------------------------------------
8,272,383
- --------------------------------------------------------------------------------
Germany -- 12.9%
2,700 Buderus AG 1,220,460
4,000 Mannesmann AG 1,559,609
5,000 Schmalbach Lubeca AG(a) 999,537
10,000 SGL Carbon AG 1,108,908
- --------------------------------------------------------------------------------
4,888,514
- --------------------------------------------------------------------------------
Ireland -- 5.0%
358,332 Independent Newspapers PLC 1,910,521
- --------------------------------------------------------------------------------
Italy -- 7.3%
20,000 Gucci Group NV - NY Registered Shares 1,380,000
30,000 Industrie Natuzzi S.p.A. ADR 1,361,250
- --------------------------------------------------------------------------------
2,741,250
- --------------------------------------------------------------------------------
Netherlands -- 12.5%
30,925 Ahrend Groep N.V. 1,644,811
20,417 Hunter Douglas N.V. 1,444,685
20,000 Randstad Holdings N.V. 1,618,020
- --------------------------------------------------------------------------------
4,707,516
- --------------------------------------------------------------------------------
Norway -- 3.8%
100,000 Tomra Systems ASA 1,419,564
- --------------------------------------------------------------------------------
Spain -- 2.1%
20,000 Construcciones y Auxiliar de Ferrocarriles S.A. 784,467
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
19
<PAGE>
- --------------------------------------------------------------------------------
Schedules of Investments (continued) October 31, 1996
- --------------------------------------------------------------------------------
EUROPEAN PORTFOLIO
SHARES SECURITY VALUE
================================================================================
Sweden -- 5.1%
9,100 ABB AB Class A Shares $ 1,032,752
25,000 Pharmacia & Upjohn Inc. 900,000
- --------------------------------------------------------------------------------
1,932,752
- --------------------------------------------------------------------------------
Switzerland -- 5.1%
1,560 Ciba-Geigy AG 1,929,706
- --------------------------------------------------------------------------------
United Kingdom -- 9.1%
125,000 Carlton Communications PLC 1,001,465
100,000 CMG PLC 1,226,185
120,000 Compass Group PLC 1,191,988
- --------------------------------------------------------------------------------
3,419,638
- --------------------------------------------------------------------------------
TOTAL STOCKS
(Cost -- $24,882,774) 36,738,853
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENT -- 2.7%
$1,010,000 CS First Boston Corp., 5.470% due 11/1/96; Proceeds
at maturity -- $1,010,153; (Fully collateralized by U.S.
Treasury Bill due 3/27/97; Market value -- $1,033,584)
(Cost -- $1,010,000) 1,010,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $25,892,774*) $37,748,853
================================================================================
See Notes to Financial Statements.
20
<PAGE>
- --------------------------------------------------------------------------------
Schedules of Investments (continued) October 31, 1996
- --------------------------------------------------------------------------------
PACIFIC PORTFOLIO
SHARES SECURITY VALUE
================================================================================
STOCKS -- 100.0%
Australia -- 10.1%
36,896 Coca-Cola Amatil Ltd. $ 507,697
100,000 Henry Walker Group Ltd. 206,998
43,000 TABCORP Holdings Ltd. 202,914
- --------------------------------------------------------------------------------
917,609
- --------------------------------------------------------------------------------
Hong Kong -- 24.9%
30,000 Cheung Kong Holdings Ltd. 240,549
40,000 Citic Pacific Ltd. 194,509
40,000 Guoco Group Ltd. 211,580
120,000 Hong Kong & China Gas Co. Ltd. 211,063
20,723 HSBC Holdings PLC 422,109
22,000 Hutchinson Whampoa Ltd. 153,641
36,000 New World Development Co. Ltd. 209,511
70,000 Shanghai Industrial Holdings Ltd.(a) 158,879
40,000 Sun Hung Kai Properties Ltd. 455,233
- --------------------------------------------------------------------------------
2,257,074
- --------------------------------------------------------------------------------
India -- 5.5%
20,000 Larsen & Toubro Ltd. GDR 300,000
20,000 Mahindra & Mahindra Ltd. GDR(a)(b) 200,000
- --------------------------------------------------------------------------------
500,000
- --------------------------------------------------------------------------------
Indonesia -- 1.9%
150,000 Bimantara Citra 169,100
- --------------------------------------------------------------------------------
Japan -- 16.6%
10,000 Canon, Inc. 191,665
4,400 H.I.S. Co. Ltd. 233,656
3,000 Japan Associated Finance 247,143
9,000 Matsushita Electric Industrial Co. Ltd. 144,013
2,000 Nintendo Corp. Ltd. 128,011
3,000 Noritsu Koki Co. Ltd. 156,937
1,000 Shohkoh Fund 210,128
13,000 Yagi Antenna 188,588
- --------------------------------------------------------------------------------
1,500,141
- --------------------------------------------------------------------------------
Malaysia -- 13.1%
55,000 Hong Leong Credit Berhad 304,746
60,000 Muhibbah Engineering Berhad 222,029
66,250 Sungei Way Holdings Berhad 377,568
90,000 Sunway Building Technology Berhad 283,176
- --------------------------------------------------------------------------------
1,187,519
- --------------------------------------------------------------------------------
New Zealand -- 4.4%
2,500 Telecom Corp. of New Zealand Ltd. ADR 208,125
25,000 Wilson & Horton Ltd. 194,535
- --------------------------------------------------------------------------------
402,660
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
21
<PAGE>
- --------------------------------------------------------------------------------
Schedules of Investments (continued) October 31, 1996
- --------------------------------------------------------------------------------
PACIFIC PORTFOLIO
SHARES SECURITY VALUE
================================================================================
Philippines -- 6.7%
300,000 Belle Corp.(a) $ 79,909
200,000 Fil-Estate Land, Inc. 186,454
4,000 Metropolitan Bank & Trust Co. 88,280
1,200,000 SM Prime Holdings Inc. 255,708
- --------------------------------------------------------------------------------
610,351
- --------------------------------------------------------------------------------
Singapore -- 8.0%
50,000 Sembawang Maritime Ltd. 132,009
65,000 Singapore Technologies Industrial Corp. 141,164
400,000 Steamers Maritime Holding Ltd. 317,956
35,000 Van Der Horst Ltd. 129,170
- --------------------------------------------------------------------------------
720,299
- --------------------------------------------------------------------------------
South Korea -- 2.2%
5,000 Korea Electric Power Corp. 146,907
220 Sungmi Telecom Electronics 49,098
- --------------------------------------------------------------------------------
196,005
- --------------------------------------------------------------------------------
Thailand -- 6.6%
100,000 Krung Thai Bank Public Co. Ltd. 274,455
75,000 Siam Makro Public Co. Ltd. 320,524
- --------------------------------------------------------------------------------
594,979
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $8,833,510*) $9,055,737
================================================================================
See Notes to Financial Statements.
22
<PAGE>
- --------------------------------------------------------------------------------
Schedules of Investments (continued) October 31, 1996
- --------------------------------------------------------------------------------
INTERNATIONAL BALANCED PORTFOLIO
SHARES SECURITY VALUE
================================================================================
STOCKS -- 51.1%
Australia -- 2.4%
50,895 Coca-Cola Amatil Ltd. $ 700,326
200,000 Portman Mining Ltd. 356,894
- --------------------------------------------------------------------------------
1,057,220
- --------------------------------------------------------------------------------
Austria -- 3.7%
2,000 VA Technologie AG 279,875
10,000 Wolford AG 1,319,546
- --------------------------------------------------------------------------------
1,599,421
- --------------------------------------------------------------------------------
Brazil -- 1.0%
6,000 Telecomunicoes Brasileiras S.A. Telebras ADR 447,000
- --------------------------------------------------------------------------------
Chile -- 0.8%
10,000 Embotelladora Andina S.A. ADR 345,000
- --------------------------------------------------------------------------------
Finland -- 1.3%
12,000 Nokia OY AB Class A Shares 553,933
- --------------------------------------------------------------------------------
France -- 2.9%
1,000 Carrefour Supermarche 555,382
1,691 Castorama Dubois Investisse 289,656
6,000 Sidel S.A. 400,650
- --------------------------------------------------------------------------------
1,245,688
- --------------------------------------------------------------------------------
Germany -- 1.5%
6,000 SGL Carbon AG 665,344
- --------------------------------------------------------------------------------
Hong Kong -- 3.5%
75,000 Cheung Kong Holdings Ltd. 601,374
50,000 Guoco Group Ltd. 264,474
180,000 Hong Kong & China Gas Co. Ltd. 316,595
15,000 Hong Kong & China Gas Co. Ltd. Warrants,
Expire 9/30/97(a) 5,528
50,000 Hutchinson Whampoa Ltd. 349,184
- --------------------------------------------------------------------------------
1,537,155
- --------------------------------------------------------------------------------
Ireland -- 4.0%
50,920 CRH PLC 527,231
100,703 Greencore Group PLC 586,922
120,000 Independent Newspapers PLC 639,804
- --------------------------------------------------------------------------------
1,753,957
- --------------------------------------------------------------------------------
Italy -- 3.6%
10,000 Gucci Group N.V. NY Registered Shares 690,001
60,000 Industria Macchine Automatiche 238,205
5,000 Industrie Natuzzi S.p.A. ADR 226,875
200,000 Telecom Italia Mobile S.p.A. 412,569
- --------------------------------------------------------------------------------
1,567,650
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
23
<PAGE>
- --------------------------------------------------------------------------------
Schedules of Investments (continued) October 31, 1996
- --------------------------------------------------------------------------------
INTERNATIONAL BALANCED PORTFOLIO
SHARES SECURITY VALUE
================================================================================
Japan -- 2.7%
15,000 Canon Inc. $ 287,499
2,000 Japan Associated Finance 164,761
25,000 Kajima Corp. 215,184
14,000 Matsushita Electric Industrial Co. Ltd. 224,019
31,000 Mitsubishi Heavy Industries Ltd. 238,484
- --------------------------------------------------------------------------------
1,129,947
- --------------------------------------------------------------------------------
Malaysia -- 1.8%
140,000 Sungei Way Holdings Berhad 797,878
- --------------------------------------------------------------------------------
Mexico -- 0.8%
72,840 Gruma S.A. de C.V. Class B Shares 360,586
- --------------------------------------------------------------------------------
Netherlands -- 5.6%
10,000 Hunter Douglas N.V. 707,589
15,000 IHC Caland N.V. 837,610
7,000 Wolters Kluwer CVA 900,229
- --------------------------------------------------------------------------------
2,445,428
- --------------------------------------------------------------------------------
Singapore -- 0.9%
50,000 Cerebos Pacific Ltd. 386,799
561 Jardine Matheson Holding Ltd. 3,170
- --------------------------------------------------------------------------------
389,969
- --------------------------------------------------------------------------------
Sweden -- 4.0%
10,000 Astra AB Class A Shares 460,050
15,000 Autoliv AB 637,519
22,000 Telefonaktiebolaget LM Ericsson ADR 607,750
- --------------------------------------------------------------------------------
1,705,319
- --------------------------------------------------------------------------------
Switzerland -- 2.7%
1,000 Sandoz AG 1,160,721
- --------------------------------------------------------------------------------
Thailand -- 1.2%
86,000 Siam Makro Public Co. Ltd. 367,535
20,000 United Communication Industry Public Co. Ltd. 166,241
- --------------------------------------------------------------------------------
533,776
- --------------------------------------------------------------------------------
United Kingdom -- 6.7%
100,000 Boxmore International PLC 513,761
50,000 Hozelock Group PLC 356,212
100,000 Powerscreen International PLC 995,768
100,000 Rentokil Initial PLC 671,714
5,000 Reuters Holdings PLC ADR 371,875
- --------------------------------------------------------------------------------
2,909,330
- --------------------------------------------------------------------------------
TOTAL STOCKS
(Cost -- $18,406,620) 22,205,322
================================================================================
See Notes to Financial Statements.
24
<PAGE>
- --------------------------------------------------------------------------------
Schedules of Investments (continued) October 31, 1996
- --------------------------------------------------------------------------------
INTERNATIONAL BALANCED PORTFOLIO
SHARES SECURITY VALUE
================================================================================
CALL OPTION -- 0.1%
Japan -- 0.1%
120,000,000 Japan Government Bond, 3.000% due 9/20/05
Call @ 99.617, Expire 12/4/96 (Cost -- $8,757) $ 38,720
================================================================================
FACE
AMOUNT+ SECURITY VALUE
================================================================================
BONDS -- 41.7%
Australia -- 1.8%
800,000 Australian Government, 12.000% due 11/15/01 766,797
- --------------------------------------------------------------------------------
Belgium -- 5.7%
73,000,000 Belgium Kingdom, 7.000% due 5/15/06 2,487,710
- --------------------------------------------------------------------------------
Canada -- 6.1%
3,400,000 Government of Canada, 7.000% due 12/1/06 2,641,712
- --------------------------------------------------------------------------------
Finland -- 2.1%
4,000,000 Finnish Government, 7.250% due 4/18/06 922,543
- --------------------------------------------------------------------------------
Germany -- 8.1%
5,200,000 Bundesrepublik Deutschland, 6.250% due 4/26/06 3,495,189
- --------------------------------------------------------------------------------
Italy -- 6.0%
1,000,000,000 Buoni Poliennali Del Tes, 8.250% due 7/11/99 680,780
2,325,000,000 Buoni Poliennali Del Tes, 9.500% due 2/1/06 1,667,450
350,000,000 Buoni Poliennali Del Tes, 8.750% due 7/1/06 242,590
- --------------------------------------------------------------------------------
2,590,820
- --------------------------------------------------------------------------------
Spain -- 5.3%
82,000,000 Bonos Y Oblig Del Estado, 9.400% due 4/30/99 681,539
150,000,000 Bonos Y Oblig Del Estado, 10.150% due 1/31/06 1,354,972
30,000,000 Bonos Y Oblig Del Estado, 8.800% due 4/30/06 252,403
- --------------------------------------------------------------------------------
2,288,914
- --------------------------------------------------------------------------------
Sweden -- 2.9%
9,000,000 Swedish Government, 6.000% due 2/9/05 1,263,496
- --------------------------------------------------------------------------------
United Kingdom -- 3.7%
1,000,000 UK Treasury, 7.500% due 12/7/06 1,614,150
- --------------------------------------------------------------------------------
TOTAL BONDS
(Cost -- $17,711,259) 18,071,331
================================================================================
See Notes to Financial Statements.
25
<PAGE>
- --------------------------------------------------------------------------------
Schedules of Investments (continued) October 31, 1996
- --------------------------------------------------------------------------------
INTERNATIONAL BALANCED PORTFOLIO
FACE
AMOUNT SECURITY VALUE
================================================================================
SHORT-TERM INVESTMENTS -- 7.1%
Discount Note -- 2.3%
$1,000,000 PT Polysindo, 9.347% due 12/4/96 $ 992,851
- --------------------------------------------------------------------------------
Repurchase Agreement -- 4.8%
2,066,000 CS First Boston Corp., 5.470% due 11/1/96;
Proceeds at maturity -- $2,066,314; (Fully
collateralized by U.S. Treasury Bill due
3/27/97; Market value -- $2,111,254) 2,066,000
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost -- $3,057,430) 3,058,851
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $39,184,066*) $43,374,224
================================================================================
(a) Non-income producing security.
(b) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions that are exempt
from registration, generally to qualified institutional buyers.
+ Represents local currency.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
26
<PAGE>
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International
European Pacific Balanced
Portfolio Portfolio Portfolio
========================================================================================
<S> <C> <C> <C>
ASSETS:
Investments, at value
(Cost -- $25,892,774, $8,833,510
and $39,184,066) $ 37,748,853 $ 9,055,737 $ 43,374,224
Foreign currency
(Cost -- $255,554, $2,257,669
and $97,658) 245,763 2,254,978 97,049
Cash 371 -- 754
Receivable for securities sold 829,832 271,171 5,676,271
Receivable for Fund shares sold 58,555 790,405 449,536
Receivable for open forward foreign
currency contracts (Note 4) -- -- 85,270
Dividends and interest receivable 104,517 5,127 656,289
Receivable from manager -- 123,853 --
- ----------------------------------------------------------------------------------------
Total Assets 38,987,891 12,501,271 50,339,393
- ----------------------------------------------------------------------------------------
LIABILITIES:
Management fees payable 28,316 -- 32,107
Distribution fees payable 12,153 2,385 5,402
Payable for open forward foreign
currency contracts (Note 4) 2,610 1,189 221,080
Payable for securities purchased -- 926,654 4,297,978
Payable for Fund shares purchased -- 913 68,702
Payable to bank -- 982,036 --
Accrued expenses 21,978 38,084 80,012
Other liabilities -- 161 3,905
- ----------------------------------------------------------------------------------------
Total Liabilities 65,057 1,951,422 4,709,186
- ----------------------------------------------------------------------------------------
Total Net Assets $ 38,922,834 $ 10,549,849 $ 45,630,207
========================================================================================
NET ASSETS:
Par value of capital shares $ 2,273 $ 1,046 $ 3,281
Capital paid in excess of par value 24,427,326 12,074,284 41,276,797
Accumulated net investment income (loss) (220) (42,594) 334,918
Accumulated net realized gain (loss)
from security transactions 2,644,019 (1,704,920) (27,446)
Net unrealized appreciation
of investments and foreign currencies 11,849,436 222,033 4,042,657
- ----------------------------------------------------------------------------------------
Total Net Assets $ 38,922,834 $ 10,549,849 $ 45,630,207
========================================================================================
</TABLE>
See Notes to Financial Statements.
27
<PAGE>
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities (continued) October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International
European Pacific Balanced
Portfolio Portfolio Portfolio
========================================================================================
<S> <C> <C> <C>
Shares Outstanding:
Class A 610,496 484,031 1,159,476
-------------------------------------------------------------------------------------
Class B 1,544,050 400,532 378,293
-------------------------------------------------------------------------------------
Class C 117,997 161,547 350,969
-------------------------------------------------------------------------------------
Class Y -- -- 1,391,961
-------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $17.25 $10.18 $13.90
-------------------------------------------------------------------------------------
Class B * $17.09 $10.01 $13.90
-------------------------------------------------------------------------------------
Class C ** $17.04 $9.98 $13.87
-------------------------------------------------------------------------------------
Class Y (and redemption price) -- -- $13.93
-------------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value
per share) $18.16 $10.72 $14.63
========================================================================================
</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.
28
<PAGE>
- --------------------------------------------------------------------------------
Statements of Operations For the Year Ended October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International
European Pacific Balanced
Portfolio Portfolio Portfolio
========================================================================================
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 534,517 $ 112,994 $ 252,517
Interest 35,088 12,810 1,045,587
Less: Foreign withholding tax (73,790) (14,685) (26,683)
- ----------------------------------------------------------------------------------------
Total Investment Income 495,815 111,119 1,271,421
- ----------------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 314,805 82,839 274,278
Distribution fees (Note 2) 294,487 59,777 133,249
Shareholder and system servicing fees 83,459 24,080 40,800
Registration fees 78,966 66,950 95,227
Custody 44,096 30,721 38,113
Shareholder communications 29,600 10,858 16,800
Audit and legal 25,000 15,080 24,500
Directors' fees 4,847 3,213 4,650
Other 7,097 7,724 20,699
- ----------------------------------------------------------------------------------------
Total Expenses 882,357 301,242 648,316
Less: Custody earnings credit (Note 2) (10,967) (14,959) (30,389)
- ----------------------------------------------------------------------------------------
Net Expenses 871,390 286,283 617,927
- ----------------------------------------------------------------------------------------
Net Investment Income (Loss) (375,575) (175,164) 653,494
- ----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS, OPTIONS AND FOREIGN
CURRENCIES (NOTES 3, 4 AND 5):
Realized Gain (Loss) From:
Security transactions
(excluding short-term securities) 3,673,054 (140,210) 10,939
Options contracts -- -- 137,674
Foreign currency transactions (79,630) (19,401) 434,262
- ----------------------------------------------------------------------------------------
Net Realized Gain (Loss) 3,593,424 (159,611) 582,875
- ----------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
(Depreciation) of Investments and
Foreign Currencies:
Beginning of year 8,915,699 (124,290) 1,402,183
End of year 11,849,436 222,033 4,042,657
- ----------------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 2,933,737 346,323 2,640,474
- ----------------------------------------------------------------------------------------
Net Gain on Investments, Options and
Foreign Currencies 6,527,161 186,712 3,223,349
- ----------------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 6,151,586 $ 11,548 $3,876,843
========================================================================================
</TABLE>
See Notes to Financial Statements.
29
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- -------------------------------------------------------------------------------
Years Ended October 31,
---------------------------
European Portfolio 1996 1995
===============================================================================
OPERATIONS:
Net investment income (loss) $ (375,575) $ 69,836
Net realized gain 3,593,424 484,759
Increase in net unrealized appreciation 2,933,737 3,456,753
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations 6,151,586 4,011,348
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (59,829) --
Net realized gains (100,457) --
- -------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (160,286) --
- -------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 35,761,098 26,923,706
Net asset value of shares issued
in connection with the transfer of the
Smith Barney European Fund's
net assets (Note 8) -- 30,778,301
Net asset value of shares issued
for reinvestment of dividends 152,260 --
Cost of shares reacquired (40,988,044) (30,503,488)
- -------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions (5,074,686) 27,198,519
- -------------------------------------------------------------------------------
Increase in Net Assets 916,614 31,209,867
NET ASSETS:
Beginning of year 38,006,220 6,796,353
- -------------------------------------------------------------------------------
End of year* $38,922,834 $38,006,220
===============================================================================
* Includes accumulated net investment
income (loss) of: $(220) $64,926
===============================================================================
See Notes to Financial Statements.
30
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
Years Ended October 31,
---------------------------
Pacific Portfolio 1996 1995
================================================================================
OPERATIONS:
Net investment loss $ (175,164) $ (58,146)
Net realized loss (159,611) (1,451,008)
Increase in net unrealized appreciation
(depreciation) 346,323 (581,771)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Operations 11,548 (2,090,925)
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- --
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders -- --
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 28,672,810 40,966,925
Net asset value of shares issued
for reinvestment of dividends -- --
Cost of shares reacquired (25,526,221) (42,190,082)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions 3,146,589 (1,223,157)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 3,158,137 (3,314,082)
NET ASSETS:
Beginning of year 7,391,712 10,705,794
- --------------------------------------------------------------------------------
End of year* $10,549,849 $ 7,391,712
================================================================================
* Includes accumulated net investment loss of: $(42,594) $(41,379)
================================================================================
See Notes to Financial Statements.
31
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
Years Ended October 31,
---------------------------
International Balanced Portfolio 1996 1995
================================================================================
OPERATIONS:
Net investment income $ 653,494 $ 817,194
Net realized gain (loss) 582,875 (289,190)
Increase in net unrealized appreciation 2,640,474 1,125,829
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 3,876,843 1,653,833
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (813,403) (771,525)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (813,403) (771,525)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 23,961,742 6,748,172
Net asset value of shares issued
for reinvestment of dividends 554,791 691,456
Cost of shares reacquired (6,997,464) (8,218,656)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions 17,519,069 (779,028)
- --------------------------------------------------------------------------------
Increase in Net Assets 20,582,509 103,280
NET ASSETS:
Beginning of year 25,047,698 24,944,418
- --------------------------------------------------------------------------------
End of year* $45,630,207 $25,047,698
================================================================================
* Includes accumulated net investment income of: $334,918 $60,565
================================================================================
See Notes to Financial Statements.
32
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The European Portfolio ("European"), Pacific Portfolio ("Pacific") and
International Balanced Portfolio ("International Balanced") are separate
investment portfolios ("Portfolios") of the Smith Barney World Funds, Inc.
("Fund"). The Fund, a Maryland corporation, is registered under the Investment
Company Act of 1940, as amended, as an open-end investment management company
and consists of these Portfolios and three other separate investment portfolios:
International Equity, Global Government Bond and Emerging Markets Portfolios.
The financial statements and financial highlights for the other portfolios are
presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolios
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; (c) securities maturing within 60
days are valued at cost plus accreted discount, or minus amortized premium,
which approximates market value; (d) gains or losses on the sale of securities
are calculated by using the specific identification method; (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) direct expenses are charged to each
Portfolio and class; management fees and general expenses are allocated on the
basis of relative net assets; (h) dividends and distributions to shareholders
are recorded on the ex-dividend date; (i) 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; (j) the character of income
and gains to be distributed are determined in accordance with income tax
regulations
33
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
which may differ from generally accepted accounting principles. At October 31,
1996, reclassifications were made to the capital accounts of the European and
Pacific Portfolios to reflect permanent book/tax differences and income and
gains available for distributions under income tax regulations. Accordingly, a
portion of net investment loss amounting to $449,844 and a portion of
accumulated net realized gains amounting to $1,136 was reclassified to paid-in
capital for the European Portfolio. In addition, a portion of net investment
loss amounting to $91,959 was reclassified to paid-in capital for the Pacific
Portfolio. Net investment income, net realized gains and net assets were not
affected by this change; (k) the Portfolios intend to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
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 Portfolios 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 of the Fund. The
European, Pacific and International Balanced Portfolios pay SBMFM a management
fee calculated at the annual rate of 0.85% of average daily net assets of each
respective Portfolio. This fee is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
the Fund's shares and as such received sales charges of approximately $70,000 on
sales of the Portfolio's Class A shares for the year ended October 31, 1996. In
addition, SB received brokerage commissions of $325.
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
34
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
the first year of purchase. For the year ended October 31, 1996, CDSCs paid to
SB for Class B shares were approximately:
International
European Pacific Balanced
================================================================================
CDSCs $33,000 $6,000 $21,000
================================================================================
Pursuant to a Distribution Plan, each Portfolio 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 Portfolios also pay a
distribution fee with respect to Class B and C shares calculated at the annual
rate of 0.75% of average daily net assets for each class, respectively. For the
year ended October 31, 1996, total Distribution Plan fees incurred by the
Portfolios were:
International
European Pacific Balanced
================================================================================
Class A $ 25,498 $12,618 $41,971
- --------------------------------------------------------------------------------
Class B 252,229 28,150 44,612
- --------------------------------------------------------------------------------
Class C 16,760 19,009 46,666
================================================================================
All officers and three Directors of the Fund are employees of SB.
The Portfolios have an arrangement with their custodian, The Bank of New
York, where they earn custody credits on available cash balances. These credits
offset custody fees which may be charged to the Portfolios during the current
year. For the year ended October 31, 1996, custody credits totalled $10,967,
$14,959 and $30,389 for European, Pacific and International Balanced,
respectively.
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:
International
European Pacific Balanced
================================================================================
Purchases $13,680,579 $9,598,586 $69,880,440
- --------------------------------------------------------------------------------
Sales 19,819,405 7,825,570 56,100,785
================================================================================
35
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At October 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
International
European Pacific Balanced
================================================================================
Gross unrealized appreciation* $12,517,715 $ 904,091 $4,924,502
Gross unrealized depreciation* (661,636) (681,864) (734,344)
- --------------------------------------------------------------------------------
Net unrealized appreciation* $11,856,079 $ 222,227 $4,190,158
================================================================================
* Substantially the same for Federal income tax purposes.
4. FORWARD FOREIGN CURRENCY CONTRACTS
At October 31, 1996, the Portfolios had open forward foreign currency
contracts as described below. The Portfolios bear the market risk that arises
from changes in foreign currency exchange rates. The unrealized gain (loss) on
the contracts reflected in the accompanying financial statements are as follows:
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
================================================================================
European
To Sell:
Norwegian Krone 4,824,332 $756,792 11/4/96 $ (2,601)
Norwegian Krone 466,011 73,103 11/4/96 (9)
- --------------------------------------------------------------------------------
Total Unrealized Loss on Forward
Foreign Currency Contracts (2,610)
================================================================================
Pacific
To Sell:
Japanese Yen 46,551,703 $409,503 11/4/96 (437)
Malaysian Ringit 1,835,127 726,154 11/4/96 (90)
Malaysian Ringit 49,698 19,665 11/5/96 (5)
Singapore Dollar 759,590 539,183 11/4/96 (657)
- --------------------------------------------------------------------------------
Total Unrealized Loss on Forward
Foreign Currency Contracts (1,189)
================================================================================
International Balanced
To Sell:
Australian Dollar 1,000,000 (792,844) 11/8/96 (2,844)
Belgian Franc 79,350,000 (2,544,212) 11/8/96 (17,142)
British Pound 1,030,000 (1,676,953) 11/8/96 (34,824)
Canadian Dollar 1,530,000 (1,141,392) 11/8/96 (17,219)
Danish Krone 4,670,000 (803,873) 11/8/96 (4,490)
Finnish Markka 4,380,000 (967,021) 11/8/96 (6,495)
German Deutschemark 3,500,000 (2,314,125) 11/8/96 (17,537)
Italian Lira 3,080,000,000 (2,030,037) 11/8/96 (5,283)
Japanese Yen 234,500,000 (2,063,953) 11/8/96 19,566
New Zealand Dollar 1,180,000 (833,989) 11/8/96 (4,674)
Swedish Krone 5,050,000 (769,396) 11/8/96 (3,908)
Spanish Peseta 87,600,000 (686,946) 11/8/96 (5,933)
Spanish Peseta 124,700,000 (977,878) 11/8/96 714
- --------------------------------------------------------------------------------
(100,069)
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
================================================================================
International Balanced
To Buy:
Australian Dollar 45,152 $ 35,801 11/1/96 $ 186
Australian Dollar 50,685 40,192 11/4/96 85
Australian Dollar 172,177 136,521 11/6/96 259
Australian Dollar 54,398 43,131 11/7/96 48
British Pound 157,752 256,687 11/7/96 (165)
British Pound 500,000 814,055 11/8/96 16,055
Canadian Dollar 1,500,000 1,119,012 11/8/96 3,771
Canadian Dollar 1,470,799 1,100,156 11/26/96 156
Danish Krone 7,600,000 1,308,231 11/8/96 (1,211)
German Deutschemark 1,604,106 1,060,601 11/8/96 10,601
German Deutschemark 7,862,560 5,198,556 11/8/96 (23,931)
Italian Lira 850,000,000 560,237 11/8/96 9,112
Japanese Yen 749,506,000 6,596,781 11/8/96 (71,575)
Japanese Yen 216,210,500 1,902,978 11/8/96 2,978
New Zealand Dollar 1,180,000 833,989 11/8/96 11,411
Spanish Peseta 124,739,429 977,199 11/4/96 (1,918)
- --------------------------------------------------------------------------------
(44,138)
- --------------------------------------------------------------------------------
Cross Forwards**: Market Value
-------------------------
To Sell: Danish Krone Italian Lira
------------ ------------
Sell Danish Krone vs. Italian Lira 957,630 955,699 11/8/96 (1,931)
British Pound
-------------
Sell Danish Krone vs. British Pound 966,538 976,866 11/8/96 10,328
- --------------------------------------------------------------------------------
8,397
- --------------------------------------------------------------------------------
Total Unrealized Loss on Forward
Foreign Currency Contracts $(135,810)
================================================================================
** Local Currency on Cross Forwards Sell Buy
- --------------------------------------------------------------------------------
Sell Danish Krone vs. Italian Lira 5,563,229 1,450,000,000
Sell Danish Krone vs. British Pound 5,614,980 600,000
- --------------------------------------------------------------------------------
5. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Portfolios
represent investments, which are marked-to-market daily. When a purchased option
expires, the Portfolio will realize a loss in the amount of the premium paid.
When the Portfolio enters into a closing sales transaction, the Portfolio 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
Portfolio 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 Portfolio exercises a call option, the
cost of the security which the Portfolio purchases upon exercise will be
increased by the premium originally paid.
As of October 31, 1996, the International Balanced Portfolio held one
purchased call option with a total cost of $8,757.
37
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
When a Portfolio writes a call or put option, an amount equal to the
premium received by the Portfolio is recorded as a liability, the value of which
is marked-to-market daily. When a written option expires, the Portfolio realizes
a gain equal to the amount of the premium received. When the Portfolio enters
into a closing purchase transaction, the Portfolio realizes a gain (or loss if
the cost of the closing purchase transaction exceeds the premium received when
the option was written) 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 Portfolio 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 Portfolio
enters into options for hedging purposes. The risk in writing a call option is
that the Portfolio 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 Portfolio 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, 1996:
Number of
International Balanced Premium Contracts
================================================================================
Options written, outstanding at October 31, 1995 $ 0 0
Options written during the year ended October 31, 1996 245,775 15
Options cancelled in closing purchase transactions (53,940) (6)
Options exercised (97,327) (5)
Options expired (94,508) (4)
- --------------------------------------------------------------------------------
Options written, outstanding at October 31, 1996 $ 0 0
================================================================================
6. PORTFOLIO CONCENTRATION
The Portfolios' 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 the investments and earnings of each of the Portfolios. Foreign investments
may also subject the Portfolios 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.
38
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
In addition to the risks described above, risks may arise from forward
foreign currency contracts with respect to the potential inability of
counter-parties to meet the terms of their contracts.
7. CAPITAL SHARES
At October 31, 1996, the Fund had one billion shares of capital stock
authorized with a par value of $0.001 per share. The Portfolios have the ability
to issue multiple classes of shares. Each share of a class represents an
identical legal interest in a Portfolio and has the same rights, except that
each class bears certain expenses specifically related to the distribution of
its shares. Effective November 7, 1994, the Portfolios adopted a new class
structure, renaming the existing Class B shares as Class C shares.
At October 31, 1996, total paid-in capital amounted to the following for
each Portfolio:
Class A Class B Class C Class Y
================================================================================
European $ 6,357,625 $16,604,809 $1,467,165 --
- --------------------------------------------------------------------------------
Pacific 5,974,437 3,994,896 2,105,997 --
- --------------------------------------------------------------------------------
International Balanced 13,619,640 4,678,234 4,191,362 $18,790,842
================================================================================
39
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1996 October 31, 1995*
--------------------- -----------------------
European Shares Amount Shares Amount
==========================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 925,533 $ 14,551,767 1,428,268 $ 19,689,880
Net asset value of shares
issued in connection with
the transfer of the
European Fund's
net assets (Note 8) -- -- 491,711 6,525,008
Shares issued on
reinvestment 5,876 83,554 -- --
Shares redeemed (1,130,019) (17,610,700) (1,513,648) (20,920,268)
- ------------------------------------------------------------------------------------------
Net Increase (Decrease) (198,610) $ (2,975,379) 406,331 $ 5,294,620
==========================================================================================
Class B
Shares sold 1,272,772 $ 20,413,451 489,229 $ 6,946,797
Net asset value of shares
issued in connection with
the transfer of the
European Fund's
net assets (Note 8) -- -- 1,834,562 24,252,906
Shares issued on
reinvestment 4,564 64,632 -- --
Shares redeemed (1,438,755) (22,998,214) (618,322) (8,837,396)
- ------------------------------------------------------------------------------------------
Net Increase (Decrease) (161,419) $ (2,520,131) 1,705,469 $ 22,362,307
==========================================================================================
Class C+
Shares sold 51,785 $ 795,880 20,683 $ 287,029
Net asset value of shares
issued in connection with
the transfer of the
European Fund's
net assets (Note 8) -- -- 29 387
Shares issued on
reinvestment 289 4,074 -- --
Shares redeemed (24,464) (379,130) (55,599) (745,824)
- ------------------------------------------------------------------------------------------
Net Increase (Decrease) 27,610 $ 420,824 (34,887) $ (458,408)
==========================================================================================
</TABLE>
* For Class B shares, transactions are for the period from November 7, 1994
(inception date) to October 31, 1995.
+ On November 7, 1994, the former Class B shares were renamed Class C shares.
40
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1996 October 31, 1995*
--------------------- -----------------------
Pacific Shares Amount Shares Amount
======================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 835,124 $ 8,882,687 1,736,685 $ 18,498,096
Shares redeemed (788,783) (8,407,176) (1,882,567) (20,211,534)
- --------------------------------------------------------------------------------------
Net Increase (Decrease) 46,341 $ 475,511 (145,882) $ (1,713,438)
======================================================================================
Class B
Shares sold 1,874,088 $ 19,538,963 2,094,088 $ 22,232,270
Shares redeemed (1,576,819) (16,512,252) (1,990,825) (21,205,511)
- --------------------------------------------------------------------------------------
Net Increase 297,269 $ 3,026,711 103,263 $ 1,026,759
======================================================================================
Class C+
Shares sold 23,983 $ 251,160 21,913 $ 236,559
Shares redeemed (58,530) (606,793) (72,193) (773,037)
- --------------------------------------------------------------------------------------
Net Decrease (34,547) $ (355,633) (50,280) $ (536,478)
======================================================================================
</TABLE>
* For Class B shares, transactions are for the period from November 7, 1994
(inception date) to October 31, 1995.
+ On November 7, 1994, the former Class B shares were renamed Class C shares.
Year Ended Year Ended
October 31, 1996 October 31, 1995*
--------------------- --------------------
International Balanced Shares Amount Shares Amount
================================================================================
Class A
Shares sold 136,189 $ 1,791,427 209,809 $ 2,540,922
Shares issued on
reinvestment 29,395 391,488 46,277 548,563
Shares redeemed (403,806) (5,337,395) (549,877) (6,611,678)
- --------------------------------------------------------------------------------
Net Decrease (238,222) $(3,154,480) (293,791) $(3,522,193)
================================================================================
Class B
Shares sold 211,895 $ 2,785,875 280,399 $ 3,376,386
Shares issued on
reinvestment 5,840 78,180 3,830 46,164
Shares redeemed (81,609) (1,097,160) (42,062) (511,211)
- --------------------------------------------------------------------------------
Net Increase 136,126 $ 1,766,895 242,167 $ 2,911,339
================================================================================
Class C+
Shares sold 45,360 $ 593,585 68,996 $ 830,864
Shares issued on
reinvestment 6,383 85,123 8,140 96,729
Shares redeemed (42,497) (562,896) (89,199) (1,095,767)
- --------------------------------------------------------------------------------
Net Increase (Decrease) 9,246 $ 115,812 (12,063) $ (168,174)
================================================================================
* For Class B shares, transactions are for the period from November 7, 1994
(inception date) to October 31, 1995.
+ On November 7, 1994, the former Class B shares were renamed Class C shares.
41
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Year Ended Year Ended
October 31, 1996* October 31, 1995
--------------------- ---------------------
International Balanced Shares Amount Shares Amount
================================================================================
Class Y
Shares sold 1,391,962 $18,790,855 -- --
Shares issued on
reinvestment -- -- -- --
Shares redeemed (1) (13) -- --
- --------------------------------------------------------------------------------
Net Increase 1,391,961 $18,790,842 -- --
================================================================================
* For Class Y shares, transactions are for the period from February 7, 1996
(inception date) to October 31, 1996.
8. TRANSFER OF NET ASSETS
On April 21, 1995, the Portfolio acquired the assets and certain
liabilities of the Smith Barney Investment Funds Inc. -- Smith Barney European
Fund ("SBEF"), pursuant to a plan of reorganization approved by SBEF
shareholders on April 20, 1995. Total shares issued by the Portfolio and the
total net assets of SBEF and the Portfolio on the date of the transfer were:
Shares Total Net Total Net
Issued by Assets of Assets of
Acquired Fund the Portfolio SBEF the Portfolio
================================================================================
SBEF 2,326,302 $30,778,301 $7,165,502
================================================================================
The total net assets of SBEF before acquisition included unrealized
appreciation of $4,996,448 and a net realized loss of $56,023. The total net
assets of the Portfolio immediately after the acquisition was $37,943,803. The
transaction was structured for tax purposes to qualify as a tax-free
reorganization under the Internal Revenue Code.
42
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
9. CAPITAL LOSS CARRYFORWARDS
At October 31, 1996, Pacific and International Balanced had, for Federal
income tax purposes, approximately $1,709,000 and $161,000, respectively, of
capital loss carryforwards available to offset future realized gains. To the
extent that these carryforward losses are used to offset gains, it is probable
that the gains so offset will not distributed. The amount and year of expiration
of each carryforward loss is indicated below:
2002 2003 2004
================================================================================
Pacific $37,000 $1,426,000 $246,000
- --------------------------------------------------------------------------------
International Balanced -- 161,000 --
================================================================================
43
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares Class B Shares
-------------------------- ----------------
European Portfolio 1996 1995 1994(1) 1996 1995(2)
==========================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $14.67 $12.88 $12.50 $14.56 $12.62
- ------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (loss)(3) (0.08) 0.07 (0.11) (0.20) 0.02
Net realized and unrealized gain 2.79 1.72 0.49 2.77 1.92
- ------------------------------------------------------------------------------------------
Total Income From Operations 2.71 1.79 0.38 2.57 1.94
- ------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.09) -- -- -- --
Net realized gains (0.04) -- -- (0.04) --
- ------------------------------------------------------------------------------------------
Total Distributions (0.13) -- -- (0.04) --
- ------------------------------------------------------------------------------------------
Net Asset Value, End of Year $17.25 $14.67 $12.88 $17.09 $14.56
- ------------------------------------------------------------------------------------------
Total Return 18.65% 13.90% 3.04%+++ 17.72% 15.37%+++
- ------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $10,528 $11,870 $5,189 $26,384 $24,825
- ------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.85% 2.06% 1.34%+ 2.59% 3.31%+
Net investment income (loss) (0.49) 0.51 (1.12)+ (1.22) 0.26+
- ------------------------------------------------------------------------------------------
Portfolio Turnover Rate 39% 34% 21% 39% 34%
- ------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4) $ 0.05 $ 0.06 -- $ 0.05 $ 0.06
==========================================================================================
</TABLE>
(1) For the period from February 7, 1994 (inception date) to October 31, 1994.
(2) For the period from November 7, 1994 (inception date) to October 31, 1995.
(3) The Manager waived all or part of its fees for the year ended October 31,
1995 and the period ended October 31, 1994. In addition, the manager agreed
to reimburse the European Portfolio for $10,344 of the Portfolio's expenses
for the period ended October 31, 1994. If such fees and expenses were not
waived or reimbursed, the per share effect on net investment income and the
expense ratios would have been as follows:
Expense Ratios
Per Share Decreases to Without Fee Waivers
Net Investment Income and Custody Credits
---------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
Class A $0.01 $0.10 2.09% 2.37%+
Class B 0.00* -- 3.35+ --
In addition, during the years ended October 31, 1996 and October 31, 1995,
the Portfolio has earned credits from the custodian which reduce service
fees incurred. If the credits are taken into consideration, the expense
ratios for Class A would be 1.82% and 2.02%, respectively; and for Class B
would be 2.56% and 3.26% (annualized), respectively; prior year numbers
have not been restated to reflect these credits.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
* Amount represents less than $0.01.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
44
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares
------------------------------------
European Portfolio 1996 1995(1) 1994(2)
==============================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $14.51 $12.83 $12.48
- ------------------------------------------------------------------------------
Income From Operations:
Net investment loss(3) (0.14) (0.08) (0.16)
Net realized and unrealized gain 2.71 1.76 0.51
- ------------------------------------------------------------------------------
Total Income From Operations 2.57 1.68 0.35
- ------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- --
Net realized gains (0.04) -- --
- ------------------------------------------------------------------------------
Total Distributions (0.04) -- --
- ------------------------------------------------------------------------------
Net Asset Value, End of Year $17.04 $14.51 $12.83
- ------------------------------------------------------------------------------
Total Return 17.78% 13.09% 2.80%+++
- ------------------------------------------------------------------------------
Net Assets, End of Year (000s) $2,011 $1,311 $1,607
- ------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 2.52% 2.51% 2.02%+
Net investment loss (1.17) (0.64) (1.60)+
- ------------------------------------------------------------------------------
Portfolio Turnover Rate 39% 34% 21%
- ------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4) $0.05 $0.06 --
==============================================================================
</TABLE>
(1) On November 7, 1994, the former Class B shares were renamed Class C shares.
(2) For the period from February 14, 1994 (inception date) to October 31, 1994.
(3) The Manager waived all or part of its fees for the year ended October 31,
1995 and the period ended October 31, 1994. In addition, the manager agreed
to reimburse the European Portfolio for $10,344 of the Portfolio's expenses
for the period ended October 31, 1994. If such fees and expenses were not
waived or reimbursed, the per share effect on net investment income and the
expense ratios would have been as follows:
Expense Ratios
Per Share Decreases to Without Fee Waivers
Net Investment Income and Custody Credits
---------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
Class C $0.01 $0.10 2.54% 3.07%+
In addition, during the years ended October 31, 1996 and October 31, 1995,
the Portfolio has earned credits from the custodian which reduce service
fees incurred. If the credits are taken into consideration, the expense
ratios for Class C would be 2.50% and 2.48%, respectively; prior year
numbers have not been restated to reflect these credits.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
45
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares Class B Shares
------------------------- -----------------
Pacific Portfolio 1996(1) 1995 1994(2) 1996(1) 1995(3)
===============================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.07 $12.92 $12.50 $ 9.99 $12.64
- -----------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss(4) (0.14) (0.01) (0.07) (0.23) (0.01)
Net realized and unrealized gain (loss) 0.25 (2.84) 0.49 0.25 (2.64)
- -----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.11 (2.85) 0.42 0.02 (2.65)
- -----------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- -- --
- -----------------------------------------------------------------------------------------------
Total Distributions -- -- -- -- --
- -----------------------------------------------------------------------------------------------
Net Asset Value, End of Year $10.18 $10.07 $12.92 $10.01 $9.99
- -----------------------------------------------------------------------------------------------
Total Return 1.09% (22.06) 3.36%+++ 0.20% (20.97)%+++
- -----------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $4,929 $4,409 $7,538 $4,009 $1,031
- -----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 2.64% 1.97% 1.51%+ 3.65% 3.39%+
Net investment loss (1.38) (0.71) (0.82)+ (2.26) (1.47)+
- -----------------------------------------------------------------------------------------------
Portfolio Turnover Rate 86% 31% 6% 86% 31%
- -----------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(5) $0.02 $0.01 -- $0.02 $0.01
===============================================================================================
</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 February 7, 1994 (inception date) to October 31, 1994.
(3) For the period from November 7, 1994 (inception date) to October 31, 1995.
(4) The Manager waived all or part of its fees for the period ended October 31,
1995 and the period ended October 31, 1994. In addition, the Manager agreed
to reimburse the Pacific Portfolio for $30,862 of the Portfolio's expenses
for the period ended October 31, 1995. If such fees and expenses were not
waived or reimbursed, the per share effect on net investment and the
expense ratios would have been as follows:
Expense Ratios
Per Share Decreases to Without Fee Waivers
Net Investment Income and Custody Credits
---------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
Class A $0.14 $0.03 3.18% 1.87%+
Class B 0.16 -- 4.90+ --
In addition, during the years ended October 31, 1996 and October 31, 1995,
the Portfolio has earned credits from the custodian which reduce service
fees incurred. If the credits are taken into consideration, the expense
ratios for Class A would be 2.51% and 1.70%, respectively; and for Class B
would be 3.47% and 3.06% (annualized), respectively; prior year numbers
have not been restated to reflect these credits.
(5) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
46
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares
-------------------------------
Pacific Portfolio 1996(1) 1995(2) 1994(3)
=============================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $9.95 $12.86 $12.50
- -----------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss(4) (0.24) (0.02) (0.11)
Net realized and unrealized gain (loss) 0.27 (2.89) 0.47
- -----------------------------------------------------------------------------
Total Income (Loss) From Operations 0.03 (2.91) 0.36
- -----------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- --
- -----------------------------------------------------------------------------
Total Distributions -- -- --
- -----------------------------------------------------------------------------
Net Asset Value, End of Year $9.98 $9.95 $12.86
- -----------------------------------------------------------------------------
Total Return 0.30% (22.63)% 2.88%+++
- -----------------------------------------------------------------------------
Net Assets, End of Year (000s) $1,612 $1,952 $3,167
- -----------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 3.46% 2.69% 2.29%+
Net investment loss (2.22) (1.45) (1.49)+
- -----------------------------------------------------------------------------
Portfolio Turnover Rate 86% 31% 6%
- -----------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(5) $0.02 $0.01 --
=============================================================================
</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) On November 7, 1994, the former Class B shares were renamed Class C shares.
(3) For the period from February 11, 1994 (inception date) to October 31, 1994.
(4) The Manager waived all or part of its fees for the year ended October 31,
1995 and the period ended October 31, 1994. In addition, the Manager agreed
to reimburse the Portfolio for $30,862 of the Portfolio's expense for the
year ended October 31, 1995. If such fees and expenses were not waived or
reimbursed, the per share effect on net investment income and the expense
ratios would have been as follows:
Expense Ratios
Per Share Decreases to Without Fee Waivers
Net Investment Income and Custody Credits
---------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
Class C $0.13 $0.03 3.88% 2.70%+
In addition, during the years ended October 31, 1996 and October 31, 1995,
the Portfolio has earned credits from the custodian which reduce service
fees incurred. If the credits are taken into consideration, the expense
ratios for Class C would be 3.29% and 2.42%, respectively; prior year
numbers have not been restated to reflect these credits.
(5) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
47
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares Class B Shares
----------------------------- -----------------
International Balanced Portfolio 1996(1) 1995 1994(2) 1996(1) 1995(3)
============================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.64 $12.20 $12.00 $12.65 $12.08
- --------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(4) 0.26 0.35 0.07 0.15 0.36
Net realized and unrealized gain 1.35 0.48 0.13 1.36 0.50
- --------------------------------------------------------------------------------------------
Total Income From Operations 1.61 0.83 0.20 1.51 0.86
- --------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.35) (0.39) -- (0.26) (0.29)
- --------------------------------------------------------------------------------------------
Total Distributions (0.35) (0.39) -- (0.26) (0.29)
- --------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.90 $12.64 $12.20 $13.90 $12.65
- --------------------------------------------------------------------------------------------
Total Return 12.83% 7.05% 1.67%+++ 12.05% 7.33%+++
- --------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $16,116 $17,667 $20,634 $5,258 $3,064
- --------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 1.81% 1.62% 1.34%+ 2.62% 2.49%+
Net investment income 1.94 2.89 1.37+ 1.14 3.11+
- --------------------------------------------------------------------------------------------
Portfolio Turnover Rate 189% 42% 6% 189% 42%
- --------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(5) $0.03 $0.02 -- $0.03 $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 August 25, 1994 (inception date) to October 31, 1994.
(3) For the period from November 7, 1994 (inception date) to October 31, 1995.
(4) The Manager waived all or part of its fees for the periods ended October
31, 1995 and October 31, 1994. If such fees were not waived, the per share
effect on net investment income and the expense ratios would have been as
follows:
Expense Ratios
Per Share Decreases to Without Fee Waivers
Net Investment Income and Custody Credits
---------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
Class A $0.04 $0.02 1.96% 2.03%+
Class B 0.04 -- 2.86+ --
In addition, during the years ended October 31, 1996 and October 31, 1995,
the Portfolio has earned credits from the custodian which reduce service
fees incurred. If the credits are taken into consideration, the expense
ratios for Class A would be 1.72% and 1.52%, respectively, and for Class B
would be 2.53% and 2.39% (annualized), respectively; prior year numbers
have not been restated to reflect these credits.
(5) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
48
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares Class Y Shares
----------------------------- --------------
International Balanced Portfolio 1996(1) 1995(2) 1994(3) 1996(1)(4)
========================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.63 $12.18 $12.00 $13.15
- ----------------------------------------------------------------------------------------
Income From Operations:
Net investment income(5) 0.15 0.28 0.05 0.32
Net realized and unrealized gain 1.35 0.46 0.13 0.75
- ----------------------------------------------------------------------------------------
Total Income From Operations 1.50 0.74 0.18 1.07
- ----------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.26) (0.29) -- (0.29)
- ----------------------------------------------------------------------------------------
Total Distributions (0.26) (0.29) -- (0.29)
- ----------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.87 $12.63 $12.18 $13.93
- ----------------------------------------------------------------------------------------
Total Return 11.99% 6.29% 1.50%+++ 8.21%+++
- ----------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $4,869 $4,317 $4,310 $19,387
- ----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(5) 2.62% 2.37% 2.03%+ 1.21%+
Net investment income 1.14 2.33 0.79+ 2.55+
- ----------------------------------------------------------------------------------------
Portfolio Turnover Rate 189% 42% 6% 189%
- ----------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(6) $0.03 $0.02 -- $0.03
========================================================================================
</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) On November 7, 1994 the former Class B shares were renamed Class C shares.
(3) For the period from August 25, 1994 (inception date) to October 31, 1994.
(4) For the period from February 7, 1996 (inception date) to October 31, 1996.
(5) The Manager waived all or part of its fees for the year ended October 31,
1995 and the period ended October 31, 1994. If such fees were not waived,
the per share effect on net investment income and the expense ratios would
have been as follows:
Expense Ratios
Per Share Decreases to Without Fee Waivers
Net Investment Income and Custody Credits
---------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
Class C $0.04 $0.02 2.71% 2.74%+
In addition, during the years ended October 31, 1996 and October 31, 1995,
the Portfolio has earned credits from the custodian which reduce service
fees incurred. If the credits are taken into consideration, the expense
ratios for Class C would be 2.53% and 2.27%, respectively; and for Class Y
for the period ended October 31, 1996, would be 1.12% (annualized); prior
year numbers have not been restated to reflect these credits.
(6) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
49
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
SMITH BARNEY WORLD FUNDS, INC.:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of the European, Pacific and
International Balanced Portfolios of Smith Barney World Funds, Inc. as of
October 31, 1996, the related statements 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 and the period from February 7, 1994
(commencement of operations) to October 31, 1994 with respect to the European
and Pacific Portfolios and the period from August 25, 1994 (commencement of
operations) to October 31, 1994 with respect to the International Balanced
Portfolio. 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.
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
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 the
European, Pacific and International Balanced Portfolios of Smith Barney World
Funds, Inc. as of October 31, 1996, the results of their operations for the year
then ended, and the changes in their net assets and financial highlights for
each of the years in the two-year period then ended and the period from February
7, 1994 to October 31, 1994 with respect to the European and Pacific Portfolios
and for the period from August 25, 1994 to October 31, 1994 with respect to the
International Balanced Portfolio, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
December 20, 1996
50
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
The amount of long-term capital gains paid by European Portfolio to its
shareholders for the fiscal year ended October 31, 1996, was $100,501.
51
<PAGE>
[This page intentionally left blank]
<PAGE>
SMITH BARNEY
WORLD FUNDS, INC.
DIRECTORS
Victor Atkins
Jessica M. Bibliowicz
Alger B. Chapman
Robert A. Frankel
Rainer Greeven
Susan M. Heilbron
Heath B. McLendon, Chairman
Bruce D. Sargent
James M. Shuart
OFFICERS
Maurits E. Edersheim
Chairman of the Fund
& Advisory Director
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
James B. Conheady
Vice President
Victor S. Filatov
Vice President
Simon R. Hildreth
Vice President
Denis P. Mangan
Vice President
Jeffrey J. Russell
Vice President
Bruce D. Sargent
Vice President
Rein W. van der Does
Vice President
Irving P. David
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
- ---------------------------------
A Member of TraverlersGroup[LOGO]
INVESTMENT MANAGER
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 World Funds, Inc. --
European, Pacific and International
Balanced Portfolios. It is not authorized
for distribution to prospective investors
unless accompanied or preceded by a
current Prospectus for the Portfolios,
which contains information concerning
the Portfolios' investment policies and
expenses as well as other pertinent
information.
SMITH BARNEY
WORLD FUNDS, INC.
388 Greenwich Street
New York, New York 10013
FD01046 12/96
