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[PHOTO]
Smith Barney
World Funds, Inc.
Emerging Markets Portfolio
European Portfolio
Pacific Portfolio
-----------------
ANNUAL REPORT
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October 31, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day(SM).
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Smith Barney
World Funds, Inc.
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"As the world progresses and blossoms into a truly global economy, investment
portfolios should and will become increasingly global in nature. Farsighted
businesses and industries will prosper wherever economic and geographic factors
are the most favorable. "
Heath B. McLendon
Chairman
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The Emerging Market Portfolio seeks long-term capital appreciation of its assets
through a portfolio invested primarily in securities of emerging country
issuers. The Portfolio follows an investment strategy involving broad geographic
diversification.
<TABLE>
<CAPTION>
NASDAQ SYMBOL
-------------
<S> <C>
Class A SMMAX
Class B SEMBX
</TABLE>
The European Portfolio seeks long-term capital appreciation by investing
primarily in equity of issuers based in countries of Europe.
<TABLE>
<CAPTION>
NASDAQ SYMBOL
-------------
<S> <C>
Class A SBEAX
Class B SBEBX
</TABLE>
The Pacific Portfolio's primary investment objective is long-term capital
appreciation. In seeking to achieve its objective, the Portfolio will invest
primarily in a diversified portfolio of equity securities of companies in
Australia, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan,
Papau New Guinea, the People's Republic of China, the Philippines, Singapore,
South Korea, Sri Lanka, Taiwan and Thailand.
<TABLE>
<CAPTION>
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WHAT'S INSIDE
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<S> <C>
A Message from the Chairman........................................... 1
Emerging Markets Portfolio
Portfolio Manager Commentary ...................................... 2
Historical Performance ............................................ 5
Portfolio at a Glance ............................................. 7
European Portfolio
Portfolio Manager Commentary ...................................... 8
Historical Performance ............................................ 11
Portfolio at a Glance ............................................. 13
Pacific Portfolio
Portfolio Managers Commentary ..................................... 14
Historical Performance ............................................ 17
Portfolio at a Glance ............................................. 19
A Roundtable Discussion with the
Portfolio Managers ................................................... 20
Schedules of Investments.............................................. 24
Statements of Assets and Liabilities.................................. 32
Statements of Operations.............................................. 33
Statements of Changes in Net Assets................................... 34
Notes to Financial Statements ........................................ 36
Financial Highlights ................................................. 42
Independent Auditors' Report ......................................... 51
Tax Information ...................................................... 52
</TABLE>
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A Message from the Chairman
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[PHOTO]
HEATH B.
MCLENDON
Chairman
Dear Shareholder:
Never before have investors been in a situation where the world is rapidly
evolving into one vast economy. The separations that divided the Free World from
the Communist World and those that insulated developed nations from
underdeveloped ones are dissolving. Open borders now exist globally and where
borders have opened, free trade has followed. Some previously underdeveloped
countries are experiencing rapid development and, as a result, are creating
higher standards of living and a commensurate demand for products and services
that have long characterized more developed countries. Progress seldom moves
forward in a straight and easy line, however, without some imbalances occurring.
This year, we have witnessed firsthand the imbalances that progress can bring.
After a period of spectacular economic growth, many Asian economies began to
overheat. In particular, the real estate markets in those countries have
outpaced their underlying economies. Now, in keeping with the immutable laws of
the business cycle, the Asian markets are entering a period of consolidation. At
the same time, Europe is undergoing the historic unification of its currencies
and economic systems. And the lesser developed countries of Eastern Europe, the
former Soviet Union and Africa are beginning their own vigorous economic
expansions. While this process may be unsettling for many global investors in
the short term, we believe it's exceptionally positive for them over the long
term.
As the world progresses and blossoms into a truly global economy, investment
portfolios should and will become increasingly global in nature. Farsighted
businesses and industries will prosper wherever economic and geographic factors
are the most favorable. Historically, investing in the U.S. stock market has
never been a totally smooth ride, so one cannot expect investing in today's
global markets to be any different. But, global investing has become a much
wider road of late and one that points to a brighter future.
In this report, you will find specific market commentary and performance
information for the Smith Barney World Funds, Inc.--Emerging Markets Portfolio,
European Portfolio and Pacific Portfolio. In addition, Portfolio Managers Scott
E. Kalb, Donald Elefson and Rein W. van der Does discuss their investment
management styles and recent global market events in a roundtable discussion
that begins on page 20.
In closing, we thank you for your confidence in our investment approach and our
family of international funds. We look forward to continue helping you take
advantage of the investment opportunities available in today's global economy.
We would also like to take this opportunity to invite you to visit our web site,
Smith Barney Access(sm), at www.smithbarney.com.
Sincerely,
/S/ Heath B. McLendon
Heath B. McLendon
Chairman
November 21, 1997
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Smith Barney World Funds, Inc. 1
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Emerging Markets Portfolio
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[PHOTO]
DONALD ELEFSON
Vice President
Portfolio Manager
Donald Elefson joined the Smith Barney International Equity team in 1994.
Previously, he was at Merrill Lynch Asset Management, where he assisted in the
management of emerging markets mutual funds. Prior to Merrill Lynch, he held
positions in equity analysis with Cazenove Inc. and BHGF Securities in New York,
and with George Hauck and Sohn in Frankfurt, Germany. He is a Chartered
Financial Analyst, the past chairman of the New York Society of Securities
Analysts International Program committee and a member of the Institute of
Chartered Financial Analysts. Mr. Elefson holds a B.A. in Economics from the
University of Washington.
Performance Update
For the year ended October 31, 1997, the Emerging Markets Portfolio
("Portfolio") generated a total return of 3.06% for Class A shares without sales
charge. In comparison, the average total return for the Portfolio's Lipper
Analytical Services, Inc. ("Lipper") peer group was 3.10% for the same period.
(Lipper is an independent fund-tracking organization.) For performance
information on the Portfolio's other share classes, please refer to pages 5 and
6.
Investment Strategy
Remaining true to its management style, we maintained the Portfolio's
diversification guidelines of investing no more than 15% to 20% in any one
country at a time. This discipline fortunately kept the Portfolio from too much
exposure to certain troubled areas such as Malaysia.
In order to benefit from rising expectations of worldwide economic growth, the
Portfolio invested heavily at the beginning of the year in cyclical stocks.
Earnings for cyclical stocks such as paper companies, chemical companies and
steel companies, were expected to strengthen. As the year wore on, we took a
profit in many of these cyclical stocks. Some of these companies include
Acindar-Argentine (flat steel producer), Borsodchem-Hungarian (petrochemical
producer) and Lukoil (Russia's second largest integrated oil producer). As a
result of overall currency inspired market weakness, we bought more defensive
stocks like telecommunication companies. Other significant Portfolio investments
during the reporting period include Guandong Kelon (a Chinese appliance
manufacturer), Quingling Motors (a leading Chinese automobile producer), Grupo
Televisa (a Mexican media concern), Industrias Bachocco (a leading Mexican
poultry supplier) and Elektra (a Mexican retailer).
At the start of the reporting period, Asia represented approximately 49% of the
Portfolio's assets and, due to the turmoil in many of the Asian markets, ended
at roughly 27%. China/Hong Kong actually increased slightly from 9% to
approximately 11% of assets. All the other key Asian markets went down with
respect to Portfolio representation. Malaysia was reduced the most from 10% to
less than 1% of total assets. Given the prolonged weakness in this region, we
expect to maintain these weightings over the short term.
We shifted our asset reductions in Asia toward Latin America and Central Europe.
Latin America went from roughly 27% of assets to 40% and Central Europe from
about 14% to roughly 19% during the reporting period. Because we believed that
Mexico's prospects for economic growth have broadened, we increased our exposure
to the country from roughly 7% to 17%. Moreover, we increased our Russian
holdings from about 3% to about 6%, as its prospects have improved steadily and
its political system has remained relatively stable. As a result of stronger
government commitment toward economic reform, we increased the Portfolio's
exposure to Turkey from roughly 2% to about 5%.
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2 1997 Annual Report to Shareholders
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Emerging Markets Overview
At the beginning of 1997, expectations were high for strong worldwide gross
domestic product ("GDP") growth. The International Monetary Fund ("IMF") had
predicted a growth rate of 4.3% for 1997, led by continued development of
emerging economies. This optimism created a good start for 1997 global
investment, as companies and countries were expected to benefit from high
economic growth.
At the same time, U.S. inflation fears subsided over the course of the year.
This in turn kept interest rates low and helped fuel the climb of the U.S. stock
market. Strength in the U.S. stock market reduced the money flows.
Asia
By late summer 1997, serious trouble surfaced in Thailand. Speculators who felt
the Thai baht was undeserving of its valuation began to attack the currency.
After Thailand gave in to these devaluation pressures, other countries in the
region such as Indonesia, Malaysia and the Philippines were also pressured to
devalue their currencies in order to maintain their export competitiveness.
Having smelled easy money, speculators then turned to other fixed currency
regimes (i.e., currencies tied to other currencies) such as Hong Kong. After a
stellar performance on the back of low U.S. interest rates and an improved
outlook for the "new" Hong Kong under China, the regional currency onslaught
created intense pressure on Hong Kong's stock market. Generally, the first line
of defense in currency control is through interest rate adjustments. Hong Kong
monetary authorities raised short-term interest rates aggressively, which
stopped the Hong Kong stock market dead in its tracks. What had been one of the
best performing stock markets in the world suddenly became a major problem.
Although Hong Kong's dollar remains linked to the U.S. dollar, pressures to let
Hong Kong's dollar fall continues.
Aside from currency weaknesses affecting most of the region, the main event of
1997 was the takeover of Hong Kong by China. Anticipation of this event lent
strength to China-related stocks listed on the Hong Kong exchange. Prior to the
handover, red chips (i.e., Chinese holding companies listed in Hong Kong) and
H-shares (i.e., Chinese-domiciled companies listed in Hong Kong) fared very
well. Up until June 30, 1997, the Hong Kong market as a whole also fared well.
After the handover, the Hong Kong stock market began a mild decline. But once
the currency contagion took root, the market dropped dramatically.
In 1997, China became more prominent in the world of emerging market investing.
We believe that China's new heightened role in the world will be important for
Asia in the future. China has handled the Hong Kong transition smoothly and
Jiang Zemin made an historic visit to the U.S. -- two events that should bolster
China's economic and political stature in the world in the months ahead.
Latin America
This "Asian contagion" spread to Latin America and took root in Brazil. Prior to
Asia's turmoil, Brazil was one of the best performing markets in 1997 and was up
more than 80%. Investor optimism was fueled by the reduction of inflation from
1000% in the early 1990s to a meager 5% in 1997. Normally, this would have been
enough to counter speculative pressures, but the situation in Asia had
heightened awareness of some countries' macro-economic weaknesses. Brazilian
authorities used all the appropriate measures to defend Brazil's currency
including raising interest rates to 40%, as well as swift announcements
heralding sweeping fiscal reforms. As of October 31, 1997, Brazil's currency has
held up but its stock market has clearly suffered.
More specifically, Telebras, Brazil's holding company for telecommunications,
was the star of Brazil's robust stock market. Brazil initially caught the
interest of investors because the government had successfully reduced inflation
from astronomical levels to more workable levels. In addition, Brazil's
government had implemented a massive restructuring and privatization of
Brazilian public industry. With anticipated
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Smith Barney World Funds, Inc. 3
<PAGE>
privatization, public sector companies led Brazil's stock market. However, as a
result of the currency attacks, Brazil's stock market gave up much of its gains
for the year, which penalized the Emerging Markets Portfolio's overall
performance.
Europe and Russia
Central Europe has long been an important region for emerging markets. During
the reporting period, Poland, Russia and Hungary have attracted the most
investor interest. Of the three countries, Russia has the greatest influence by
far. Long plagued by anemic economic conditions and political uncertainty,
Russia finally began to stabilize this year. President Boris Yeltsin stayed
healthy, inflation declined and fiscal reform proceeded. By global standards,
Russian stocks were inexpensive throughout the year -- a fact not overlooked by
many investors, as Russia emerged as one of the world's top performers with
returns of over 100% during the reporting period.
Outlook
We expect that the next six months will continue to be a period of global
economic readjustment. In our opinion, growth in Asia and Brazil will slow due
to higher interest rates. These two investment areas account for a substantial
portion of the emerging markets universe. Along with lower growth, we also
expect that there will be heightened investor awareness to economic activity,
especially currency weakness.
Going forward, our strategy will be to purchase quality stocks at low valuation
levels in the aftermath of global weakness. We will continue to look for
bargains in stocks that have stable outlooks but were previously very expensive.
We think telecommunication and beverage stocks are two examples that fit our
criteria. Due to the present global weakness, we think that many stable
defensive-type stocks are very inexpensive and offer very attractive, long-term
investment potential.
Thank you for your continued confidence in us.
Sincerely,
/s/ Donald Elefson
Donald Elefson
Vice President
November 25, 1997
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4 1997 Annual Report to Shareholders
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<TABLE>
<CAPTION>
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Historical Performance -- Class A Shares
===========================================================================================
Net Asset Value
-----------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
===========================================================================================
<S> <C> <C> <C> <C>
10/31/97 $12.08 $12.45 $0.00 3.06%
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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
===========================================================================================
<CAPTION>
Net Asset Value
-----------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
===========================================================================================
<S> <C> <C> <C> <C>
10/31/97 $11.95 $12.21 $0.00 2.18%
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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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<CAPTION>
Net Asset Value
-----------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
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<S> <C> <C> <C> <C>
10/31/97 $11.95 $12.22 $0.00 2.26%
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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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</TABLE>
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
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Smith Barney World Funds, Inc. 5
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<TABLE>
<CAPTION>
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Average Annual Total Return
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Without Sales Charge(1)
-------------------------------------------
Class A Class B Class C
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<S> <C> <C> <C>
Year Ended 10/31/97 3.06% 2.18% 2.26%
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Inception* through 10/31/97 1.50 0.70 0.74
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<CAPTION>
With Sales Charge(2)
-------------------------------------------
Class A Class B Class C
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<S> <C> <C> <C>
Year Ended 10/31/97 (2.12)% (2.82)% 1.26%
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Inception* through 10/31/97 (0.58) (0.51) 0.74
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Cumulative Total Return
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<CAPTION>
Without Sales Charge(1)
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<S> <C>
Class A (Inception* through 10/31/97) 3.75%
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Class B (Inception* through 10/31/97) 1.75
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Class C (Inception* through 10/31/97) 1.83
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</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 charge ("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. Thereafter, this CDSC declines 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.
* The inception date for Class A, B and C shares is May 12, 1995.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
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6 1997 Annual Report to Shareholders
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Emerging Markets Portfolio at a Glance (unaudited)
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Growth of $10,000 Invested in Class A, B and C Shares of the
Emerging Markets Portfolio vs. MSCI Free World Market Index+
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May 1995--October 1997
[The following table was shown as a bar chart in the printed matter.]
<TABLE>
<CAPTION>
Emerging Markets Emerging Markets Emerging Markets
Portfolio Portfolio Portfolio MSCI Free World
Class A Class B Class C Market Index
<S> <C> <C> <C> <C>
May 12, 1995 9,501 10,000 10,000 10,000
Oct 1995 8,757 8,724 9,092 10,497
Apr 1996 9,850 9,800 10,167 11,928
Oct 1996 9,565 9,560 9,958 12,264
Apr 1997 11,283 11,292 11,700 13,146
Oct 31, 1997 10,375 10,175 10,183 14,098
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A, B and C shares at
inception on May 12, 1995, assuming deduction of the maximum 5.00% sales
charge at the time of investment for Class A shares, the deduction of the
maximum 5.00% CDSC for Class B shares and the deduction of the 1.00% CDSC
for Class C shares. It also assumes reinvestment of dividends and capital
gains, if any, at net asset value through October 31, 1997. The Morgan
Stanley Capital International ("MSCI") Free World Market 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 as a mutual fund.
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.
<TABLE>
<CAPTION>
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Top Ten Holdings* As of October 31, 1997
====================================================================
<S> <C>
1. Ferreyros SA 2.2%
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2. Kepez Elektrik TAS 2.2
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3. Al-Ahram Beverages Co. SAE GDR 2.0
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4. Disco SA ADR 2.0
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5. Grupo Televisa SA GDR 1.9
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6. PT Indah Kiat Pulp & Paper Corp. 1.9
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7. First Tractor Co. Ltd., Class H Shares 1.8
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8. Telecomunicacoes Brasileiras SA--Telebras ADR 1.8
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9. Qingling Motors Co., Class H Shares* 1.8
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10. Cia Electricidade do Estado do Rio de Janeiro 1.7
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* As a percentage of total investments.
</TABLE>
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Investment Allocation as of October 31, 1997*
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[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
40.4% Latin America
27.6% Asia/Pacific
19.5% Euroope
7.4% Repurchase Agreement
5.1% Africa
</TABLE>
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Smith Barney World Funds, Inc. 7
<PAGE>
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European Portfolio
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[PHOTO]
REIN W.
VAN DER DOES
Vice President
Portfolio Manager
Rein W. van der Does began his career with Drexel Burnham Lambert in 1968 as a
domestic research analyst. In 1975, he joined Drexel's International Research
Department and was appointed Director of International Research and Head of
Portfolio Strategy in 1985. He moved with the International Equity team to Smith
Barney in 1990. He is a member of the New York State Association for
International Investment and a member of the New York Society of Security
Analysts. Mr. van der Does was awarded a doctorate in Economics from the Dutch
Economic University in Rotterdam.
Performance Update
The European Portfolio ("Portfolio") posted a total return of 12.88% for Class A
shares without sales charge for the year ended October 31, 1997. In comparison,
the Portfolio's Lipper Analytical Services, Inc. peer group returned an average
of 20.38% for the same period. (Lipper is an independent fund-tracking
organization.) As discussed below, the Portfolio underperformed primarily
because of its small- and mid-capitalization emphasis as large-capitalization
stocks in Europe performed extremely well during the reporting period. In
addition, because we are bottom-up investors, market conditions have very little
impact in our investment decision-making process. The Portfolio's benchmark, the
Morgan Stanley Capital International ("MSCI") European Market Index, had a total
return of 25.98%. For performance information on the Portfolio's other share
classes, please refer to pages 11 and 12.
As the trend toward privatization and corporate restructuring continues in
Europe, investors have tended to focus on large-capitalization companies,
particularly during the period covered in this report. As a result, the smaller
companies emphasized in the Portfolio have underperformed the broad market
indices. However, in 1996, these small-capitalization companies performed much
better and enabled the Portfolio to outperform the MSCI European Market Index by
a wide margin. We believe that as European stock markets mature, they will
broaden to include more and more smaller companies, as has been the case for the
U.S. stock market. In our view, small- and mid-capitalization companies offer
excellent growth potential over the long term and we will continue to look for
investment opportunities among these issues.
European Markets Update
The European Monetary Union ("EMU") took center stage in nearly all political
and economic discussions throughout the reporting period. As the deadline for
first round admission approaches, some major European countries are having
difficulty in meeting the entrance guidelines set forth by the Maastricht
Treaty. Some of the guidelines specifically prohibit some countries easy
entrance into the EMU include a budget deficit no higher than 3% of Gross
Domestic Product ("GDP") and public debt to GDP no higher than 60%. Germany,
Europe's largest and most powerful economy, is one country struggling to meet
the membership criteria. The high cost of reuniting with East Germany has been
largely responsible for the financial difficulties felt throughout Germany.
Earlier this year, French voters returned the Socialist Party to power and
caused some observers to doubt the future prospects for European integration.
However, France's newly elected Prime Minister, Lionel Jospin, has announced
cabinet appointments that have calmed investor fears and should not impede
France from joining the EMU.
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8 1997 Annual Report to Shareholders
<PAGE>
A surprise entrant for the EMU might be Italy. The Italian government has done a
remarkable job in cutting its deficit from a recent cyclical high of 12.1% of
1992 nominal GDP to what is forecasted to be 3.8% for 1997. In our opinion, we
expect the U.K., Netherlands, Denmark, Finland and Sweden to have deficits under
2% of GDP by next year and in some cases could be close to balanced budgets.
Although the shift from the Conservative Party to the Labor Party in Britain has
changed the political dynamics of that nation, we believe the U.K. will most
likely join the EMU sooner than expected. With strong economic conditions and
among the best funded pensions in Europe, the U.K. is one of the best qualified
candidates for the EMU.
In our opinion, the movement toward the EMU has contributed to low interest
rates in Europe, which has aided its economic upturn. Clearly, we believe that
European economies as a whole are accelerating toward 2.8% real GDP growth for
1998 versus 2.3% in 1997. This improved economic environment, combined with
heavy corporate restructuring, should result in excellent earnings in Europe
this year and into 1998.
While European governments have been working to improve their fiscal health,
European companies have continued their focus on enhancing shareholder value.
The value these European companies add are demonstrated through improved
profitability and higher corporate earnings. This improved profit picture and
positive corporate earnings are mainly due to restructuring and outsourcing,
merging and demerging, and more companies focusing their attention on core
businesses. The major overhaul of European companies mimic similar downsizing
and streamlining experienced by U.S. companies earlier this decade.
Lastly, stock ownership has been stimulated by European governments through the
privatization of many key state-owned industries. For example, the recent huge
privatizations of Telecom Italia in Italy, Deutsche Telecom in Germany and
Telefonica in Spain should enable these major industries to operate with much
greater efficiency. In addition, European pension funds are being privatized. As
a result, Europeans have been allowed to increase their stock holdings and
European stock markets have become a greater focus.
Investment Strategy
In our opinion, the progress toward the EMU, the rising influence of
shareholders and ongoing privatization should contribute to a favorable climate
for many European companies. We continue to favor a "bottom-up" approach when
selecting investments for the Portfolio. Although economic cycles are important
when evaluating a company's outlook, we generally search for companies that
exhibit excellent growth prospects regardless of the macroeconomic conditions in
Europe. In our opinion, this approach should provide investors with competitive
returns over the long term.
Over the past year, we continued to identify opportunities in health care,
computer services and telecommunications in companies such as Orion (Finland's
leading health care company), Cap Gemini (France's largest computer services
vendor), Content Beheer (a temporary employment agency in Holland), Telefonica
(a Spanish telecommunications company), Amper (a Spanish telecommunication
equipment manufacturer) and Azkoyen (Europe's leading manufacturer of vending
machines).
We sold our positions in SEZ Holding (a Swiss IPO) because it was a very small
illiquid issue. In addition, EuroDisney (a theme park in France) was sold
because the company was unprofitable. BIS (a temporary
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Smith Barney World Funds, Inc. 9
<PAGE>
employment agency in France) was sold due to a corporate takeover. Our positions
in Fila (sports apparel and shoes in Italy) and Carlton Communications (U.K.
media) were eliminated because their realized losses were greater than
anticipated. Lastly, Pharmacia Upjohn (Swedish/U.K. pharmaceuticals) was sold
due to what we believed were unsatisfactory changes in management.
European Markets Outlook
In our opinion, many European companies continue to offer excellent values
compared to their U.S. counterparts. In addition, many stocks in Europe
represent better relative value than comparable U.S. stocks. For example,
European stocks are selling at an average of approximately 9.4x 1997 price/cash
flow compared to U.S. stocks which are selling 13.1x 1997 price/cash flow as of
this writing. In addition, Europe's average stock dividend yield is roughly 2.3%
while U.S. stock dividends now average around 1.7%. Moreover, in Europe's
rapidly changing market environment, stock selection will be a key for
investment performance. Therefore, we will continue to monitor market conditions
closely to identify new opportunities and reevaluate existing holdings.
Thank you for your investment in the European Portfolio.
Sincerely,
/s/ Rein W. van der Does
Rein W. van der Does
Vice President
November 28, 1997
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10 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================
Historical Performance -- Class A Shares
===================================================================================================================
Net Asset Value
------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
===================================================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $17.25 $18.23 $0.00 $1.16 12.88%
- -------------------------------------------------------------------------------------------------------------------
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 $1.20
===================================================================================================================
<CAPTION>
===================================================================================================================
Historical Performance -- Class B Shares
===================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
===================================================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $17.09 $17.92 $0.00 $1.16 12.08%
- -------------------------------------------------------------------------------------------------------------------
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 $1.20
===================================================================================================================
<CAPTION>
===================================================================================================================
Historical Performance -- Class C Shares
===================================================================================================================
Net Asset Value
----------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
===================================================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $17.04 $17.86 $0.00 $1.16 12.06%
- -------------------------------------------------------------------------------------------------------------------
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 $1.20
===================================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 11
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================================================
Average Annual Total Return
==========================================================================================================================
Without Sales Charge(1)
--------------------------------------------
Class A Class B Class C
===========================================================================================================================
<S> <C> <C> <C>
Year Ended 10/31/97 12.88% 12.08% 12.06%
- ---------------------------------------------------------------------------------------------------------------------------
Inception* through 10/31/97 12.89 15.12 12.23
===========================================================================================================================
<CAPTION>
With Sales Charge(2)
--------------------------------------------
Class A Class B Class C
===========================================================================================================================
<S> <C> <C> <C>
Year Ended 10/31/97 7.22% 7.08% 11.06%
- ---------------------------------------------------------------------------------------------------------------------------
Inception* through 10/31/97 11.34 14.36 12.23
===========================================================================================================================
==========================================================================================================================
Cumulative Total Return
==========================================================================================================================
<CAPTION>
Without Sales Charge(1)
===========================================================================================================================
<S> <C>
Class A (Inception* through 10/31/97) 57.19%
- ---------------------------------------------------------------------------------------------------------------------------
Class B (Inception* through 10/31/97) 52.22
- ---------------------------------------------------------------------------------------------------------------------------
Class C (Inception* through 10/31/97) 53.45
===========================================================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from initial purchase. Thereafter, this CDSC declines 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 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.
- --------------------------------------------------------------------------------
12 1997 Annual Report to Shareholders
<PAGE>
================================================================================
European Portfolio at a Glance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of the
European Portfolio vs. MSCI European Market Index+
- --------------------------------------------------------------------------------
February 1994--October 1997
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
European Portfolio MSCI European Market Index
Feb 7, 1994 9,549 10,000
Apr 1994 9,481 9,761
Oct 1994 9,840 10,064
Apr 1995 10,298 10,664
Oct 1995 11,207 11,393
Apr 1996 12550 12,366
Oct 1996 13298 13,383
Apr 1997 14311 14,959
Oct 31, 1997 15010 16,861
+ 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, 1997. The
Morgan Stanley Capital International ("MSCI") European Market 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 as 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.
<TABLE>
<CAPTION>
================================================================================
Top Ten Holdings* As of October 31, 1997
================================================================================
<S> <C>
1. Nokia Oyj, Class A Shares 7.7%
- --------------------------------------------------------------------------------
2. Novartis AG 5.7
- --------------------------------------------------------------------------------
3. Tomra Systems ASA 5.6
- --------------------------------------------------------------------------------
4. Fugro NV 5.4
- --------------------------------------------------------------------------------
5. CMG PLC 5.0
- --------------------------------------------------------------------------------
6. Independent Newspapers PLC 4.6
- --------------------------------------------------------------------------------
7. VA Technologie AG 4.6
- --------------------------------------------------------------------------------
8. Koninklijke Ahrend Groep NV 4.5
- --------------------------------------------------------------------------------
9. Samas Groep NV CVA 4.1
- --------------------------------------------------------------------------------
10. Total SA, Class B Shares 4.1
- --------------------------------------------------------------------------------
</TABLE>
* As a percentage of total investments.
================================================================================
Investment Allocation as of October 31, 1997*
================================================================================
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
France .............................. 16.5%
Germany ............................. 14.1%
Netherlands ......................... 21.6%
United Kingdom ...................... 7.8%
Finland ............................. 9.7%
Switzerland ......................... 6.3%
Other ............................... 18.4%
Norway .............................. 5.6%
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 13
<PAGE>
================================================================================
Pacific Portfolio
================================================================================
Portfolio Managers
[PHOTO]
SCOTT E. KALB
Vice President
Scott E. Kalb joined the Smith Barney International Equity Team in 1995. He has
11 years experience in research and was formerly Head of International Equity
Research at Smith Barney from 1990 to 1995, where he was responsible for the
coverage of equities in emerging markets, including Latin America, Asia, the
Middle East and Africa, as well as Europe and Japan. Prior to joining Smith
Barney, Mr. Kalb served as the First Vice President of Corporate Finance, and
Vice President of Equity Research, for Drexel Burnham Lambert. Previously, he
worked at James Capel and he also served for two years as economic consultant
for the Ministry of Finance in Korea. Mr. Kalb lived in Asia for ten years and
in London for two, speaks Korean fluently and some Japanese. Mr. Kalb holds a
B.A. degree from Oberlin College and an M.A. in Economics from Harvard
University.
[PHOTO]
DAVID ISHIBASHI
Vice President
David Ishibashi joined Smith Barney International Equity team as a Vice
President and Portfolio Manager in 1993. Mr. Ishibashi came to Smith Barney from
SG Warburg, where he was responsible for Japanese equities and headed the Japan
desk. Previously, he was at Baring Securities, Inc., where he was responsible
for Japan and Southeast Asia and opened and operated Baring's first West Coast
office. He also spent four years at Nomura Securities International brokering
Japanese securities and established the Nomura Finance Collection at the Crocker
School of Business and Business Library. Prior to that, he served as a financial
analyst at Rockwell International. Mr. Ishibashi has a B.A. from California
State College at Los Angeles and attended the post graduate studies program in
Tokyo at the Inter-Cultural Japanese Language Institute.
Performance Update
During the six months ended October 31, 1997 the Pacific Portfolio ("Portfolio")
declined by 22.0%, underperforming its Lipper Analytical Services, Inc. peer
group average return of -17.2% and the Morgan Stanley Capital International
("MSCI") All Country Asia Pacific Index return of -13.2% for the same period.
However, for the fiscal year, the Portfolio was down by 16.9%, finishing ahead
of both the Lipper peer group average return of -18.5% and the MSCI Index return
of -20.2%. (The MSCI All Country Asia Pacific Index, comprising equities in
Australia, New Zealand and the Far East, is a common benchmark against which the
performance of Asian funds is measured. Lipper Analytical Services, Inc. is a
major fund-tracking organization.)
Asian Markets Update
The last six months have been a terrible time for Asian stock markets in
general, with every market in the region recording losses for the period in U.S.
dollar terms. In particular, Southeast Asian stock markets, including Malaysia,
Indonesia, Thailand and the Philippines, fell by 48%-56%. Disappointingly, even
countries with relatively good fundamentals and well-managed, blue-chip
companies were affected negatively by the turmoil. For example, the Hong Kong
stock market was down by 29% in October, wiping out gains for the year and
leading to a 17% decline for the 12 month period. For the Portfolio's fiscal
year, no stock markets in our Asian universe recorded gains in U.S. dollar
terms.
What went wrong in Asia during the last year? We can identify three significant
trends. To start with, the crisis that began in Thailand could not be contained
and spread to other countries in the region. Thailand had borrowed a lot of
money and invested it into nonproductive assets, particularly property. When the
- --------------------------------------------------------------------------------
14 1997 Annual Report to Shareholders
<PAGE>
bubble burst, property and other asset prices plunged, the Thai baht came under
pressure and interest rates rose, leading to slower growth, rising nonperforming
loans and political turmoil. The Thai crisis exposed similar problems in
Indonesia, the Philippines and Malaysia. While not as severe as in Thailand,
current account deficits, overheated property markets and too much accumulated
debt in these countries caused a sharp devaluation in their currencies and
plunged stock markets. Like Thailand, Indonesia and the Philippines have been
driven into the arms of the IMF ("International Monetary Fund") and other
international agencies for cash infusions to avoid wholesale defaults and
bankruptcies.
The next problem: even the so-called "safe havens" such as Australia, New
Zealand, Hong Kong and Singapore, were dragged down by regional turmoil. These
countries have low current account deficits or even surpluses, reasonable
corporate debt levels and sound economic management; yet this did not prevent
their stock markets from recording big losses in October. Even China, relatively
isolated from the problems of the rest of the region as it continues to
implement economic restructuring, was hurt during October, with China-related
shares falling sharply.
Finally, Northeast Asia developed its own contagion. Highly leveraged
corporations in Korea have over-expanded capacity and are filing for bankruptcy
at an accelerating rate. This development has put pressure on the Korean won and
has had negative implications for neighboring countries such as Japan and
Taiwan. The combination of these three trends has led to a general sell-off of
Asian stocks by international and global funds. It also removed any "safe
harbor" for dedicated Pacific Basin portfolios, as all stock markets in the
region suffered losses.
Portfolio Changes
We made four "defensive" adjustments in the Pacific Portfolio to cope with the
developments we've outlined in the previous section. First, we reduced our
weighting in Hong Kong to roughly 16% from 25%, deleting holdings in property
and financial companies, as we expect these sectors to be hardest hit by rising
interest rates and declining asset prices. For example, we sold positions in
Hong Kong and Shanghai Banking Corporation ("HSBC") and Sun Hung Kai Properties,
two well-managed companies held in the Portfolio for some time. Once interest
rates have settled and property prices have adjusted appropriately, we may
consider buying back some of these shares at more attractive price levels.
Second, we increased our weighting in Japan to around 28% from 20%, adding to
select blue-chips we felt might offer some shelter from the storms in Asia. In
this regard, we added positions in Advantest, a world leader in semiconductor
test equipment, and Sony, the electronics and media giant. This increase in
weighting is in line with our strategy to gradually raise exposure to Japan as
we find fundamentally attractive companies to add to the Portfolio.
Third, we increased our weighting in Singapore to 12% from roughly 4.5%, with
particular focus on the electronics and technology sectors, as many of these
companies are benefiting from the boom in related U.S. sectors while trading at
attractive levels. Two of our favorites in this area are Venture, one of the
world's top contract manufacturers of electronic equipment and consumer goods,
and Creative Technology, a world leader in the production of sound and video
cards for personal computers. Singapore's favorable economic outlook, including
a large current account surplus, low inflation and conservative monetary
policies and reasonable growth, provide a strong base for local companies in a
region beset by problems.
Finally, we reduced our weighting in Malaysia to about 5% from roughly 12%,
disappointed by the government's response to the current crisis and expecting
that property and financial stocks will continue to suffer. Malaysia is one of
the few Southeast Asian countries that has not fully admitted the extent of
local economic problems, nor taken appropriate policy steps to correct these
problems. Accordingly, we feel that the ringitt is vulnerable to further
devaluation and that infrastructure development, the bulwark of the stock
market, is likely to be delayed or scrapped.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 15
<PAGE>
Market Outlook
We believe that Asian markets are close to reaching a period of stability and
positive returns after a year of currency devaluations and share price declines.
We are encouraged by two positive developments. First, cheaper local currencies
have made Asian goods very competitive in world markets. As a result, countries
in the region are returning to an outward-looking economic strategy--using trade
as an engine for growth--to jump-start recovery. We believe this shift will
hasten economic reform and guide local corporations to become more efficient. To
take advantage of this development, we have increased our weighting in
export-oriented companies that are benefiting from dollar revenue streams and
low local currency costs. These include electronics companies in Singapore and
Thailand, palm oil producers in Malaysia, fishing, paper and pulp, and energy
companies in Indonesia.
Second, value is beginning to emerge in Asian stock markets. Blue-chip companies
with excellent management teams and strong track records are currently trading
at very attractive levels. We expect 1998 will be a year of adjustment and
transition, eventually leading to recovery in the region. Once the dust settles
and stability is reached, we hope to take advantage of this trend by
accumulating shares in some of these undervalued blue-chips.
We genuinely appreciate your patience and thank you for your trust in our
investment management approach.
Sincerely,
/s/ Scott E. Kalb /s/ David Ishibashi
Scott E. Kalb David Ishibashi
Vice President Vice President
November 26, 1997
- --------------------------------------------------------------------------------
16 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================================
Historical Performance -- Class A Shares
================================================================================================================================
Net Asset Value
-----------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
================================================================================================================================
<S> <C> <C> <C> <C>
10/31/97 $10.18 $ 8.46 $0.00 (16.90)%
- --------------------------------------------------------------------------------------------------------------------------------
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
================================================================================================================================
<CAPTION>
================================================================================================================================
Historical Performance -- Class B Shares
================================================================================================================================
Net Asset Value
-----------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
================================================================================================================================
<C> <C> <C> <C> <C>
10/31/97 $10.01 $ 8.25 $0.00 (17.58)%
- --------------------------------------------------------------------------------------------------------------------------------
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
================================================================================================================================
<CAPTION>
================================================================================================================================
Historical Performance -- Class C Shares
================================================================================================================================
Net Asset Value
-----------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
================================================================================================================================
<C> <C> <C> <C> <C>
10/31/97 $ 9.98 $ 8.21 $0.00 (17.74)%
- --------------------------------------------------------------------------------------------------------------------------------
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
================================================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 17
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
Average Annual Total Return
===========================================================================================================================
Without Sales Charge(1)
----------------------------------------------
Class A Class B Class C
===========================================================================================================================
<S> <C> <C> <C>
Year Ended 10/31/97 (16.90)% (17.58)% (17.74)%
- ---------------------------------------------------------------------------------------------------------------------------
Inception* through 10/31/97 (9.93) (13.32) (10.68)
===========================================================================================================================
<CAPTION>
With Sales Charge(2)
----------------------------------------------
Class A Class B Class C
===========================================================================================================================
<S> <C> <C> <C>
Year Ended 10/31/97 (21.08)% (21.70)% (18.56)%
- ---------------------------------------------------------------------------------------------------------------------------
Inception* through 10/31/97 (11.17) (14.21) (10.68)
===========================================================================================================================
<CAPTION>
===========================================================================================================================
Cumulative Total Return
===========================================================================================================================
Without Sales Charge(1)
===========================================================================================================================
<S> <C>
Class A (Inception* through 10/31/97) (32.32)%
- ---------------------------------------------------------------------------------------------------------------------------
Class B (Inception* through 10/31/97) (34.73)
- ---------------------------------------------------------------------------------------------------------------------------
Class C (Inception* through 10/31/97) (34.32)
===========================================================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from initial purchase. Thereafter, this CDSC declines 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.
- --------------------------------------------------------------------------------
18 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Pacific Portfolio at a Glance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of the
Pacific Portfolio vs. MSCI All Country Asia Pacific Index+
- --------------------------------------------------------------------------------
February 1994--October 1997
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
Pacific Portfolio MSCI All Country Asia Pacific Index
Feb 7, 1994 9,549 10,000
Apr 1994 9,465 10,012
Oct 1994 9,870 10,716
Apr 1995 8,121 10,248
Oct 1995 7,693 9,438
Apr 1996 8,579 11,076
Oct 1996 7,777 9,650
Apr 1997 8,289 8,873
Oct 31, 1997 6,463 7,703
+ 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, 1997. The
Morgan Stanley Capital International ("MSCI") All Country Asia 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.
<TABLE>
<CAPTION>
================================================================================
Top Ten Holdings* As of October 31, 1997
================================================================================
<S> <C>
1. Shohkoh Fund & Co. Ltd. 4.4%
- --------------------------------------------------------------------------------
2. Hong Kong & China Gas Co. Ltd 3.7
- --------------------------------------------------------------------------------
3. Hutchinson Whampoa Ltd. 3.6
- --------------------------------------------------------------------------------
4. Seven-Eleven Japan Co. Ltd. 3.1
- --------------------------------------------------------------------------------
5. Fuji Photo Film Co. 3.0
- --------------------------------------------------------------------------------
6. Sumitomo Realty & Development Co. 3.0
- --------------------------------------------------------------------------------
7. Bejing Datang Power Generation Co. Ltd. 2.9
- --------------------------------------------------------------------------------
8. Coca-Cola Amatil Ltd. 2.9
- --------------------------------------------------------------------------------
9. Mahindra & Mahindra Ltd. GDR 2.9
- --------------------------------------------------------------------------------
10. Murata Manufacturing Co. Ltd. 2.8
- --------------------------------------------------------------------------------
</TABLE>
* As a percentage of total investments.
================================================================================
Investment Allocation as of October 31, 1997*
================================================================================
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Hong Kong ........................... 16.2%
Japan ............................... 28.0%
Malaysia ............................ 4.8%
Australia ........................... 6.3%
Thailand ............................ 5.5%
Indonesia ........................... 8.0%
Singapore ........................... 12.0%
Other ............................... 11.2%
Repurchase Agreement ................ 8.0%
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 19
<PAGE>
================================================================================
A Roundtable Discussion
with Portfolio Managers Scott E. Kalb,
Donald Elefson and Rein W. van der Does
================================================================================
================================================================================
ASIA
================================================================================
[MAP OF ASIA]
" I don't think these countries are going to sink into the ocean and disappear.
I believe that they have pretty good economic engines and that they will
survive and prosper."
SCOTT KALB
Portfolio Manager
Pacific Portfolio
What happened in Asia?
Scott: I think there were two problems in Asia. First, over the past few years,
companies in a lot of Asian countries borrowed too much money and became
overleveraged. Asian banks did little to discourage this build-up of leverage,
and became overextended themselves, while local governments had poor regulatory
frameworks to control capital flows effectively. The second problem is that a
lot of this borrowed capital was invested unwisely, either in non-productive
assets, like property or stock, or needless capacity expansions. Such
investments did little to strengthen the underlying economies of these
countries. In a sense, many Asian companies turned away from their original
strength, which is using trade as an engine for economic growth. Instead, Asia's
markets turned inward and put their money into domestic, nonproductive assets.
Don: I agree with Scott. In my view, one problem became the availability of too
much easy capital. Many of these Asian countries tied their currencies to the
U.S. dollar. That means, if you invested in Asian assets, you didn't take any
currency risk and currency is a major aspect of risk with respect to
international investing. As a result, more money flows into the system and the
cycle keeps growing. Money chases money without exposure to the full risk
spectrum. When there is no release valve in a currency, it shows up as
inflation.
And how did this inflationary environment lead to currency devaluation?
Don: Say I'm a Thai company. I borrow money from a bank which I will pay back in
dollars. Inflation rises, profits get narrowed, and all of a sudden I'm not
generating enough revenue to pay back those dollars. Then you have devaluation.
I believe it was correct for many of these countries to maintain the currency
peg to the U.S. dollar in the beginning to build foreign market share; but the
treatment for the "disease" ran a little too long.
In the aftermath of the currency devaluations, how do you view Asia's economic
future?
Scott: What we have seen is a shakeout of overinflated property and financial
assets. Now, currencies have to be devalued, current account deficits have to be
corrected and interest rates have to be raised. But I think all of this
ultimately will prove positive.
After undergoing a period of adjustment (which could take a couple of years)
Asian countries should emerge that much stronger. I don't think any of these
countries are going to sink into the ocean and disappear. I believe that they
have pretty good economic engines and that they should survive and prosper.
Are you finding more buying opportunities now?
Don: Yes. For instance, we have never invested much in certain sectors such as
telecommunication stocks because they were always believed to be too expensive.
In an inflationary environment, profits of telephone companies tend to get
squeezed by rising costs without a commensurate rise in rates. However, with the
fall in Asia's markets, the uncertainty in Latin American markets and a slowing
inflation rate in the U.S., I believe we could be heading for global
disinflation, if not deflation. If this is true, then it will lower the overall
cost
- --------------------------------------------------------------------------------
20 1997 Annual Report to Shareholders
<PAGE>
structure of these companies. Moreover, it will also lower the pricing power of
most companies. But that's not true with respect to telecommunications. These
companies have always focused on their rate increases. It has never been a
question of rates coming down.
This is a situation that fits the kind of earnings story we look for--lower
costs driving earnings. Right now, many of these telecommunication stocks are
some of the best buys I have seen in a long time.
================================================================================
EMERGING
MARKETS
================================================================================
[THREE MAPS OF LATIN AMERICA AND MEXICO]
" Stay globally diversified. Don't invest in only one region or country. The
only thing that I can guarantee is that somewhere it will happen again. That's
why it is important to maintain a long-term investment horizon."
DON ELEFSON
Portfolio Manager
Emerging Markets Portfolio
Why was Latin America affected by the Asian crisis?
Scott: Whenever there is a fundamental economic or stock market shock, emerging
markets as a whole tend to get hit harder because they are smaller, and,
therefore, more vulnerable to the movement of capital. When investors see a
crisis developing in one region, they may decide to pull money out of emerging
markets in general, which has a big impact on every market. It wasn't just Latin
America that got hit. The pain was shared basically everywhere.
Don: You're right, Scott. I also think that once speculators saw the first
indicator of a weak or precarious currency in one region, they went searching
for other signs of weakness. What these currency speculators look for is
something called a current account deficit. That basically means that imports
are greater than exports. And if more money is flowing out than coming in, then
it shows that you are depleting reserves, which is a sign that your products may
not be competitive and your local currency may be overvalued relative to your
trading partners. So, countries with current account deficit problems came under
intense scrutiny.
In the case of Latin America, Brazil, which is the largest economy in the
region, also had a linked currency and a mounting current account deficit. But
unlike Thailand, Brazil was importing to increase their productive capacity and
consequently should be able to work themselves out of trouble fairly quickly.
Scott: Again, that's why I think much of the recent turmoil is a short-term
phenomenon. Once we move past the first stages of the crisis, investors will
return to the financial fundamentals and that will become the main criteria for
investment decision making.
How do you view the prospects for Latin America?
Scott: I think they are excellent. Mexico is recovering nicely and should
continue to do so. After the peso devaluation and subsequent recession, Mexico
has emerged with an effective economic policy. It also has benefited from the
strength of the U.S. economy and NAFTA.
Don: Absolutely. I might add that the Mexican economy recovered faster than most
people thought it would. The recovery there has been financed, for the most
part, by the Mexican worker who has been accepting wage increases lower than the
rate of inflation. My main concern for Mexico is what will happen when workers
demand a payback for this sacrifice. That's why I think this currency crisis may
be very beneficial for Mexico. It may put a little fear into Mexican labor
unions and remind them not to push so hard that they drive the country back into
recession.
And what about the countries to the south of Mexico?
Scott: Brazil is the country that is most at risk at the moment. They are in
desperate need of fiscal reform. However, officials there have introduced a
fiscal package that I think will make a big difference. In the short run, high
interest rates may slow growth considerably. But in the long term, public sector
reform and privatization should be the mainspring of future economic growth in
Brazil.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 21
<PAGE>
Chile was probably most affected by events in Asia because its Pacific coastline
encourages more trade with Asia than its neighbors. Argentina has proven to have
a very effective monetary policy and authorities there have been very successful
in managing inflation, although growth may slow next year due to lower trade
with Brazil.
Any lessons for investors from the Mexican peso devaluation two years ago?
Don: Stay globally diversified. Don't invest in only one region or country. The
only thing that I can guarantee is that somewhere it will happen again. That's
why it's important to maintain a long-term investment horizon. I believe that
patient international investors will be well rewarded over the long term.
Russia and the Eastern European countries have had very strong stock market
performances over the last two years. How have they held up during the global
turbulence?
Don: These countries have also been rained on by the global storm. Although it
is true that the Russian stock market has recently given up a large portion of
its huge gains amassed over the last two years, the country remains
fundamentally sound. Russian companies continue to improve their management
practices and their product lines. Moreover, Russia is poised for GDP growth for
the first time next year; inflation is coming down and the government there has
never had such political stability.
The Eastern European nations of Poland, Hungary and the Czech Republic are also
coming into their own. At the same time, they are becoming more and more
integrated into Western Europe. In fact, I expect that the Czech Republic could
become a member of the European Union in the next few years.
================================================================================
EUROPE
================================================================================
[MAP OF EUROPE]
" We are beginning to see the emergence of a true shareholder's culture in
Europe. Many European companies are focusing more and more on the bottom line
and are undergoing the kind of restructuring that we saw among U.S. companies
in the Eighties and Nineties."
REIN VAN DER DOES
Portfolio Manager
European Portfolio
Rein, how has the continued drive toward a common European currency affected the
markets there?
Rein: One of the positive effects of the European Monetary Union, or EMU, has
been to bring down interest rates. Over the last six years, interest rates
across the Continent have come down quite substantially. For example, long-term
interest rates in Germany, which is the largest economy in Europe, dropped from
roughly 9.5% in 1992 to around 5.4% presently. That is a significant drop. As
the deadline for first-round membership in EMU approaches (i.e., May 1998),
interest rates across the continent should tend to settle down to similar
levels.
Voters in both Great Britain and France returned more labor-oriented governments
to power, partially in response to the high unemployment in those countries.
Have these political developments threatened the EMU?
Rein: No, I don't think so. Labor governments generally work better with unions
than nonlabor administrations. If we look at Australia, for example, the best
time for Australian markets has been when
- --------------------------------------------------------------------------------
22 1997 Annual Report to Shareholders
<PAGE>
Labor is in power there. When Mssr. Jospin was campaigning, he announced that he
wanted Italy, Spain and Portugal to also join the EMU in the first phase.
Following the election, interest rates in Italy began to fall. So, this has been
very favorable for the EMU.
England is a different story because it has elected not to be part of the first
round of EMU membership, although it could join in upcoming rounds. I might add
that if England keeps doing what they are doing, it runs the risk of becoming a
little island off the coast of Continental Europe.
Do you feel that the Asian crisis will have an impact on European stock markets?
Rein: Clearly, it will have some impact; but it should be marginal. The U.S. and
Europe are the most important export markets for European companies, with Asia
making up a relatively small portion of trade.
Would you agree that Europe may be an excellent opportunity for investors now?
Rein: Very much so. We are beginning to see the emergence of a true
shareholder's culture in Europe. Many European companies are focusing more and
more on the bottom line and are undergoing the kind of restructuring that we saw
among U.S. companies in the Eighties and Nineties. Moreover, the privatization
of state-owned industries and pension plans should only increase the demand for
European stocks.
Gentlemen, thank you for spending some time with us today.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 23
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
Schedules of Investments October 31, 1997
===========================================================================================================================
EMERGING MARKETS PORTFOLIO
SHARES SECURITY VALUE
===========================================================================================================================
<S> <C> <C>
STOCKS -- 91.8%
Argentina -- 4.2%
19,028 Banco de Galicia y Buenos Aires SA de CV ADR $ 461,132
16,500 Disco SA ADR* 668,250
44,609 Perez Companc SA 278,527
- ---------------------------------------------------------------------------------------------------------------------------
1,407,909
- ---------------------------------------------------------------------------------------------------------------------------
Brazil -- 12.9%
31,000 Aracruz Celulose SA ADR 467,558
851,000 Cia Cervejaria Brahma Preferred* 539,546
927,900,000 Cia Electricidade do Estado do Rio de Janeiro* 580,726
42,100,000 Cia Paranaense de Energia-Copel Preferred* 508,255
15,400,000 Cia Siderurgica Nacional 558,730
1,250,000 Cia Tecidos Norte de Minas-- Coteminas Preferred 464,841
1,150,000 Empresa Nacional de Comercio Redito E Participacoes SA Preferred* 0
2,100,000 Petroleo Brasileiro SA Preferred 390,476
3,500 SV Engenharia Preferred SA* 13,016
286,100 Tectoy Industria de Brinquedos SA Preferred* 55,793
6,020 Telecomunicacoes Brasileiras SA-- Telebras ADR 611,030
436,646 Telecomunicacoes de Brasilia SA Preferred 176,243
181,457 Telecomunicacoes do Rio de Janeiro SA Rights Preferred* 1,646
- ---------------------------------------------------------------------------------------------------------------------------
4,367,860
- ---------------------------------------------------------------------------------------------------------------------------
Chile -- 3.8%
22,000 Administradora de Fondos de Pensiones Provida SA ADR 368,500
8,300 Sociedad Quimica y Minera de Chile SA ADR 430,563
18,200 Vina Concha y Toro SA ADR 495,950
- ---------------------------------------------------------------------------------------------------------------------------
1,295,013
- ---------------------------------------------------------------------------------------------------------------------------
China -- 1.3%
1,050,000 Shanghai China International Travel Service Co., Ltd. 430,500
- ---------------------------------------------------------------------------------------------------------------------------
Czech Republic -- 1.2%
1,901 Ceska Zbrojovka AS 102,497
2,655 SPT Telecom AS* 305,774
- ---------------------------------------------------------------------------------------------------------------------------
408,271
- ---------------------------------------------------------------------------------------------------------------------------
Egypt -- 2.0%
24,500 Al-Ahram Beverages Co. SAE GDR* 673,750
- ---------------------------------------------------------------------------------------------------------------------------
Greece -- 1.4%
70,000 Lavipharm SA 472,989
- ---------------------------------------------------------------------------------------------------------------------------
Hong Kong -- 9.7%
600,000 Anhui Conch Cement Co., Ltd., Class H Shares* 127,304
30,000 Bengang Steel Plates Co., Ltd., Class B Shares* 8,888
790,000 First Tractor Co., Ltd., Class H Shares* 613,235
445,000 Guangdong Kelon Electrical Holdings Co., Class H Shares 564,202
10,000 HSBC Holdings PLC 226,405
789,920 Hubei Sanonda Co., Ltd., Class B Shares* 327,026
916,000 Qingling Motors Co., Class H Shares* 598,460
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
24 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================================
EMERGING MARKETS PORTFOLIO
SHARES SECURITY VALUE
===========================================================================================================================
<S> <C> <C>
Hong Kong -- 9.7% (continued)
457,000 Shandong Chenming Paper Holdings Ltd., Class B Shares* $ 390,219
310,000 Shenzhen Fangda Co., Ltd., Class B Shares 415,098
- ---------------------------------------------------------------------------------------------------------------------------
3,270,837
- ---------------------------------------------------------------------------------------------------------------------------
Hungary -- 3.5%
221,932 Fotex RT* 247,701
5,218 Graboplast RT 281,800
6,276 Pannonplast RT 345,362
3,400 Richter Gedeon RT 313,026
- ---------------------------------------------------------------------------------------------------------------------------
1,187,889
- ---------------------------------------------------------------------------------------------------------------------------
India -- 2.7%
16,700 Hindalco Industries Ltd. GDR 482,630
34,900 Larsen & Toubro Ltd. GDR* 366,450
5,000 Videsh Sanchar Nigam Ltd. GDR 69,000
- ---------------------------------------------------------------------------------------------------------------------------
918,080
- ---------------------------------------------------------------------------------------------------------------------------
Indonesia -- 2.0%
1,724,530 PT Indah Kiat Pulp & Paper Corp. 657,761
108,336 PT Indah Kiat Pulp & Paper Corp. Warrants, Expire 7/11/02* 9,015
99 PT Steady Safe Transportation 27
- ---------------------------------------------------------------------------------------------------------------------------
666,803
- ---------------------------------------------------------------------------------------------------------------------------
Malaysia -- 0.6%
66,000 Genting Berhad 185,194
- ---------------------------------------------------------------------------------------------------------------------------
Mexico -- 17.3%
116,600 Cemex SA de CV, Class B Shares 506,836
495,000 Cintra SA* 462,078
90,160 Corporacion GEO SA de CV, Class B Shares* 483,994
104,000 Empresas La Moderna SA de CV* 505,796
20,000 Grupo Elektra SA de CV GDR 536,250
229,000 Grupo Financiero Banamex Accival SA de CV (Banacci), Class B Shares* 456,912
19,700 Grupo Imsa SA de CV ADR 469,106
32,000 Grupo Industrial Durango SA ADR* 416,000
711,400 Grupo Posadas SA Series L* 380,202
19,900 Grupo Televisa SA GDR* 626,850
12,600 Hylsamex SA GDR* 485,100
2,000 Hylsamex SA GDR*+ 77,000
25,000 Industrias Bachoco SA ADR* 425,000
- ---------------------------------------------------------------------------------------------------------------------------
5,831,124
- ---------------------------------------------------------------------------------------------------------------------------
Peru -- 2.2%
18,133 Fabricacion Industrial de Maquinaria SA 2,141
709,490 Ferreyros SA 733,052
- ---------------------------------------------------------------------------------------------------------------------------
735,193
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 25
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================================
EMERGING MARKETS PORTFOLIO
SHARES SECURITY VALUE
===========================================================================================================================
<S> <C> <C>
Poland -- 5.7%
2,760 Bank Slaski SA $ 160,769
16,870 Debica SA 445,349
8,200 E. Wedel SA 395,294
51,200 Elektrim Spolka Akcyjna SA 481,882
8,500 Polish National Investment Fund* 317,073
56,100 Swarzedzkie Fabryk Mebli SA* 122,341
- ---------------------------------------------------------------------------------------------------------------------------
1,922,708
- ---------------------------------------------------------------------------------------------------------------------------
Portugal -- 2.4%
31,000 Colep-Companhia Portuguesa de Embalagens* 449,459
44,000 Lusomundo-SGPS SA Preferred 373,552
- ---------------------------------------------------------------------------------------------------------------------------
823,011
- ---------------------------------------------------------------------------------------------------------------------------
Russia -- 6.3%
28 ING Baring Russian Regional Telecom Basket+ 308,033
31,000 Irkutskenergo ADR 434,000
12,000 Mosenergo ADR 510,000
50,000 Surgutneftegaz ADR 468,750
12,250 Unified Energy Systems GDR* 407,925
- ---------------------------------------------------------------------------------------------------------------------------
2,128,708
- ---------------------------------------------------------------------------------------------------------------------------
South Africa -- 3.1%
561,292 Metro Cash & Carry Ltd. 542,339
43,000 Sasol Ltd. 518,234
- ---------------------------------------------------------------------------------------------------------------------------
1,060,573
- ---------------------------------------------------------------------------------------------------------------------------
South Korea -- 1.9%
5,200 Comtec Systems Co., Ltd.* 308,292
3,000 Lotte Confectionery Co. 342,040
12 Seah Steel Corp. 146
162 Woongjin Publishing Co. 5,054
- ---------------------------------------------------------------------------------------------------------------------------
655,532
- ---------------------------------------------------------------------------------------------------------------------------
Sri Lanka -- 2.0%
100,440 John Keells Holdings Ltd. 512,492
468,600 Lanka Walltile Ltd.* 152,868
- ---------------------------------------------------------------------------------------------------------------------------
665,360
- ---------------------------------------------------------------------------------------------------------------------------
Thailand -- 0.3%
25,400 Thai Engine Manufacturing Public Co. Ltd.* 86,060
- ---------------------------------------------------------------------------------------------------------------------------
Turkey -- 5.3%
415,000 Brisa Bridgestone Sabanci Lastik Sanayi ve Ticaret AS 411,608
1,382,500 Ege Biracilik Ve Malt Sanayii AS 271,226
150,000 Kepez Elektrik TAS 743,869
2,187,500 Turk Sise ve Cam Fabrikalari AS* 375,511
- ---------------------------------------------------------------------------------------------------------------------------
1,802,214
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKS
(Cost-- $30,209,917) 30,995,578
===========================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
26 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================================
EMERGING MARKETS PORTFOLIO
FACE
AMOUNT SECURITY VALUE
===========================================================================================================================
<S> <C> <C>
CONVERTIBLE BONDS -- 0.8%
China -- 0.5%
$ 150,000 Quingling Motors Ltd., 3.500% due 1/22/02 $ 168,690
- ---------------------------------------------------------------------------------------------------------------------------
Taiwan -- 0.3%
100,000 Primax Electronics Ltd., 0.500% due 9/30/04 91,500
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost-- $250,000) 260,190
===========================================================================================================================
REPURCHASE AGREEMENT -- 7.4%
2,500,000 CIBC Wood Gundy Securities Inc., 5.590% due 11/3/97; Proceeds at
maturity -- $2,501,165; (Fully collateralized by U.S. Treasury Notes,
6.125% due 5/15/98; Market value-- $2,550,362) (Cost-- $2,500,000) 2,500,000
===========================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $32,959,917**) $33,755,768
===========================================================================================================================
</TABLE>
* Non-income producing security.
+ Security is exempt from registration under Rule 144A of the Securities
Exchange Act of 1933. This security may be resold in transactions that are
exempt from registration to qualified institutional buyers.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 27
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================================
EUROPEAN PORTFOLIO
SHARES SECURITY VALUE
===========================================================================================================================
<S> <C> <C>
STOCKS -- 100.0%
Austria -- 4.5%
12,000 VA Technologie AG $ 2,132,739
- ---------------------------------------------------------------------------------------------------------------------------
Canada -- 0.1%
242,957 International UNP Holdings Ltd.* 25,002
- ---------------------------------------------------------------------------------------------------------------------------
Finland -- 9.7%
40,000 Nokia Oyj, Class A Shares 3,530,000
25,000 Orion-yhtyma OY, Class B Shares 924,080
- ---------------------------------------------------------------------------------------------------------------------------
4,454,080
- ---------------------------------------------------------------------------------------------------------------------------
France -- 16.5%
10,000 Atos SA* 1,125,781
15,000 Cap Gemini SA 1,193,539
8,623 Castorama Dubois Investisse 900,351
10,000 Christian Dior SA 1,111,883
10,254 Guilbert SA 1,341,429
982 Lagardere SCA 28,303
17,029 Total SA, Class B Shares 1,893,426
- ---------------------------------------------------------------------------------------------------------------------------
7,594,712
- ---------------------------------------------------------------------------------------------------------------------------
Germany -- 14.1%
2,700 Buderus AG 1,311,487
33,000 Leica Camera AG 762,157
4,000 Mannesmann AG 1,696,589
7,000 Schmalbach-Lubeca AG 1,303,527
10,000 SGL Carbon AG 1,426,414
- ---------------------------------------------------------------------------------------------------------------------------
6,500,174
- ---------------------------------------------------------------------------------------------------------------------------
Ireland -- 4.6%
358,332 Independent Newspapers PLC 2,102,381
- ---------------------------------------------------------------------------------------------------------------------------
Italy -- 4.5%
20,000 Gucci Group NV-- NY Registered Shares 727,500
60,000 Industrie Natuzzi S.p.A. ADR 1,342,500
- ---------------------------------------------------------------------------------------------------------------------------
2,070,000
- ---------------------------------------------------------------------------------------------------------------------------
Netherlands -- 21.6%
25,000 Content Beheer NV 785,799
70,000 Fugro NV 2,470,758
41,472 Hunter Douglas NV 1,709,569
62,800 Koninklijke Ahrend Groep NV 2,093,658
25,000 Randstad Holdings NV 998,351
40,930 Samas Groep NV CVA 1,866,494
- ---------------------------------------------------------------------------------------------------------------------------
9,924,629
- ---------------------------------------------------------------------------------------------------------------------------
Norway -- 5.6%
100,000 Tomra Systems ASA 2,571,209
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
28 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================================
EUROPEAN PORTFOLIO
SHARES SECURITY VALUE
===========================================================================================================================
<S> <C> <C>
Spain -- 4.7%
30,000 Amper SA* $ 869,909
4,250 Azkoyen SA 468,096
30,800 Telefonica de Espana 841,194
- ---------------------------------------------------------------------------------------------------------------------------
2,179,199
- ---------------------------------------------------------------------------------------------------------------------------
Switzerland -- 6.3%
1,664 Novartis AG 2,613,257
1,000 Sulzer Medica AG* 272,128
- ---------------------------------------------------------------------------------------------------------------------------
2,885,385
- ---------------------------------------------------------------------------------------------------------------------------
United Kingdom -- 7.8%
100,000 CMG PLC 2,322,500
120,000 Compass Group PLC 1,262,702
- ---------------------------------------------------------------------------------------------------------------------------
3,585,202
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost-- $29,361,641**) $46,024,712
===========================================================================================================================
</TABLE>
* Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 29
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================================
PACIFIC PORTFOLIO
SHARES SECURITY VALUE
===========================================================================================================================
<S> <C> <C>
STOCKS -- 88.8%
Australia -- 6.3%
5,000 Australia & New Zealand Banking Group Ltd. ADR $ 174,376
28,404 Coca-Cola Amatil Ltd. 214,235
20,000 Leighton Holdings Ltd. 74,014
- ---------------------------------------------------------------------------------------------------------------------------
462,625
- ---------------------------------------------------------------------------------------------------------------------------
Hong Kong -- 16.2%
420,000 Beijing Datang Power Generation Co. Ltd.* 211,916
115,000 Guangdong Kelon Electrical Holdings Co. 145,805
70,000 Guangnan Holdings 64,299
142,000 Hong Kong & China Gas Co. Ltd. 268,219
108 HSBC Holdings PLC 2,445
38,000 Hutchison Whampoa Ltd. 263,018
17,000 Shanghai Industrial Holdings Ltd. 75,658
75,000 VTech Holdings Ltd. 146,516
- ---------------------------------------------------------------------------------------------------------------------------
1,177,876
- ---------------------------------------------------------------------------------------------------------------------------
India -- 3.8%
20,000 Mahindra & Mahindra Ltd. GDR+ 210,000
5,000 Videsh Sanchar Nigam Ltd. GDR+ 69,000
- ---------------------------------------------------------------------------------------------------------------------------
279,000
- ---------------------------------------------------------------------------------------------------------------------------
Indonesia -- 8.0%
7,000 Gulf Indonesia Resources Ltd.* 147,000
150,000 PT Bimantara Citra 137,309
100,000 PT Daya Guna Samudera 128,988
30,000 PT Fiskaragung Perkasa 12,482
420,000 PT Indah Kiat Pulp & Paper Corp. 160,195
- ---------------------------------------------------------------------------------------------------------------------------
585,974
- ---------------------------------------------------------------------------------------------------------------------------
Japan -- 28.0%
1,300 Advantest Corp. 107,549
6,000 Fuji Photo Film Co. 217,510
4,000 Meitec 118,067
17,000 Minebea Co. Ltd. 169,619
5,000 Murata Manufacturing Co. Ltd. 202,877
5,000 Noritsu Koki Co. Ltd. 166,293
2,000 Rohm Co. Ltd. 197,888
3,000 Seven-Eleven Japan Co. Ltd. 224,495
1,000 Shohkoh Fund & Co. Ltd. 324,271
1,100 Sony Corp. 91,369
30,000 Sumitomo Realty & Development Co. 219,257
- ---------------------------------------------------------------------------------------------------------------------------
2,039,195
- ---------------------------------------------------------------------------------------------------------------------------
Malaysia -- 4.8%
70,700 Hap Seng Consolidated Berhad 110,799
58,000 Kuala Lumpur Kepong Berhad 138,507
60,000 Muhibbah Engineering Berhad 103,880
- ---------------------------------------------------------------------------------------------------------------------------
353,186
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
30 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================================
PACIFIC PORTFOLIO
SHARES SECURITY VALUE
===========================================================================================================================
<S> <C> <C>
Philippines -- 1.5%
600,000 SM Prime Holdings Inc. $ 105,159
- ---------------------------------------------------------------------------------------------------------------------------
Singapore-- 12.0%
3,000 Creative Technology Ltd.* 76,288
68,000 Datacraft Asia Ltd. 155,040
28,000 Elec & Eltek International Holdings Ltd.* 201,600
141,000 GPE Industries Ltd. 99,406
140,000 Lindeteves-Jacoberg Ltd. 151,303
26,000 Parkway Holdings Ltd. 65,786
36,000 Venture Manufacturing Ltd. 123,585
- ---------------------------------------------------------------------------------------------------------------------------
873,008
- ---------------------------------------------------------------------------------------------------------------------------
South Korea -- 2.7%
2,359 LG Information & Communication Ltd. 134,968
1,524 Samsung Electronics Co. 60,664
- ---------------------------------------------------------------------------------------------------------------------------
195,632
- ---------------------------------------------------------------------------------------------------------------------------
Thailand -- 5.5%
47,300 Circuit Electronic Industries PLC 41,506
20,000 Delta Electronics PLC 165,753
39,900 GSS Array Technology PLC* 78,778
16,000 K.R. Precision PLC 117,002
- ---------------------------------------------------------------------------------------------------------------------------
403,039
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKS
(Cost-- $6,721,275) 6,474,694
===========================================================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
===========================================================================================================================
<S> <C> <C>
CONVERTIBLE BONDS -- 3.2%
Taiwan -- 3.2%
$ 50,000 Primax Electronics Ltd., 0.500% due 9/30/04+ 45,750
200,000 Siliconware Precision Industries, 0.500% due 7/21/04+ 190,000
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL BONDS
(Cost-- $250,000) 235,750
===========================================================================================================================
REPURCHASE AGREEMENT -- 8.0%
586,000 CIBC Wood Gundy Securities Inc., 5.590% due 11/3/97; Proceeds at
maturity -- $586,272; (Fully collateralized by U.S. Treasury Notes,
6.125% due 5/15/98; Market value-- $598,386) (Cost-- $586,000) 586,000
===========================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $7,557,275**) $ 7,296,444
===========================================================================================================================
</TABLE>
* Non-income producing security.
+ Security is exempt from registration under Rule 144A of the Securities
Exchange Act of 1933. This security may be resold in transactions that are
exempt from registration, normally to qualified institutional buyers.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 31
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Statements of Assets and Liabilities October 31, 1997
====================================================================================================================================
Emerging
Markets European Pacific
Portfolio Portfolio Portfolio
====================================================================================================================================
<S> <C> <C> <C>
ASSETS:
Investments, at cost $32,959,917 $29,361,641 $ 7,557,275
Foreign currency, at cost 508,663 6,871 18,009
====================================================================================================================================
Investments, at value $33,755,768 $46,024,712 $ 7,296,444
Foreign currency, at value 504,970 7,033 16,817
Cash 270,131 272,861 11,269
Receivable for securities sold 2,921,499 -- 91,561
Receivable for Fund shares sold 71,222 258,954 2,652,835
Dividends and interest receivable 37,102 131,325 7,422
Receivable for open forward foreign currency contracts 3,054 -- 165
Receivable from manager -- -- 44,915
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets 37,563,746 46,694,885 10,121,428
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 816,189 -- 196,409
Payable for Fund shares purchased 124,037 109,263 8,472
Management fees payable 35,793 35,241 --
Distribution fees payable 8,937 9,883 3,029
Payable for open forward foreign currency contracts 25 -- --
Accrued expenses 93,995 91,647 112,822
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 1,078,976 246,034 320,732
- ------------------------------------------------------------------------------------------------------------------------------------
Total Net Assets $36,484,770 $46,448,851 $ 9,800,696
====================================================================================================================================
NET ASSETS:
Par value of capital shares $ 2,966 $ 2,579 $ 1,175
Capital paid in excess of par value 36,698,659 28,818,518 12,415,118
Accumulated net investment loss -- -- (133,696)
Accumulated net realized gain (loss) from
security transactions and foreign currencies (995,376) 970,197 (2,224,450)
Net unrealized appreciation (depreciation)
of investments and foreign currencies 778,521 16,657,557 (257,451)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Net Assets $36,484,770 $46,448,851 $ 9,800,696
====================================================================================================================================
Shares Outstanding:
Class A 1,128,346 774,504 561,460
-------------------------------------------------------------------------------------------------------------------------------
Class B 1,482,729 1,630,863 431,415
-------------------------------------------------------------------------------------------------------------------------------
Class C 354,520 174,062 181,859
-------------------------------------------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $12.45 $18.23 $8.46
-------------------------------------------------------------------------------------------------------------------------------
Class B * $12.21 $17.92 $8.25
-------------------------------------------------------------------------------------------------------------------------------
Class C ** $12.22 $17.86 $8.21
-------------------------------------------------------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $13.11 $19.19 $8.91
====================================================================================================================================
</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.
- --------------------------------------------------------------------------------
32 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Statements of Operations For the Year Ended October 31, 1997
====================================================================================================================================
Emerging
Markets European Pacific
Portfolio Portfolio Portfolio
====================================================================================================================================
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 633,923 $ 602,855 $ 103,228
Interest 120,118 84,209 8,734
Less: Foreign withholding tax (56,463) (49,927) (7,752)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Income 697,578 637,137 104,210
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 380,979 390,268 79,628
Distribution fees (Note 2) 268,925 362,116 63,958
Registration fees 114,966 90,001 97,999
Custody 92,972 32,183 49,251
Shareholder and system servicing fees 63,005 97,042 29,257
Shareholder communications 23,263 39,353 11,002
Audit and legal 22,002 30,801 23,499
Directors' fees 4,100 4,800 3,213
Other 12,176 19,081 7,997
- ------------------------------------------------------------------------------------------------------------------------------------
Total Expenses 982,388 1,065,645 365,804
- ------------------------------------------------------------------------------------------------------------------------------------
Net Investment Loss (284,810) (428,508) (261,594)
- ------------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
(NOTES 3 AND 4):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) (944,241) 970,201 (515,578)
Foreign currency transactions (790) (78,619) (14,941)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) (945,031) 891,582 (530,519)
- ------------------------------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments and Foreign Currencies:
Beginning of year 569,673 11,849,436 222,033
End of year 778,521 16,657,557 (257,451)
- ------------------------------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation) 208,848 4,808,121 (479,484)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Gain (Loss) on Investments and Foreign Currencies (736,183) 5,699,703 (1,010,003)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations $(1,020,993) $ 5,271,195 $(1,271,597)
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 33
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Statements of Changes in Net Assets For the Year Ended October 31, 1997
====================================================================================================================================
Emerging
Markets European Pacific
Portfolio Portfolio Portfolio
====================================================================================================================================
<S> <C> <C> <C>
OPERATIONS:
Net investment loss $ (284,810) $ (428,508) $ (261,594)
Net realized gain (loss) (945,031) 891,582 (530,519)
Increase (decrease) in net unrealized appreciation 208,848 4,808,121 (479,484)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (1,020,993) 5,271,195 (1,271,597)
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains -- (2,644,023) --
- ------------------------------------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders -- (2,644,023) --
- ------------------------------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS:
Net proceeds from sale of shares 35,138,483 59,471,115 27,795,046
Net asset value of shares issued
for reinvestment of dividends -- 2,505,751 --
Cost of shares reacquired (23,833,181) (57,078,021) (27,272,602)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 11,305,302 4,898,845 522,444
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 10,284,309 7,526,017 (749,153)
NET ASSETS:
Beginning of year 26,200,461 38,922,834 10,549,849
- ------------------------------------------------------------------------------------------------------------------------------------
End of year* $ 36,484,770 $ 46,448,851 $ 9,800,696
====================================================================================================================================
* Includes accumulated net investment loss of: -- -- $(133,696)
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
34 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Statements of Changes in Net Assets For the Year Ended October 31, 1996
====================================================================================================================================
Emerging
Markets European Pacific
Portfolio Portfolio Portfolio
====================================================================================================================================
<S> <C> <C> <C>
OPERATIONS:
Net investment loss $ (143,205) $ (375,575) $ (175,164)
Net realized gain (loss) 52,756 3,593,424 (159,611)
Increase in net unrealized appreciation 1,615,021 2,933,737 346,323
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 1,524,572 6,151,586 11,548
- ------------------------------------------------------------------------------------------------------------------------------------
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:
Net proceeds from sale of shares 20,033,650 35,761,098 28,672,810
Net asset value of shares issued
for reinvestment of dividends -- 152,260 --
Cost of shares reacquired (11,661,068) (40,988,044) (25,526,221)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions 8,372,582 (5,074,686) 3,146,589
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets 9,897,154 916,614 3,158,137
NET ASSETS:
Beginning of year 16,303,307 38,006,220 7,391,712
- ------------------------------------------------------------------------------------------------------------------------------------
End of year* $26,200,461 $38,922,834 $10,549,849
====================================================================================================================================
* Includes accumulated net investment loss of: $(5,529) $(220) $(42,594)
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 35
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
1. Significant Accounting Policies
The Emerging Markets, European and Pacific Portfolios ("Portfolios") are
separate investment 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-ended investment management company. The Fund
consists of these Portfolios and three other separate investment portfolios:
Global Government Bond, International Equity and International Balanced
Portfolios. The financial statements and financial highlights for the other
portfolios are presented in a separate annual report.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing prices on the primary
exchange on which they are traded; securities listed or traded on certain
foreign exchanges or other markets whose operations are similar to the U.S.
over-the-counter market (including securities listed on exchanges where the
primary market is believed to be over-the-counter) and securities for which no
sales price 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 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 dividend
income is 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 Fund expenses are allocated on the basis of
relative net assets by class; (h) dividends and distributions to shareholders
are recorded on the ex-dividend date; (i) the accounting records of each
Portfolio are maintained in U.S. dollars. All assets and liabilities denominated
in foreign currencies are translated into 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 which may differ from generally accepted accounting principles. At
October 31, 1997, reclassifications were made to the capital accounts of the
Portfolios to reflect permanent book/tax differences and income and gains
available for distributions under tax regulations. Accordingly, a portion of net
investment loss amounting to $285,646, $507,347 and $181,481 was reclassified to
paid-in capital for the Emerging Markets, European and Pacific Portfolios,
respectively. Net investment income, net realized gains and net assets were not
affected by this change; (k) each 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 each Portfolio 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.
- --------------------------------------------------------------------------------
36 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
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 ("SBH"), acts as investment manager of the Fund. The European
and Pacific Portfolios pay SBMFM a management fee calculated at the annual rate
of 0.85% of the average daily net assets of each respective portfolio. The
Emerging Markets Portfolio pays SBMFM a management fee calculated at the annual
rate of 1.00% of the average daily net assets of the portfolio. These fees are
calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of the
Fund's shares. SB received sales charges of approximately $163,000 on sales of
the Portfolios' Class A shares for the year ended October 31, 1997.
For the Emerging Markets, European and Pacific Portfolios, 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. Thereafter this CDSC
declines by 1.00% per year until no CDSC is incurred. Class C shares have a
1.00% CDSC, which applies if redemption occurs within the first year of
purchase.
For the year ended October 31, 1997, CDSCs paid to SB were approximately:
<TABLE>
<CAPTION>
Portfolio Class B Class C
================================================================================
<S> <C> <C>
Emerging Markets $61,000 --
- --------------------------------------------------------------------------------
European 36,000 $1,000
- --------------------------------------------------------------------------------
Pacific 12,000 1,000
================================================================================
</TABLE>
Pursuant to a Distribution Plan, the Portfolios pay 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 Emerging Markets,
European and Pacific Portfolios pay 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 Portfolio and class. For the year ended October 31,
1997, total Distribution Plan fees incurred by the Portfolios were:
<TABLE>
<CAPTION>
Portfolio Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Emerging Markets $37,470 $189,861 $41,594
- --------------------------------------------------------------------------------
European 32,501 302,094 27,521
- --------------------------------------------------------------------------------
Pacific 9,943 37,798 16,217
================================================================================
</TABLE>
All officers and two Directors of the Fund are employees of SB.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 37
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
3. Investments
During the year ended October 31, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<CAPTION>
Portfolio Purchases Sales
====================================================================================================================================
<S> <C> <C>
Emerging Markets $43,364,470 $ 35,339,174
- ------------------------------------------------------------------------------------------------------------------------------------
European 16,118,287 12,522,346
- ------------------------------------------------------------------------------------------------------------------------------------
Pacific 13,756,980 15,106,572
====================================================================================================================================
</TABLE>
At October 31, 1997, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
Portfolio Appreciation Depreciation (Depreciation)
====================================================================================================================================
<S> <C> <C> <C>
Emerging Markets $ 4,037,340 $ 3,241,489 $ 795,851
- ------------------------------------------------------------------------------------------------------------------------------------
European 17,701,263 1,038,192 16,663,071
- ------------------------------------------------------------------------------------------------------------------------------------
Pacific 468,081 728,912 (260,831)
====================================================================================================================================
</TABLE>
4. Forward Foreign Currency Contracts
At October 31, 1997, the Emerging Markets and Pacific 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 were as follows:
<TABLE>
<CAPTION>
Emerging Markets Portfolio
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
====================================================================================================================================
<S> <C> <C> <C> <C>
To Buy:
Hong Kong Dollar 990,524 $ 128,140 11/4/97 $ (25)
- ------------------------------------------------------------------------------------------------------------------------------------
To Sell:
South Africa Rand 5,237,215 1,086,897 11/4/97 3,054
- ------------------------------------------------------------------------------------------------------------------------------------
Total Unrealized Gain on
Forward Foreign Currency Contracts $3,029
====================================================================================================================================
<CAPTION>
Pacific Portfolio
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain
====================================================================================================================================
<S> <C> <C> <C> <C>
To Buy:
Singapore Dollar 123,894 $ 78,728 11/3/97 $ 165
- ------------------------------------------------------------------------------------------------------------------------------------
Total Unrealized Gain on
Forward Foreign Currency Contracts $ 165
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
38 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
5. Option 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 amount of the premium originally paid. When the Portfolio exercises a call
option, the cost of the security that the Portfolio purchases upon exercise will
be increased by the premium originally paid.
As of October 31, 1997, the Portfolios had no open purchased call or put
options.
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 depending
upon whether the cost of the closing transaction is greater or less than the
premium originally received without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a written call option is exercised the cost of the security sold will be
decreased by the premium originally received. When a written put option is
exercised, the amount of the premium originally received will reduce the cost of
the security that 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.
During the year ended October 31, 1997, the Portfolios had no written call or
put options.
6. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized
as assets. Securities equal to the initial margin amount are segregated by the
custodian in the name of the broker. Additional securities are also segregated
up to the current market value of the futures contract. During the period the
futures contract is open, changes in the value of the contract are recognized as
unrealized gains or losses by "marking-to-market" on a daily basis to reflect
the market value of the contract at the end of each day's trading. Variation
margin payments are 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 Portfolio records a realized gain or
loss equal to the difference between the proceeds from (or cost of) the closing
transactions and the Portfolio's basis in the contract. The Portfolio enters
into such contracts to hedge a portion of its portfolio. The Portfolio bears the
market risk that arises from changes in the value of the financial instruments
and securities indices (futures contracts).
As of October 31, 1997, the Portfolios had no open futures contracts.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 39
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
7. Concentration of Risk
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.
In addition to the risks described above, risks may arise from forward foreign
currency contracts with respect to the potential inability of counterparties to
meet the terms of their contracts.
8. Capital Loss Carryforwards
At October 31, 1997, the Emerging Markets and Pacific Portfolios had, for
Federal income tax purposes, approximately $925,000 and $2,224,000,
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 be distributed. The amount and
date of expiration of the carryforward losses for each Portfolio is indicated
below:
<TABLE>
<CAPTION>
Portfolio 10/31/02 10/31/03 10/31/04 10/31/05 Total
====================================================================================================================================
<S> <C> <C> <C>
Emerging Markets -- $ 46,000 -- $879,000 $ 925,000
- ------------------------------------------------------------------------------------------------------------------------------------
Pacific $37,000 1,426,000 $246,000 515,000 2,224,000
====================================================================================================================================
</TABLE>
9. Capital Shares
At October 31, 1997, 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.
At October 31, 1997, total paid-in capital amounted to the following for each
Portfolio:
<TABLE>
<CAPTION>
Portfolio Class A Class B Class C
====================================================================================================================================
<S> <C> <C> <C>
Emerging Markets $13,886,495 $18,329,530 $4,485,600
- ------------------------------------------------------------------------------------------------------------------------------------
European 9,002,217 17,402,608 2,416,272
- ------------------------------------------------------------------------------------------------------------------------------------
Pacific 6,220,193 3,959,440 2,236,660
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
40 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Notes to Financial Statements (continued)
====================================================================================================================================
Transactions in shares of each class were as follows:
Year Ended Year Ended
October 31, 1997 October 31, 1996
----------------------------------- ---------------------------------
Shares Amount Shares Amount
====================================================================================================================================
<S> <C> <C> <C> <C>
Emerging Markets Portfolio
Class A
Shares sold 976,387 $ 14,159,665 845,973 $ 10,156,535
Shares redeemed (732,804) (10,604,436) (600,551) (7,224,148)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 243,583 $ 3,555,229 245,422 $ 2,932,387
====================================================================================================================================
Class B
Shares sold 1,261,047 $ 17,982,006 701,375 $ 8,323,429
Shares redeemed (871,681) (12,363,356) (300,425) (3,574,650)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 389,366 $ 5,618,650 400,950 $ 4,748,779
====================================================================================================================================
Class C
Shares sold 212,076 $ 2,996,812 130,701 $ 1,553,686
Shares redeemed (62,423) (865,389) (71,401) (862,270)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 149,653 $ 2,131,423 59,300 $ 691,416
====================================================================================================================================
European Portfolio
Class A
Shares sold 753,014 $ 13,546,213 925,533 $ 14,551,767
Shares issued on reinvestment 39,393 670,082 5,876 83,554
Shares redeemed (628,399) (11,429,037) (1,130,019) (17,610,700)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) 164,008 $ 2,787,258 (198,610) $ (2,975,379)
====================================================================================================================================
Class B
Shares sold 2,437,568 $ 43,249,301 1,272,772 $ 20,413,451
Shares issued on reinvestment 100,838 1,696,102 4,564 64,632
Shares redeemed (2,451,593) (43,812,735) (1,438,755) (22,998,214)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) 86,813 $ 1,132,668 (161,419) $ (2,520,131)
====================================================================================================================================
Class C
Shares sold 148,958 $ 2,675,601 51,785 $ 795,880
Shares issued on reinvestment 8,322 139,567 289 4,074
Shares redeemed (101,215) (1,836,249) (24,464) (379,130)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 56,065 $ 978,919 27,610 $ 420,824
====================================================================================================================================
Pacific Portfolio
Class A
Shares sold 727,722 $ 7,499,628 835,124 $ 8,882,687
Shares redeemed (650,293) (7,183,758) (788,783) (8,407,176)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 77,429 $ 315,870 46,341 $ 475,511
====================================================================================================================================
Class B
Shares sold 1,620,231 $ 16,776,361 1,874,088 $ 19,538,963
Shares redeemed (1,589,348) (16,734,838) (1,576,819) (16,512,252)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 30,883 $ 41,523 297,269 $ 3,026,711
====================================================================================================================================
Class C
Shares sold 336,933 $ 3,519,057 23,983 $ 251,160
Shares redeemed (316,621) (3,354,006) (58,530) (606,793)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) 20,312 $ 165,051 (34,547) $ (355,633)
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 41
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Financial Highlights
====================================================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class A Shares
---------------------------------------
Emerging Markets Portfolio 1997(1) 1996 1995(2)
====================================================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $12.08 $11.06 $12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss(3) (0.05) (0.02) (0.05)#
Net realized and unrealized gain (loss) 0.42 1.04 (0.89)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.37 1.02 (0.94)
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.45 $12.08 $11.06
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 3.06% 9.22% (7.83)%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $14,046 $10,691 $7,069
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio to Average Net Assets:
Expenses(3) 2.11% 2.25% 1.45%+
Net investment loss (0.34) (0.19) (0.63)+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 99% 78% 17%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
on equity transactions(4)(5) $0.00* $0.00* $0.00*
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from May 12, 1995 (inception date) to October 31, 1995.
(3) 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 ratio would have been as follows:
<TABLE>
<CAPTION>
Per Share Increase Expense Ratio
to Net Investment Loss Without Fee Waivers
---------------------- -------------------
1995 1995
---- ----
<S> <C> <C>
Class A $0.05 2.12%+
</TABLE>
In addition, during the year ended October 31, 1996 and the period ended
October 31, 1995, the Portfolio had earned credits from the custodian which
reduced service fees incurred. If the credits are taken into consideration,
the expense ratios for Class A would have been 2.16% and 1.20%
(annualized), respectively.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(5) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commission on trades executed outside these
countries are generally executed as a percentage of cost or proceeds
ranging from 0.5% to 1.0%.
# Includes realized gains and losses on foreign currency transactions.
* Amount represents 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.
- --------------------------------------------------------------------------------
42 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Financial Highlights (continued)
====================================================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class B Shares
-----------------------------------------
Emerging Markets Portfolio 1997(1) 1996 1995(2)
====================================================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $11.95 $11.02 $12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss(3) (0.14) (0.10) (0.09)#
Net realized and unrealized gain (loss) 0.40 1.03 (0.89)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.26 0.93 (0.98)
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.21 $11.95 $11.02
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 2.18% 8.44% (8.17)%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $18,107 $13,062 $7,630
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio to Average Net Assets:
Expenses(3) 2.88% 3.06% 2.00%+
Net investment loss (1.00) (0.94) (1.17)+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 99% 78% 17%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
on equity transactions(4)(5) $0.00* $0.00* $0.00*
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from May 12, 1995 (inception date) to October 31, 1995.
(3) 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 ratio would have been as follows:
<TABLE>
<CAPTION>
Per Share Increase Expense Ratio
to Net Investment Loss Without Fee Waivers
---------------------- -------------------
1995 1995
---- ----
<S> <C> <C>
Class B $0.05 2.68%+
</TABLE>
In addition, during the year ended October 31, 1996 and the period ended
October 31, 1995, the Portfolio had earned credits from the custodian which
reduced service fees incurred. If the credits are taken into consideration,
the expense ratios for Class B would have been 2.97% and 1.74%
(annualized), respectively.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(5) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commission on trades executed outside these
countries are generally executed as a percentage of cost or proceeds
ranging from 0.5% to 1.0%.
# Includes realized gains and losses on foreign currency transactions.
* Amount represents 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.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 43
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Financial Highlights (continued)
====================================================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class C Shares
-----------------------------------------
Emerging Markets Portfolio 1997(1) 1996 1995(2)
====================================================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $11.95 $11.02 $12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss(3) (0.15) (0.10) (0.08)#
Net realized and unrealized gain (loss) 0.42 1.03 (0.90)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.27 0.93 (0.98)
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.22 $11.95 $11.02
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 2.26% 8.44% (8.17)%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $4,332 $2,448 $1,604
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio to Average Net Assets:
Expenses(3) 2.86% 3.02% 1.95%+
Net investment loss (1.03) (0.92) (1.08)+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 99% 78% 17%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
on equity transactions(4)(5) $0.00* $0.00* $0.00*
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from May 12, 1995 (inception date) to October 31, 1995.
(3) 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 ratio would have been as follows:
<TABLE>
<CAPTION>
Per Share Increase Expense Ratio
to Net Investment Loss Without Fee Waivers
---------------------- -------------------
1995 1995
---- ----
<S> <C> <C>
Class C $0.05 2.61%+
</TABLE>
In addition, during the year ended October 31, 1996 and the period ended
October 31, 1995, the Portfolio had earned credits from the custodian which
reduced service fees incurred. If the credits are taken into consideration,
the expense ratios for Class C would have been 2.92% and 1.70%
(annualized), respectively.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(5) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commission on trades executed outside these
countries are generally executed as a percentage of cost or proceeds
ranging from 0.5% to 1.0%.
# Includes realized gains and losses on foreign currency transactions.
* Amount represents 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.
- --------------------------------------------------------------------------------
44 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Financial Highlights (continued)
====================================================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class A Shares
-------------------------------------------------------
European Portfolio 1997(1) 1996 1995 1994(2)
====================================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $17.25 $14.67 $12.88 $12.50
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (loss)(3) (0.08) (0.08) 0.07 (0.11)
Net realized and unrealized gain 2.22 2.79 1.72 0.49
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 2.14 2.71 1.79 0.38
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- (0.09) -- --
Net realized gains (1.16) (0.04) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.16) (0.13) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $18.23 $17.25 $14.67 $12.88
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 12.88% 18.65% 13.90% 3.04%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $14,118 $10,528 $11,870 $5,189
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.80% 1.85% 2.06% 1.34%+
Net investment income (loss) (0.42) (0.49) 0.51 (1.12)+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 28% 39% 34% 21%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4)(5) $0.07 $0.05 $0.06 --
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from February 7, 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:
<TABLE>
<CAPTION>
Expense Ratios
Per Share Decreases to Without Fee Waivers
Net Investment Income and Custody Credits
--------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Class A $0.01 $0.10 2.09% 2.37%+
</TABLE>
In addition, during the years ended October 31, 1996 and October 31, 1995,
the Portfolio had earned credits from the custodian which reduced service
fees incurred. If the credits are taken into consideration, the expense
ratios for Class A would have been 1.82% and 2.02%, respectively; numbers
prior to October 31, 1995 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.
(5) Trades executed in the United States and Canada are executed at an average
commission rate of $0.06 per share. Commission on trades executed outside
these countries generally are executed as a percentage of cost or proceeds
ranging from 0.50% to 1.00%. The European Portfolio paid commissions which
equaled an average rate of 0.30% on the total of either cost or proceeds on
executed trades, which is below the average range. While the amount of
commissions paid is reasonable on a percentage basis, the commission per
share amount appears high because these securities were trading at a very
large dollar amount per share, which is atypical of the way U.S. or
Canadian companies' shares trade. As a result, since less shares trade for
a comparable dollar amount than would ordinarily be the case in the U.S. or
Canada, the commission per share amount skewed upward.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 45
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Financial Highlights (continued)
====================================================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class B Shares
-----------------------------------------
European Portfolio 1997(1) 1996 1995(2)
====================================================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $17.09 $14.56 $12.62
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (loss)(3) (0.20) (0.20) 0.02
Net realized and unrealized gain 2.19 2.77 1.92
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.99 2.57 1.94
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net realized gains (1.16) (0.04) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.16) (0.04) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $17.92 $17.09 $14.56
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 12.08% 17.72% 15.37%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $29,221 $26,384 $24,825
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 2.52% 2.59% 3.31%+
Net investment income (loss) (1.13) (1.22) 0.26+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 28% 39% 34%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4)(5) $0.07 $0.05 $0.06
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(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. If such fees were not waived, the per share effect on net investment
income and the expense ratio would have been as follows:
<TABLE>
<CAPTION>
Expense Ratio
Per Share Decrease to Without Fee Waivers
Net Investment Income and Custody Credits
--------------------- -------------------
1995 1995
---- ----
<S> <C> <C>
Class B $0.00* 3.35%+
</TABLE>
In addition, during the year ended October 31, 1996 and the period ended
October 31, 1995, the Portfolio had earned credits from the custodian which
reduced service fees incurred. If the credits are taken into consideration,
the expense ratios for Class B would have been 2.56% and 3.26%,
respectively; numbers prior to October 31, 1995 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.
(5) Trades executed in the United States and Canada are executed at an average
commission rate of $0.06 per share. Commission on trades executed outside
these countries generally are executed as a percentage of cost or proceeds
ranging from 0.50% to 1.00%. The European Portfolio paid commissions which
equaled an average rate of 0.30% on the total of either cost or proceeds on
executed trades, which is below the average range. While the amount of
commissions paid is reasonable on a percentage basis, the commission per
share amount appears high because these securities were trading at a very
large dollar amount per share, which is atypical of the way U.S. or
Canadian companies' shares trade. As a result, since less shares trade for
a comparable dollar amount than would ordinarily be the case in the U.S. or
Canada, the commission per share amount skewed upward.
* Amount represents 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.
- --------------------------------------------------------------------------------
46 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Financial Highlights (continued)
====================================================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class C Shares
-------------------------------------------------------
European Portfolio 1997(1) 1996 1995(2) 1994(3)
====================================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $17.04 $14.51 $12.83 $12.48
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment loss(4) (0.21) (0.14) (0.08) (0.16)
Net realized and unrealized gain 2.19 2.71 1.76 0.51
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.98 2.57 1.68 0.35
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net realized gains (1.16) (0.04) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.16) (0.04) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $17.86 $17.04 $14.51 $12.83
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 12.06% 17.78% 13.09% 2.80%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $3,110 $2,011 $1,311 $1,607
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 2.54% 2.52% 2.51% 2.02%+
Net investment loss (1.18) (1.17) (0.64) (1.60)+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 28% 39% 34% 21%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(5)(6) $0.07 $0.05 $0.06 --
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) On November 7, 1994, the former Class B shares were renamed Class C shares.
(3) For the period from February 14, 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 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:
<TABLE>
<CAPTION>
Expense Ratios
Per Share Decreases to Without Fee Waivers
Net Investment Income and Custody Credits
--------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Class C $0.01 $0.10 2.54% 3.07%+
</TABLE>
In addition, during the years ended October 31, 1996 and October 31, 1995,
the Portfolio had earned credits from the custodian which reduced service
fees incurred. If the credits are taken into consideration, the expense
ratios for Class C would have been 2.50% and 2.48%, respectively; numbers
prior to October 31, 1995 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. (6) Trades executed in the
United States and Canada are executed at an average commission rate of
$0.06 per share. Commission on trades executed outside these countries
generally are executed as a percentage of cost or proceeds ranging from
0.50% to 1.00%. The European Portfolio paid commissions which equaled an
average rate of 0.30% on the total of either cost or proceeds on executed
trades, which is below the average range. While the amount of commissions
paid is reasonable on a percentage basis, the commission per share amount
appears high because these securities were trading at a very large dollar
amount per share, which is atypical of the way U.S. or Canadian companies'
shares trade. As a result, since less shares trade for a comparable dollar
amount than would ordinarily be the case in the U.S. or Canada, the
commission per share amount skewed upward.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 47
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Financial Highlights (continued)
====================================================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class A Shares
------------------------------------------------------
Pacific Portfolio 1997 1996(1) 1995 1994(2)
====================================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.18 $10.07 $12.92 $12.50
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss(3) (0.17) (0.14) (0.01) (0.07)
Net realized and unrealized gain (loss) (1.55) 0.25 (2.84) 0.49
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.72) 0.11 (2.85) 0.42
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $8.46 $10.18 $10.07 $12.92
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (16.90)% 1.09% (22.06)% 3.36%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $4,750 $4,929 $4,409 $7,538
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 3.37% 2.64% 1.97% 1.51%+
Net investment loss (2.36) (1.38) (0.71) (0.82)+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 154% 86% 31% 6%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4)(5) $0.01 $0.02 $0.01 --
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from February 7, 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 Pacific Portfolio for $30,862 of the Portfolio's expenses
for the year 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:
<TABLE>
<CAPTION>
Expense Ratios
Per Share Decreases to Without Fee Waivers
Net Investment Income and Custody Credits
--------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Class A $0.14 $0.03 3.18% 1.87%+
</TABLE>
In addition, during the years ended October 31, 1996 and October 31, 1995,
the Portfolio had earned credits from the custodian which reduced service
fees incurred. If the credits are taken into consideration, the expense
ratios for Class A would have been 2.51% and 1.70%, respectively; numbers
prior to October 31, 1995 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.
(5) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commission on trades executed outside these
countries are generally executed as a percentage of cost or proceeds
ranging from 0.5% to 1.0%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
48 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Financial Highlights (continued)
====================================================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class B Shares
----------------------------------------
Pacific Portfolio 1997 1996(1) 1995(2)
====================================================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $10.01 $9.99 $12.64
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss(3) (0.27) (0.23) (0.01)
Net realized and unrealized gain (loss) (1.49) 0.25 (2.64)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.76) 0.02 (2.65)
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $8.25 $10.01 $ 9.99
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (17.58)% 0.20% (20.97)%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $3,558 $4,009 $1,031
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 4.24% 3.65% 3.39%+
Net investment loss (3.07) (2.26) (1.47)+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 154% 86% 31%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4)(5) $0.01 $0.02 $0.01
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(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 period ended October 31,
1995. 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 ratio would have been as
follows:
<TABLE>
<CAPTION>
Expense Ratio
Per Share Decrease to Without Fee Waivers
Net Investment Income and Custody Credits
--------------------- -------------------
1995 1995
---- ----
<S> <C> <C>
Class B $0.16 4.90%+
</TABLE>
In addition, during the year ended October 31, 1996 and the period ended
October 31, 1995, the Portfolio had earned credits from the custodian which
reduced service fees incurred. If the credits are taken into consideration,
the expense ratios for Class B would have been 3.47% and 3.06%
(annualized), respectively; numbers prior to October 31, 1995 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.
(5) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commission on trades executed outside these
countries are generally executed as a percentage of cost or proceeds
ranging from 0.5% to 1.0%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 49
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Financial Highlights (continued)
====================================================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class C Shares
------------------------------------------------------
Pacific Portfolio 1997 1996(1) 1995(2) 1994(3)
====================================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 9.98 $ 9.95 $12.86 $12.50
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss(4) (0.27) (0.24) (0.02) (0.11)
Net realized and unrealized gain (loss) (1.50) 0.27 (2.89) 0.47
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.77) 0.03 (2.91) 0.36
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $8.21 $ 9.98 $ 9.95 $12.86
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (17.74)% 0.30% (22.63)% 2.88%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $1,493 $1,612 $1,952 $3,167
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 4.44% 3.46% 2.69% 2.29%+
Net investment loss (3.21) (2.22) (1.45) (1.49)+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 154% 86% 31% 6%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(5)(6) $0.01 $0.02 $0.01 --
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(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:
<TABLE>
<CAPTION>
Expense Ratios
Per Share Decreases to Without Fee Waivers
Net Investment Income and Custody Credits
--------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Class C $0.13 $0.03 3.88% 2.70%+
</TABLE>
In addition, during the years ended October 31, 1996 and October 31, 1995,
the Portfolio had earned credits from the custodian which reduced service
fees incurred. If the credits are taken into consideration, the expense
ratios for Class C would have been 3.29% and 2.42%, respectively; numbers
prior to October 31, 1995 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. (6) Trades executed in the
United States and Canada have an average commission rate of $0.06 per
share. Commission on trades executed outside these countries are generally
executed as a percentage of cost or proceeds ranging from 0.5% to 1.0%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
50 1997 Annual Report to Shareholders
<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 Emerging Markets, European, and Pacific
Portfolios of Smith Barney World Funds, Inc. as of October 31, 1997, and the
related statements 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 and for the period from May 12, 1995 (commencement of operations) to
October 31, 1995, with respect to the Emerging Markets Portfolio, and for each
of the years in the three-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. 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, 1997, by correspondence with the custodian. As to securities
purchased or sold but not received or delivered, we performed other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Emerging Markets, European and Pacific Portfolios of Smith Barney World Funds,
Inc. as of October 31, 1997, and the results of their operations for the year
then ended, the changes in their 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 and for the period from May 12, 1995 to
October 31, 1995 with respect to the Emerging Markets Portfolio, and for each of
the years in three-year period then ended and for the period from February 7,
1994 to October 31, 1994 with respect to the European and Pacific Portfolios, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
December 18, 1997
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 51
<PAGE>
================================================================================
Tax Information (unaudited)
================================================================================
For Federal tax purposes the European Portfolio hereby designates for the fiscal
year ended October 31, 1997:
o long-term capital gain distributions paid of $2,644,023.
- --------------------------------------------------------------------------------
52 1997 Annual Report to Shareholders
<PAGE>
Smith Barney
World Funds, Inc.
Directors Investment Adviser and Administrator
Victor Atkins Smith Barney Mutual Funds Management Inc.
Robert A. Frankel
Rainer Greeven Distributor
Susan M. Heilbron Smith Barney Inc.
Heath B. McLendon, Chairman
Bruce D. Sargent Custodian
James M. Shuart Chase Manhattan Bank
Officers Shareholder
Maurits E. Edersheim Servicing Agent
Chairman of the Fund First Data Investor Services Group, Inc.
& Advisory Director P.O. Box 9134
Boston, MA 02205-9134
Heath B. McLendon
Chief Executive Officer
This report is for the information of
Lewis E. Daidone shareholders of Smith Barney World Funds,
Senior Vice President Inc.--Emerging Markets, European and Pacific
and Treasurer Portfolios, but it may also be used as sales
literature when preceded or accompanied by
David Ishibashi the current prospectus, which gives details
Vice President about charges, expenses, investment
objectives and operating policies of the
Scott E. Kalb Fund. If used as sales material after
Vice President December 31, 1997, this report must be
accompanied by performance for the most
Bruce D. Sargent recently completed calendar quarter.
Vice President
Rein W. van der Does
Vice President
Irving P. David
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
----------------------------------
A Member of Travelers Group [LOGO]
Smith Barney
World Funds, Inc.
Smith Barney Mutual Funds
388 Greenwich Street
New York, New York 10013
FD01358 12/97
[PHOTO]
Smith Barney
World Funds, Inc.
Global Government Bond Portfolio
International Equity Portfolio
International Balanced Portfolio
- -------------
ANNUAL REPORT
- -------------
October 31, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Everyday(SM).
<PAGE>
Smith Barney
World Funds, Inc.
================================================================================
"As the world progresses and blossoms into a truly global economy, investment
portfolios should and will become increasingly global in nature. Farsighted
businesses and industries will prosper wherever economic and geographic factors
are the most favorable."
Heath B. McLendon
Chairman
================================================================================
The Global Government Bond Portfolio seeks as high a level of current income and
capital appreciation as is consistent with investing principally in high-quality
bonds of the U.S. and foreign governments.
NASDAQ SYMBOL
-------------
Class A SBGLX
Class B SGGBX
The International Equity Portfolio seeks total return on its assets from growth
of capital and income. The Portfolio seeks to achieve its objective by investing
at least 65% of its assets in a diversified portfolio of equity securities of
established non-U.S. issuers.
NASDAQ SYMBOL
-------------
Class A SBIEX
Class B SBIBX
Class C SBICX
The International Balanced Portfolio seeks long-term growth of capital and
income through a portfolio invested primarily in securities of established
non-U.S. issuers.
NASDAQ SYMBOL
-------------
Class A SIEBX
================================================================================
WHAT'S INSIDE
================================================================================
A Message from the Chairman ............................................... 1
Global Government Bond Portfolio
Portfolio Manager Commentary ........................................... 2
Historical Performance ................................................. 4
Portfolio at a Glance .................................................. 6
International Equity Portfolio
Portfolio Manager Commentary ........................................... 7
Historical Performance ................................................. 10
Portfolio at a Glance .................................................. 12
International Balanced Portfolio
Portfolio Manager Commentary ........................................... 13
Historical Performance ................................................. 14
Portfolio at a Glance .................................................. 16
A Roundtable Discussion with the
Portfolio Managers ........................................................ 17
Schedules of Investments .................................................. 21
Statements of Assets and Liabilities ...................................... 31
Statements of Operations .................................................. 32
Statements of Changes in Net Assets ....................................... 33
Notes to Financial Statements ............................................. 35
Financial Highlights ...................................................... 44
Tax Information ........................................................... 56
Independent Auditors' Report .............................................. 57
<PAGE>
================================================================================
A Message from the Chairman
================================================================================
[PHOTO]
HEATH B.
MCLENDON
Chairman
Dear Shareholder:
Never before have investors been in a situation where the world is rapidly
evolving into one vast economy. The separations that divided the Free World from
the Communist World and that insulated developed nations from underdeveloped
ones are dissolving. Open borders now exist globally and where borders have
opened, free trade has followed. Previously underdeveloped countries are
experiencing rapid development and, as a result, are creating higher standards
of living and a commensurate demand for products and services that have long
characterized more developed countries. Progress seldom moves forward in a
straight and easy line, however, without some imbalances occurring.
This year, we have witnessed firsthand the imbalances that progress can bring.
After a period of spectacular economic growth, many Asian economies began to
overheat. In particular, the real estate markets in those countries have
outpaced their underlying economies. Now, in keeping with the immutable laws of
the business cycle, the Asian markets are entering a period of consolidation. At
the same time, Europe is undergoing the historic unification of its currencies
and economic systems. And the lesser developed countries of Eastern Europe, the
former Soviet Union and Africa are beginning their own vigorous economic
expansions. While this process may be unsettling for many global investors in
the short term, we believe it's exceptionally positive for them over the long
term.
As the world progresses and blossoms into a truly global economy, investment
portfolios should and will become increasingly global in nature. Farsighted
businesses and industries will prosper wherever economic and geographic factors
are the most favorable. Investing in the U.S. stock market has never been a
totally smooth ride historically, so one cannot expect investing in today's
global markets to be any different. But, global investing has become a much
wider road of late and one that points to a brighter future.
In this report, you will find specific market commentary and performance
information for the Smith Barney World Funds, Inc. -- Global Government Bond
Portfolio, International Equity Portfolio and International Balanced Portfolio.
In addition, Portfolio Managers Jeff Russell and Victor Filatov discuss their
investment management styles and recent global market events in a roundtable
discussion that begins on page 17.
In closing, we thank you for your confidence in our investment approach and our
family of international funds. We look forward to continue helping you take
advantage of the investment opportunities available in today's global economy.
We would also like to take this opportunity to invite you to visit our web site,
Smith Barney Access (sm) at www.smithbarney.com.
Sincerely,
/s/ Heath B. McLendon
- ---------------------
Heath B. McLendon
Chairman
November 21, 1997
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 1
<PAGE>
================================================================================
Global Government Bond Portfolio
================================================================================
Portfolio Managers
VICTOR S. FILATOV, Vice President
Victor S. Filatov joined Smith Barney Global Capital Management in 1993 from
J.P. Morgan where, as head of the Bond Index Group, he was responsible for
developing the J.P. Morgan Government Bond Index and for international fixed
income and currency research. 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 B.A. in Mathematics and Economics from Clark
University and a M.A. in Economics from the University of Pennsylvania.
DENIS P. MANGAN, Vice President
Denis P. Mangan joined Smith Barney Capital Management in 1994, where he is a
Global Fixed Income Portfolio Manager and Research Specialist. He was previously
at J.P. Morgan as a Proprietary Fixed Income Trader and a Researcher of Fixed
Income Options and Trading for three years. Prior to that, Mr. Mangan spent two
years at Citibank, NA London as a Fixed Income and Currency Strategist for the
Strategic Positioning Desk. He also was at Citicorp for seven years in Treasury
management, doing analysis and strategic positioning. Mr. Mangan graduated with
honors from Trinity College, Dublin, holds a M.A. in Mathematics from Columbia
University, and a Ph.D. in Financial Economics from Columbia University.
Performance Update
For the year ended October 31, 1997, the Smith Barney World Funds, Inc. --
Global Government Bond Portfolio ("Portfolio") had a total return of 8.21% for
Class A shares without sales charge and outperformed its Lipper Analytical
Services, Inc. ("Lipper") peer group average of 4.69% for the same period.
(Lipper is an independent fund-tracking organization.) Additional performance
information about the Portfolio's other share classes can be found on pages 4
and 5.
Investment Strategy
As noted, the 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 U.S. and foreign governments. We strive to outperform the
U.S. government bond market with no more risk than investing solely in U.S.
government bonds. In addition, we utilize a hedging strategy to minimize the
risk of currency fluctuations.
North America
During the reporting period, we maintained a substantial exposure to U.S.
government bonds, which, as of October 31, 1997, made up roughly 33% of the
Portfolio's investments. In the weeks leading up to the collapse of the Asian
financial markets, we began to see signs of trouble surfacing. In response, we
sold all of our emerging market bonds and replaced them with 10-year U.S.
Treasury notes.
The U.S. Treasury market has performed well over the past year with an
especially sharp rally coming in the third quarter of 1997. However, this good
performance by U.S. Treasuries came at the expense of significant volatility as
many investors anticipated possible official interest rate changes. The Federal
Reserve Board ("Fed") raised short-term borrowing costs slightly in March 1997
in response to a strengthening U.S. economy. The Fed indicated an official bias
toward tightening at subsequent meetings held during the summer and fall but
declined to raise interest rates any further.
Even as the U.S. economy surges ahead, signs of the "inevitable" accompanying
inflationary pressures are few and far between. Judging from the lack of
follow-up rate hikes, it appears that the Fed has adopted a wait-and-see
approach to managing inflation, especially in light of the recent global market
turmoil. Moreover, the Fed may be calculating that as the inflation rate falls
and short-term interest rates remain constant, the relative increase in the real
fed-funds rate is in itself a tightening of monetary pressure. (The fed-funds
rate is the interest rate banks charge each other for overnight loans and is a
closely watched indicator of the direction of interest rates.) In addition, the
relatively strong U.S. dollar, coupled with intense competition in many
industries, has helped keep prices down throughout the global economy.
- --------------------------------------------------------------------------------
2 1997 Annual Report to Shareholders
<PAGE>
We therefore remain bullish on the prospects for the U.S. bond market. We would
not be surprised to see yields on the benchmark 30-year U.S. Treasury bond fall
to around the 6% level over the next few quarters. Given the near absence of
inflationary pressures and the recent global market volatility, we do not expect
the Fed to raise short-term interest rates again for the remainder of the year
and possibly even through the beginning of 1998.
Europe
The long-awaited economic recovery in Europe appears to be finally well
underway, particularly in core economies such as France and Germany. Exports
remain the driving force behind the recovery in Europe and buoyant demand from
major trading partners combined with competitive exchange rates should ensure a
continuation of that stimulus to growth. In addition, a number of countries have
benefited from the continued progress toward a European Monetary Union ("EMU"),
which proposes a single European currency. Membership in the EMU requires, among
other things, that member countries maintain strict fiscal control with budget
deficits making up no more than 3% of their Gross Domestic Product ("GDP"). As
prospective countries strive to meet the EMU admission guidelines, bond yields
across the Continent have continued to drop and interest rates have tended to
converge toward similar levels.
As of October 31, 1997, the Portfolio's major European holdings were Germany
(9.6%), United Kingdom (6.0%) and Italy (5.3%). During the course of the
Portfolio's fiscal year, we substantially reduced our Spanish and Danish bond
holdings because we believe that as the EMU approaches, interest rates will
continue to converge across the Continent, making the previously higher-yielding
peripheral markets less attractive. Conversely, we increased our exposure to
core countries such as Germany and the United Kingdom for the same reason.
Japan
The Japanese government bond market continued to provide attractive returns in
U.S. dollar terms over the year. During this period, we increased our position
in Japanese government bonds which, as of October 31, 1997, made up
approximately 14% of the Portfolio's investments.
The Japanese economy continues to languish with little sign of recovery in the
near future. In an apparently serious miscalculation, the government raised the
Value Added Tax in April, which caused a dramatic drop in consumer spending and
further exacerbated economic conditions. This drop in private consumption helps
to explain the 11% decline in the GDP in the second quarter. The Japanese
government has been pursuing an accommodative monetary policy designed to help
the financial sector gradually rebuild its weak capital base. By loosening the
monetary reins, Japanese policymakers hope that growth will be stimulated
through very low borrowing costs. At the same time, the poor outlook for
Japanese stocks combined with a very high domestic savings rate has led to
considerable ongoing demand for Japanese government bonds.
We believe that Japanese bond yields will remain at or close to current levels
for some time to come. For these reasons, we remain cautiously neutral toward
the Japanese bond market. Despite the relatively low Japanese interest rates,
these bonds continue to deliver competitive returns when hedged into U.S.
dollars. Moreover, although it is still struggling with its recession, Japan
remains a key global market. Therefore, we believe it is prudent to maintain
some exposure to this critical financial market.
Thank you for your continued confidence in our investment approach.
Sincerely,
/s/ Victor S. Filatov /s/ Denis P. Mangan
- --------------------- -------------------
Victor S. Filatov Denis P. Mangan
Vice President Vice President
November 5, 1997
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 3
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================================
Historical Performance - Class A Shares
=================================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
10/31/97 $12.55 $12.22 $1.22 $0.08 $0.00 8.21%
- ---------------------------------------------------------------------------------------------------------------------------------
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 $5.03 $0.99 $0.42
=================================================================================================================================
<CAPTION>
=================================================================================================================================
Historical Performance - Class B Shares
=================================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
10/31/97 $12.50 $12.22 $1.10 $0.08 $0.00 7.62%
- ---------------------------------------------------------------------------------------------------------------------------------
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 $2.57 $0.08 $0.00
=================================================================================================================================
<CAPTION>
=================================================================================================================================
Historical Performance - Class C Shares
=================================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
10/31/97 $12.47 $12.19 $1.11 $0.08 $0.00 7.73%
- ---------------------------------------------------------------------------------------------------------------------------------
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 $3.32 $0.67 $0.39
=================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
4 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================================
Historical Performance - Class Y Shares
=================================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
10/31/97 $12.39 $12.03 $1.28 $0.08 $0.00 8.61%
- ---------------------------------------------------------------------------------------------------------------------------------
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 $3.59 $0.67 $0.43
=================================================================================================================================
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
<CAPTION>
====================================================================================================================================
Average Annual Total Return
====================================================================================================================================
Without Sales Charge(1)
---------------------------------------------------------------
Class A Class B Class C Class Y
====================================================================================================================================
<S> <C> <C> <C> <C>
Year Ended 10/31/97 8.21% 7.62% 7.73% 8.61%
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 10/31/97 8.47 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 10/31/97 8.96 9.62 8.35 8.62
====================================================================================================================================
With Sales Charge(2)
---------------------------------------------------------------
Class A Class B Class C Class Y
====================================================================================================================================
<S> <C> <C> <C> <C>
Year Ended 10/31/97 3.35% 3.22% 6.75% 8.61%
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 10/31/97 7.47 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 10/31/97 8.16 8.76 8.35 8.62
====================================================================================================================================
<CAPTION>
===========================================================================================================================
Cumulative Total Return
===========================================================================================================================
Without Sales Charge(1)
===========================================================================================================================
<S> <C>
Class A (Inception* through 10/31/97) 71.46%
- ---------------------------------------------------------------------------------------------------------------------------
Class B (Inception* through 10/31/97) 31.15
- ---------------------------------------------------------------------------------------------------------------------------
Class C (Inception* through 10/31/97) 47.27
- ---------------------------------------------------------------------------------------------------------------------------
Class Y (Inception* through 10/31/97) 47.45
===========================================================================================================================
</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.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 5
<PAGE>
================================================================================
Global Government Bond Portfolio at a Glance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of the
Global Government Bond Portfolio vs. J.P. Morgan Global Bond Market Index+
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
July 1991 -- October 1997
JP Morgan Global JP Morgan Global
Global Government Bond Market Index Bond Market Index
Date Bond Portfolio - Hedged - Unhedged
- ---- -------------- ----------------- ------------------
<S> <C> <C> <C>
Jul 1991 $ 9,600 $10,000 $10,000
Oct 1991 $10,422 $10,459 $10,685
Oct 1992 $10,964 $11,370 $12,028
Oct 1993 $12,614 $12,749 $13,351
Oct 1994 $12,369 $12,609 $12,740
Oct 1995 $13,903 $15,048 $15,319
Oct 1996 $15,212 $16,566 $16,254
Oct 1997 $16,461 $18,319 $16,822
</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, 1997. The
J.P. Morgan Global Bond Market 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 as 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.
<TABLE>
<CAPTION>
================================================================
Top Ten Holdings* As of October 31, 1997
================================================================
<S> <C>
1. U.S. Treasury Notes 36.2%
- ----------------------------------------------------------------
2. Japanese Government 16.2
- ----------------------------------------------------------------
3. Deutschland Republic 11.1
- ----------------------------------------------------------------
4. United Kingdom Treasury 6.9
- ----------------------------------------------------------------
5. Buoni Poliennali del Tesoro 6.1
- ----------------------------------------------------------------
6. Kingdom of Belgium 4.9
- ----------------------------------------------------------------
7. Bonos Y Oblig del Estado 4.8
- ----------------------------------------------------------------
8. Ireland Treasury 4.7
- ----------------------------------------------------------------
9. Australian Government 2.5
- ----------------------------------------------------------------
10. Finnish Government 2.1
- ----------------------------------------------------------------
</TABLE>
* As a percentage of total bonds.
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
================================================================================
Investment Allocation** As of October 31, 1997
================================================================================
<S> <C>
Europe 36.1%
The Americas 33.2%
Asia/Pacific 17.7%
Repurchase Agreement 13.0%
</TABLE>
** As a percentage of total investments.
- --------------------------------------------------------------------------------
6 1997 Annual Report to Shareholders
<PAGE>
================================================================================
International Equity Portfolio
================================================================================
Portfolio Managers
[PHOTO]
JEFFREY J. RUSSELL, CFA
Vice President
Jeffrey J. Russell, CFA, is a Managing Director of Smith Barney and portfolio
manager of the Smith Barney World Funds, Inc.--International Equity Portfolio.
Prior to joining the firm in 1990, he worked for Drexel Burnham Lambert. Mr.
Russell holds an undergraduate degree from Massachusetts Institute of Technology
and a M.B.A. from the University of Pennsylvania's Wharton School of Finance.
[PHOTO]
JAMES B. CONHEADY
Vice President
James B. Conheady has more than 35 years experience managing international and
global equity portfolios. He has been with the International Equity team since
its formation in 1968 at Drexel Burnham Lambert and moved to Smith Barney in
1990. Mr. Conheady holds a B.S.S. degree from Georgetown University.
Performance Update
For the year ended October 31, 1997, the Class A shares of the International
Equity Portfolio ("Portfolio") had a total return of 9.30% without sales charge.
In comparison, the Morgan Stanley Capital International ("MSCI") EAFE-GDP
Weighted Index had a total return of 4.92% for the same period. (The MSCI
EAFE-GDP Weighted Index is a composite portfolio consisting of equity total
returns for the countries of Europe, Australia, New Zealand and the countries in
the Far East, weighted based on each country's Gross Domestic Product. ("GDP"))
Performance information about the Portfolio's other classes of shares can be
found on pages 10 and 11. As of October 31, 1997, the Portfolio owned securities
of 74 issuers in 25 countries, consistent with its broadly diversified
investment approach that seeks to minimize portfolio risk.
Investment Strategy
We pursue a "bottom-up" approach to stock investing--namely, we look for
promising companies and industries rather than trying to discover investment
opportunities based on the present or future condition of the global economy,
the financial markets or the performance of particular markets. We seek
companies growing at a faster rate to that of their local country. At the same
time, we strive to maintain a risk level no higher than that of the overall
international equity market through broad diversification in a variety of
markets.
Market and Portfolio Update
In the months leading to the close of the Portfolio's reporting period, the big
news has been the sharp decline of Asian markets and higher market volatility in
many international markets. Clearly, many global multinational giants with
significant Asian revenue streams, many of which have been investor favorites
over the past several years, will be under a cloud until their earnings
visibility is confirmed.
Asia and the Pacific Rim
As occurred after the Mexican peso debacle in late 1994, the Asian "Tiger"
selloff has impacted virtually all emerging and smaller equity markets. The
Asian currency contagion, initially confined to Thailand, Malaysia, Indonesia
and the Philippines, spread throughout the region and has shaken the foundation
of the U.S. dollar-linked currency regimes in Asia. The latest victims of the
plague include Hong Kong's currency (pegged since 1983 to the U.S. dollar) and
Korea, where a stringent International Monetary Fund package has been put in
place. There appears to be more downside risk in the Asian markets, with many
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 7
<PAGE>
investors capitulating and selling their (reduced) holdings to minimize asset
value attrition. Ironically, very high interest rates necessary to stem currency
pressures will achieve a key government objective of slowing the rise of Hong
Kong's real estate prices, and improving its regional competitiveness as a
service center.
There has been a great deal of pain inflicted on local Asian equity markets,
local corporate earnings and investors when currencies devalue 10%-40% and
interest rates reach sky high levels in order to defend macroeconomic policies.
Given the large equity market representation of banks, finance companies and
property stocks in Asian equity markets, the region has been transformed due to
slower capital decelerating growth rates, weak currencies and collapsing asset
prices.
Outside Southeast Asia, the inevitable economic slowdown spells more bad news
for Japan, a major exporter of goods into Asia. The Japanese economy is already
sluggish from a series of misguided policy initiatives (including April's sales
tax increase which led to reported GDP contraction at a rate in excess of 11%
during second quarter 1997) and the troubles in Asian neighboring economies.
One of the key adjustments we made to our Asian holdings during the fiscal year
was selling our position in Cheung Kong Ltd. (a real estate and property
development company) and using the proceeds to buy China Resources Enterprise
Ltd. (a property investment and investment holding company). Chinese government
officials have clearly stated a desire to increase the supply of land for
redevelopment in Hong Kong. Accordingly, we decided to take profits on Cheung
Kong. At the same time, we wanted increased exposure to the privatization
process of state-owned enterprises in China. China Resources, owned in large
part by the Ministry of Trade in China, is a diversified conglomerate with an
established track record in brewing, infrastructure, property and equipment, and
is well-positioned to make attractive acquisitions.
Europe
European equity markets and Latin America have been afflicted by Asia's
problems, largely, we suspect, due to semi-panicked selling rather than any
problems with short-term fundamentals. We continue to believe that Europe
represents the best global investment opportunity because of continued corporate
restructuring, benign interest rates and improved demand for stocks from both
individuals and institutions. In fact, Europe has now become roughly 5%-10% more
inexpensive due to the a continuing challenges facing Asia.
Our equity allocations, driven by our bottom-up stock investment approach,
continue to be weighted heavily toward Europe at about 69% of investments. As of
October 31, 1997, our major country exposures include Germany (7.8%), Ireland
(9.4%), Netherlands (7.1%), Sweden (9.1%), Switzerland (5.0%) and the U.K.
(14.0%). Europe has shown good resilience during the August global market
correction and we continue to believe that European stock markets should be the
performance leaders over the balance of 1997.
During the reporting period, we took advantage of European stock market strength
to take profits on select holdings and swap into new positions in attractive
companies. One example of this strategy is our sale of Carrefour SA (a major
retailer) and the purchase of Getronics NV (a computer product services
company).
Carrefour has expanded aggressively around the world and has been very
successful at penetrating highly populated, under-stored urban areas in Latin
America and Asia. At the same time, its shares have appreciated rapidly,
reflecting this success. We see no fundamental problems with Carrefour but with
retail sales softening in France (still accounting for around 50% of Carrefour's
revenue) and the stock trading at a lofty 30x to 40x earnings, compared to a
typical earnings growth in the mid-teens range, we felt it was prudent to take
profits on this stock.
- --------------------------------------------------------------------------------
8 1997 Annual Report to Shareholders
<PAGE>
Getronics is the largest integrated computer services company in the
Netherlands. The company is recording strong earnings in its core business and
is using cash to make strategic acquisitions in the industry. Getronics fits
nicely with a number of other European information technology companies we own
(e.g., SAP in Germany) that are benefiting from greater use of computer services
in Europe. These changes include widespread restructuring of the corporate
sector to enhance productivity and gradual conversion to a single European
currency.
Other Markets
We continue to maintain a light representation in Latin America with roughly 5%
of the Portfolio's investments invested in the region. Because we believe that
other financial markets offer superior return potential, our exposure to Latin
American companies has been limited.
While the turmoil in Asia has caused many investors to reevaluate the benefits
of international investing, we think that they stand to benefit over time by
being patient and maintaining a long-term perspective.
Sincerely,
/s/ Jeffrey J. Russell /s/ James B. Conheady
Jeffrey J. Russell James B. Conheady
Vice President Vice President
December 4, 1997
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 9
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================================
Historical Performance - Class A Shares
================================================================================================================================
Net Asset Value
------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $18.64 $20.36 $0.01 $0.00 9.30%
- --------------------------------------------------------------------------------------------------------------------------------
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 $0.32 $0.26
================================================================================================================================
<CAPTION>
================================================================================================================================
Historical Performance - Class B Shares
================================================================================================================================
Net Asset Value
------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $18.65 $20.22 $0.00 $0.00 8.42%
- --------------------------------------------------------------------------------------------------------------------------------
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
================================================================================================================================
<CAPTION>
================================================================================================================================
Historical Performance - Class C Shares
================================================================================================================================
Net Asset Value
------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $18.38 $19.93 $0.00 $0.00 8.43%
- --------------------------------------------------------------------------------------------------------------------------------
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
================================================================================================================================
<CAPTION>
================================================================================================================================
Historical Performance - Class Y Shares
================================================================================================================================
Net Asset Value
------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $18.64 $20.38 $0.06 $0.00 9.68%
- --------------------------------------------------------------------------------------------------------------------------------
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 $0.44 $0.10
================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
10 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================================
Historical Performance - Class Z Shares
================================================================================================================================
Net Asset Value
------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $18.62 $20.36 $0.06 $0.00 9.69%
- --------------------------------------------------------------------------------------------------------------------------------
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 (5.03)+
================================================================================================================================
Total $0.44 $0.10
================================================================================================================================
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
<CAPTION>
====================================================================================================================================
Average Annual Total Return
====================================================================================================================================
Without Sales Charge(1)
-----------------------------------------------------------------------------------
Class A Class B Class C Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 10/31/97 9.30% 8.42% 8.43% 9.68% 9.69%
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 10/31/97 11.69 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 10/31/97 11.80 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 10/31/97 11.43 3.55 10.83 5.45 4.71
====================================================================================================================================
With Sales Charge(2)
-----------------------------------------------------------------------------------
Class A Class B Class C Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 10/31/97 3.85% 3.42% 7.43% 9.68% 9.69%
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 10/31/97 10.55 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 10/31/97 11.23 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 10/31/97 10.95 2.60 10.83 5.45 4.71
====================================================================================================================================
<CAPTION>
========================================================================================================================
Cumulative Total Return
========================================================================================================================
Without Sales Charge(1)
========================================================================================================================
<S> <C>
Class A (10/31/87 through 10/31/97) 205.07%
- ------------------------------------------------------------------------------------------------------------------------
Class B (Inception* through 10/31/97) 10.97
- ------------------------------------------------------------------------------------------------------------------------
Class C (Inception* through 10/31/97) 64.21
- ------------------------------------------------------------------------------------------------------------------------
Class Y (Inception* through 10/31/97) 19.64
- ------------------------------------------------------------------------------------------------------------------------
Class Z (Inception* through 10/31/97) 14.73
========================================================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%. Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from initial purchase. Thereafter this CDSC declines 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 February 18, 1986,
November 7, 1994, January 4, 1993, June 16, 1994 and November 7, 1994,
respectively. Class A share performance includes the return on the Fenimore
International Fund whose management was assumed by Smith Barney on November
22, 1991.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 11
<PAGE>
================================================================================
International Equity Portfolio at a Glance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of the
International Equity Portfolio vs. MSCI EAFE-GDP Weighted Index+
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
October 1987 -- October 1997
International MSCI EAFE-GDP
Date Equity Portfolio Weighted Index
- ---- ---------------- --------------
<S> <C> <C>
Aug 1994 $ 9,500 $10,000
Oct 1988 $10,695 $12,344
Oct 1989 $12,523 $13,854
Oct 1990 $12,749 $13,556
Oct 1991 $16,477 $14,047
Oct 1992 $16,764 $13,057
Oct 1993 $23,837 $17,864
Oct 1994 $26,230 $19,782
Oct 1995 $24,280 $19,962
Oct 1996 $26,654 $22,185
Oct 1997 $29,134 $24,134
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares on October
31, 1987, 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, 1997. The Morgan Stanley Capital
International ("MSCI") 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 as 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 value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
<TABLE>
<CAPTION>
================================================================================
Top Ten Holdings* As of October 31, 1997
================================================================================
<S> <C>
1. Nokia Oyj, Class A Shares 3.9%
- ---------------------------------------------------------------
2. Telefonaktiebolaget LM Ericsson, Class B Shares 3.9
- ---------------------------------------------------------------
3. Novartis AG, Registered Shares 3.6
- ---------------------------------------------------------------
4. SAP AG 3.1
- ---------------------------------------------------------------
5. Independent Newspapers PLC 2.5
- ---------------------------------------------------------------
6. SGL Carbon AG 2.5
- ---------------------------------------------------------------
7. NTT Data Corp. 2.2
- ---------------------------------------------------------------
8. Bank of Ireland 2.2
- ---------------------------------------------------------------
9. Grafton Group PLC 2.2
- ---------------------------------------------------------------
10. Rentokil Initial PLC 2.2
- ---------------------------------------------------------------
</TABLE>
* As a percentage of total stocks.
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
================================================================================
Investment Allocation** As of October 31, 1997
================================================================================
<S> <C>
Europe 69.3%
The Americas 5.2%
Asia/Pacific 20.9%
Africa 3.0%
Repurchase Agreement 1.6%
</TABLE>
** As a percentage of total investments.
- --------------------------------------------------------------------------------
12 1997 Annual Report to Shareholders
<PAGE>
================================================================================
International Balanced Portfolio
================================================================================
Portfolio Managers -- Stocks
JEFFREY J. RUSSELL, CFA JAMES B. CONHEADY
Portfolio Managers -- Bonds
VICTOR S. FILATOV DENIS P. MANGAN
Performance Update and Investment Strategy
As noted, the Smith Barney World Funds, Inc.--International Balanced Portfolio
("Portfolio") seeks long-term growth of capital and current income through a
balanced investment in the stocks and bonds 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. For the year ended October 31, 1997, the Portfolio returned -1.71% for
Class A shares. In comparison, the MSCI EAFE-GDP Weighted Index returned 4.92%
and the J.P. Morgan Global Bond Market Index (hedged) returned 10.58% for the
same period. Additional performance information about the Portfolio's other
share classes can be found on page 14. As of October 31, 1997, stocks
represented nearly 67% of the Portfolio's holdings and bonds made up roughly 25%
of its remaining investments.
Please note that the Portfolio utilizes a team management approach with the
stock portion managed by Jeff Russell and James Conheady (International Equity
Portfolio) and the bond portion managed by Victor Filatov and Denis Mangan
(Global Government Bond Portfolio). For a more in-depth discussion of economic
and market events during the reporting period, please refer to the Managers'
commentary for the International Equity Portfolio that starts on page 7 and the
Global Government Bond Portfolio, which can be found on pages 2 and 3.
Although the equity portion of the Portfolio is managed similarly to the
International Equity Portfolio, and the fixed-income portion is managed
similarly to the Global Government Bond Portfolio, there are some differences
due to, among other things, cash flow and the timing and availability of
investment opportunities. It is thus impossible to replicate performance. The
International Balanced Portfolio's underperformance was mainly due to the small-
and mid-cap emphasis of the equity portion of the Portfolio as large-cap stocks
continued to outperform.
We thank you for your investment in the Smith Barney World Funds, Inc. --
International Balanced Portfolio.
Sincerely,
/s/ James B. Conheady /s/ Jeffrey J. Russell
James B. Conheady Jeffrey J. Russell
Vice President Vice President
/s/ Victor S. Filatov /s/ Denis P. Mangan
Victor S. Filatov Denis P. Mangan
Vice President Vice President
November 21, 1997
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 13
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================================
Historical Performance - Class A Shares
================================================================================================================================
Net Asset Value
------------------------
Beginning End Income Return Total
Year Ended of Year of Year Dividends of Capital Returns(1)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $13.90 $13.32 $0.15 $0.20 (1.71)%
- --------------------------------------------------------------------------------------------------------------------------------
10/31/96 12.64 13.90 0.35 0.00 12.89
- --------------------------------------------------------------------------------------------------------------------------------
10/31/95 12.20 12.64 0.39 0.00 7.05
- --------------------------------------------------------------------------------------------------------------------------------
Inception*-- 10/31/94 12.00 12.20 0.00 0.00 1.67+
================================================================================================================================
Total $0.89 $0.20
================================================================================================================================
<CAPTION>
================================================================================================================================
Historical Performance - Class B Shares
================================================================================================================================
Net Asset Value
------------------------
Beginning End Income Return Total
Year Ended of Year of Year Dividends of Capital Returns(1)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $13.90 $13.38 $0.08 $0.10 (2.45)%
- --------------------------------------------------------------------------------------------------------------------------------
10/31/96 12.65 13.90 0.26 0.00 12.05
- --------------------------------------------------------------------------------------------------------------------------------
Inception*-- 10/31/95 12.08 12.65 0.29 0.00 7.33+
================================================================================================================================
Total $0.63 $0.10
================================================================================================================================
<CAPTION>
================================================================================================================================
Historical Performance - Class C Shares
================================================================================================================================
Net Asset Value
------------------------
Beginning End Income Return Total
Year Ended of Year of Year Dividends of Capital Returns(1)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $13.87 $13.35 $0.08 $0.10 (2.46)%
- --------------------------------------------------------------------------------------------------------------------------------
10/31/96 12.63 13.87 0.26 0.00 11.99
- --------------------------------------------------------------------------------------------------------------------------------
10/31/95 12.18 12.63 0.29 0.00 6.29
- --------------------------------------------------------------------------------------------------------------------------------
Inception*-- 10/31/94 12.00 12.18 0.00 0.00 1.50+
================================================================================================================================
Total $0.63 $0.10
================================================================================================================================
<CAPTION>
================================================================================================================================
Historical Performance - Class Y Shares
================================================================================================================================
Net Asset Value
------------------------
Beginning End Income Return Total
Year Ended of Year of Year Dividends of Capital Returns(1)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $13.93 $13.35 $0.18 $0.23 (1.28)%
- --------------------------------------------------------------------------------------------------------------------------------
Inception*-- 10/31/96 13.15 13.93 0.29 0.00 8.21+
================================================================================================================================
Total $0.47 $0.23
================================================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends quarterly and capital gains, if
any, annually.
- --------------------------------------------------------------------------------
14 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Average Annual Total Return
====================================================================================================================================
Without Sales Charge(1)
---------------------------------------------------------------
Class A Class B Class C Class Y
====================================================================================================================================
<S> <C> <C> <C> <C>
Year Ended 10/31/97 (1.71)% (2.45)% (2.46)% (1.28)%
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 10/31/97 6.10 5.50 5.29 3.88
====================================================================================================================================
With Sales Charge(2)
---------------------------------------------------------------
Class A Class B Class C Class Y
====================================================================================================================================
Year Ended 10/31/97 (6.62)% (7.27)% (3.42)% (1.28)%
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 10/31/97 4.41 4.58 5.29 3.88
====================================================================================================================================
<CAPTION>
========================================================================================================================
Cumulative Total Return
========================================================================================================================
Without Sales Charge(1)
========================================================================================================================
<S> <C>
Class A (Inception* through 10/31/97) 20.76%
- ------------------------------------------------------------------------------------------------------------------------
Class B (Inception* through 10/31/97) 17.31
- ------------------------------------------------------------------------------------------------------------------------
Class C (Inception* through 10/31/97) 17.84
- ------------------------------------------------------------------------------------------------------------------------
Class Y (Inception* through 10/31/97) 6.82
========================================================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares. (2) Assumes reinvestment of all dividends and capital gain
distributions, if any, at net asset value. In addition, Class A shares
reflect the deduction of the maximum initial sales charge of 5.00%; Class B
shares reflect the deduction of a 5.00% CDSC, which applies if shares are
redeemed within one year from initial purchase. Thereafter, this CDSC
declines 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.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 15
<PAGE>
================================================================================
International Balanced Portfolio at a Glance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A and C Shares of the International Balanced
Portfolio vs. MSCI EAFE-GDP Weighted Index and J.P. Morgan Global Bond Market
Index+
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
August 1994 -- October 1997
International Balanced International Balanced
Portfolio - Portfolio - MSCI EAFE-GDP
Date Class A Shares Class C Shares Weighted Index
- ---- ---------------------- ---------------------- --------------
<S> <C> <C> <C>
Aug 1994 $ 9,550 $10,000 $10,000
Oct 1994 $ 9,706 $10,050 $ 9,960
Oct 1995 $10,390 $10,788 $ 9,563
Oct 1996 $11,730 $12,081 $10,607
Oct 1997 $11,529 $11,784 $11,539
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A and C shares at
inception on August 25, 1994, assuming deduction of the maximum 4.50% sales
charge at the time of investment for Class A shares and the deduction of
the 1.00% CDSC for Class C shares. It also assumes reinvestment of
dividends and capital gains, if any, at net asset value through October 31,
1997. The Morgan Stanley Capital International ("MSCI") 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 Market Index-Unhedged 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 as a mutual fund. The performance of the Portfolio's other
classes may be greater or less than the Class A and C 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.
<TABLE>
<CAPTION>
================================================================================
Top Ten Holdings* As of October 31, 1997
================================================================================
<S> <C>
1. Japanese Government 6.6%
- ---------------------------------------------------------------
2. U.S. Treasury Notes 4.0
- ---------------------------------------------------------------
3. Deutschland Republic 3.9
- ---------------------------------------------------------------
4. Buoni Poliennali del Tesoro 3.6
- ---------------------------------------------------------------
5. Santa Fe International Corp. 3.1
- ---------------------------------------------------------------
6. Novartis AG, Registered Shares 2.9
- ---------------------------------------------------------------
7. Telecomunicacoes Brasileiras SA ADR 2.8
- ---------------------------------------------------------------
8. Telecom Italia Mobile S.p.A. 2.7
- ---------------------------------------------------------------
9. United Kingdom Treasury 2.6
- ---------------------------------------------------------------
10. NTT Data Corp. 2.5
- ---------------------------------------------------------------
</TABLE>
* As a percentage of total stocks and bonds.
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
================================================================================
Investment Allocation** As of October 31, 1997
================================================================================
<S> <C>
Europe 57.2%
The Americas 12.2%
Asia/Pacific 22.6%
Repurchase Agreement 8.0%
</TABLE>
** As a percentage of total investments.
- --------------------------------------------------------------------------------
16 1997 Annual Report to Shareholders
<PAGE>
================================================================================
A Roundtable Discussion with Portfolio Managers Jeff Russell and Victor Filatov
================================================================================
ASIA [MAP]
"It's always a negative event that causes global markets to go down in tandem.
The recent turmoil in Asia was one negative event waiting to happen. After a
period of very strong returns around the world, many investors were waiting for
an excuse to sell."
JEFF RUSSELL
Portfolio Manager
International Equity Portfolio
What happened in Asia?
Jeff: The Asia crisis was triggered by a concerted run on the currency in
Thailand, which has been linked to the U.S. dollar for a number of years. The
Thai economy has become increasingly uncompetitive as the U.S. dollar
strengthened over the last two years. Exports slowed down considerably, but the
Thais still retained their great relish and desire to import specialty luxury
and capital goods, which led to an ever-increasing current accounts deficit--the
very same policy disaster that eventually engulfed Mexico in late 1994.
After making a successful run at the Thai currency, aggressive investors went
after the currencies in Malaysia, the Philippines and Indonesia, all of which
have been forced to devalue. Even Singapore, which is by far the strongest
economy in Southeast Asia, fell prey to currency speculators. Taiwan decided to
let its currency go as well, and there has recently been a concerted assault on
the Hong Kong dollar, which has been pegged to the U.S. dollar since 1983.
In order to defend their currencies, Asian monetary authorities have raised
interest rates very aggressively. For example, overnight interest rates in Hong
Kong have risen by 2% or 3% in an effort to stem speculation. Higher interest
rates tend to depress economic activity, and fears of an Asian economic slowdown
quickly rippled through markets around the world.
Jeff, does this mean that global markets are beginning to converge?
Jeff: We have seen in the past where political shocks, whether it be the Kuwaiti
invasion by Saddam Hussein or Mikhail Gorbachev dealing with civil unrest, have
led to sharp global corrections occurring in tandem.
Yet, it's always bad news that leads to a temporary convergence among the global
economies. There's never a "melt up" when good things happen, which sends
markets throughout the world up 10%. It's always a negative event that causes
global markets to go down in tandem. The recent turmoil in Asia was one negative
event waiting to happen. After a period of very strong returns in markets around
the world, many investors were waiting for an excuse to sell.
Victor, how did the events in Asia impact the Global Government Bond Portfolio?
Victor: We were very fortunate to have liquidated all of our emerging market
bonds, except for some very short-term holdings, by October 24, 1997 -- two days
before the big collapse on Monday, October 27th. We view our emerging market
investments as opportunistic. If they offer good value against the U.S. Treasury
bond market, then we will invest in emerging market debt. Earlier that week, we
began to see trouble developing that we didn't quite understand at the time and
so we sold our positions. We believe that whenever a currency crisis appears,
it's more prudent to get out of those problem areas because it will probably get
worse before it gets better.
That said, I don't think that the full impact of the Asian crisis is understood
yet and its long-term ramifications are still a question mark. In my opinion,
the Asian crisis is a major financial calamity in a part of the world where no
one expected it to happen. My chief concern now is that Asia's economies will
not recover as quickly as the economies of Latin America, if for no other reason
than their greater investment in infrastructure.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 17
<PAGE>
What are the long-term prospects for Asian stocks and Asian growth rates?
Jeff: First, we think expectations of Gross Domestic Product growth rates of 7%
to 8% per year will get ratcheted down. And whether it slows to 4% or 2% or even
0%, comparatively, it will feel like a recession. Nevertheless, our long-term
outlook for these countries remains very positive. Asian countries boast a very
high personal savings rates and these countries possess a very strong work ethic
- -- two characteristics that should serve them well in the future.
Victor: If there aren't opportunities now, then there probably will be. However,
I would like to point out that our philosophy dictates that we don't take
speculative positions in those troubled Asian currencies. The Global Government
Bond Portfolio is guided by a conservative investment discipline and
concentrates on high-grade government bonds while attempting to minimize
currency risk.
Jeff, are you finding buying opportunities in the wake of the collapse of Asian
financial markets?
Jeff: We certainly think there will be some great buying opportunities in these
markets over the next six to twelve months. You can now buy Asian stocks at
valuations that we have not seen in the last ten years. The same can't be said
for Latin America, the United States or Europe. These stocks have been
pyschologically beat up and are quite inexpensive right now from a valuation
standpoint.
EUROPE [MAP]
"I'm a little perplexed by the the strength of the U.S. dollar versus the core
European currencies like the deutschmark. In the aftermath of the Asian crisis,
I would have thought that the European markets would have been the preferred
safe haven over the U.S. bond market because those economies rely less on Asian
trade."
VICTOR FILATOV
Portfolio Manager
Global Government Bond Portfolio
How has the continued strength of the U.S. dollar affected European markets?
Jeff: The continued strength of the U.S. dollar has been beneficial for Europe
simply because Europe is a significant exporter. For example, the sharp
appreciation of the U.S. dollar against the German mark has made German industry
much more competitive. After having been depressed for a couple of years, German
industry, which is the great economic locomotive of continental Europe, is
starting to accelerate.
Victor: I agree with Jeff, although I'm a little perplexed by the recent
strength of the U.S. dollar versus the core European currencies like the
deutschmark. In the aftermath of the Asian crisis, I would have thought that
European markets would have been the preferred safe haven over the U.S. bond
market because those economies rely less on Asian trade.
Why did European financial markets react to the collapse of Asia?
Jeff: That is one of the unanswered questions of the day. Certainly, if you're a
Swiss investor or a German investor and you've made 30% or 40% for the year or
you're a first-time investor in the markets and you read all these scary
headlines, then you may be tempted to take some money off the table. But we
don't see any particular event in Asia that should substantially affect European
industry and its general prospects in the region.
- --------------------------------------------------------------------------------
18 1997 Annual Report to Shareholders
<PAGE>
Voters in both Great Britain and France returned more labor-oriented governments
to power, partially in response to the high unemployment in those countries.
Have these political developments threatened the European Monetary Union
("EMU")?
Victor: I think it is quite interesting that the Labor government has turned out
to be much more like the Conservative government than anyone expected. Since the
elections, things have gone very well. I also think that it's clear that the
U.K. will become part of the EMU, but probably not until early next century.
Overall, I think the English government has turned out to be a pleasant surprise
for most investors.
Jeff: You're correct in pointing out that we have had a general change in
governments from rather conservative representation in the U.K. to a more
energetic, Clintonian-style government. And yet, economic policies have remained
the same for the most part.
Similarly, in France, there was a lot of socialistic rhetoric going into the
campaign. But we don't think they will do anything that will imperil investment
potential there. At the same time, planned French initiatives such as an
increase in corporate tax rates or shorter work weeks aren't the kind of events
that make us terribly excited about committing new resources to the French stock
market.
So you remain generally positive regarding Europe and its future prospects?
Jeff: Generally speaking, we are very positive on Europe. Currently, we have
about two-thirds of the International Equity Portfolio's assets invested in
Europe. Moreover, we have tended to favor the "fringe" economies such as Ireland
or Sweden over the larger countries of France, Germany and the U.K because we
believe they offer greater growth potential.
In our opinion, ongoing corporate restructuring and a favorable interest rate
environment continue to make Europe a very attractive investment opportunity. In
addition, we think we're witnessing a substantial change in the demand for
stocks now that government bond rates have declined from their double-digit
rates of return. In response, more and more resources are being committed to
Europe's capital markets.
EMERGING MARKETS [MAP]
"It was only a matter of time before Latin America became embroiled in the
sell-off. We think the lesson for investors is that the laws of the business
cycle have not been repealed and that successful investing still requires a
long-term investment horizon and patience."
JEFF RUSSELL
Portfolio Manager
International Equity Portfolio
Many Latin American countries have been enjoying exceptionally strong economic
recoveries recently. How do you view their future prospects?
Jeff: Many Latin countries have had a good rebound following the Mexican peso
devaluation in late 1994 and early 1995. That crisis caused not only Mexico to
fall but also put the economic powerhouses of Brazil and Argentina into a long
recession.
However, since 1996, those countries have experienced an export-led rebound with
a recovery in domestic consumer demand as well. Generally speaking, we remain
cautiously upbeat on Latin America. As noted earlier, Latin American markets
were affected by the Asian sell-off just like the Asian nations were affected by
the Latin sell-off in late 1994.
Why was Latin America affected by events in Asia?
Jeff: When there's a pullback in the emerging markets--and the Latin American
markets are still classified as emerging markets--they all tend to get hit. And
because the Asian markets are a significant component of the emerging markets,
it was only a matter of time before Latin America became embroiled in the
sell-off. We think the lesson for investors is that the laws of the business
cycle have not been repealed and that successful investing still requires a
long-term investment horizon and patience.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 19
<PAGE>
The Brazilian economic recovery had been an emerging market success story before
the recent global instability. What are the prospects for this Latin American
leader in the aftermath of the Asian crisis?
Jeff: The Brazilian economy is currently under a little bit of a cloud because
the Brazilians had linked their currency to the U.S. dollar. Even though they
had been extraordinarily successful in bringing down inflation, Brazil's
currency has strengthened. This stronger Brazilian currency has in turn raised
concerns about the country's export competitiveness.
Brazilian policymakers have taken the usual policy prescriptions, such as
pushing up interest rates quite aggressively to keep capital in the country.
Will they be able to maintain the currency link to the U.S. dollar? Honestly, we
don't know. It may be only a matter of time before they will be forced to
devalue their currency. But we doubt this will be a dramatic currency
devaluation.
Gentlemen, thank you for spending time with us today.
- --------------------------------------------------------------------------------
20 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedules of Investments October 31, 1997
====================================================================================================================================
GLOBAL GOVERNMENT BOND PORTFOLIO
FACE
AMOUNT+ SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
BONDS -- 87.0%
Australia -- 2.2%
3,600,000 Australian Government, 10.000% due 2/15/06 $ 3,209,812
- ------------------------------------------------------------------------------------------------------------------------------------
Belgium -- 4.3%
200,000,000 Kingdom of Belgium, 9.000% due 6/27/01 6,379,497
- ------------------------------------------------------------------------------------------------------------------------------------
Finland -- 1.8%
12,000,000 Finnish Government, 10.000% due 9/15/01 2,709,727
- ------------------------------------------------------------------------------------------------------------------------------------
Germany -- 9.6%
24,000,000 Deutschland Republic, 6.000% due 7/4/07 14,339,202
- ------------------------------------------------------------------------------------------------------------------------------------
Ireland -- 4.1%
4,000,000 Ireland Treasury, 6.250% due 4/1/99 6,084,180
- ------------------------------------------------------------------------------------------------------------------------------------
Italy -- 5.3%
Buoni Poliennali del Tesoro:
7,550,000,000 6.000% due 2/15/00 4,524,237
5,540,000,000 6.750% due 2/1/07 3,410,239
- ------------------------------------------------------------------------------------------------------------------------------------
7,934,476
- ------------------------------------------------------------------------------------------------------------------------------------
Japan -- 14.1%
2,415,000,000 Japanese Government, Series 195, 2.400% due 6/20/07 21,041,644
- ------------------------------------------------------------------------------------------------------------------------------------
Spain -- 4.2%
Bonos Y Oblig del Estado:
770,000,000 6.750% due 4/15/00 5,501,930
90,000,000 8.800% due 4/30/06 735,522
- ------------------------------------------------------------------------------------------------------------------------------------
6,237,452
- ------------------------------------------------------------------------------------------------------------------------------------
Sweden -- 0.8%
8,300,000 Swedish Government, 6.000% due 2/9/05 1,094,697
- ------------------------------------------------------------------------------------------------------------------------------------
United Kingdom -- 6.0%
5,100,000 United Kingdom Treasury, 7.250% due 12/7/07 8,982,449
- ------------------------------------------------------------------------------------------------------------------------------------
United States -- 34.6%
2,500,000 Gas Argentino SA, 7.250% due 12/7/98++ 2,495,793
2,162,429 Russia GKO Loan Participation, zero coupon due 4/8/98++ 2,065,719
U.S. Treasury Notes:
8,500,000 6.250% due 1/31/02+++ 8,647,390
14,600,000 6.500% due 10/15/06 15,170,714
14,000,000 6.250% due 2/15/07 14,334,600
8,600,000 6.125% due 8/15/07 8,792,554
- ------------------------------------------------------------------------------------------------------------------------------------
51,506,770
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BONDS
(Cost-- $128,307,372) 129,519,906
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 21
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedules of Investments (continued) October 31, 1997
====================================================================================================================================
GLOBAL GOVERNMENT BOND PORTFOLIO
FACE
AMOUNT SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
REPURCHASE AGREEMENT -- 13.0%
$19,350,000 CIBC Wood Gundy Securities Inc., 5.590% due 11/3/97;
Proceeds at maturity -- $19,359,014; (Fully collateralized by
U.S. Treasury Notes, 6.125% due 5/15/98;
Market value -- $19,737,453) (Cost -- $19,350,000) $ 19,350,000
====================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $147,657,372**) $148,869,906
====================================================================================================================================
</TABLE>
+ Represents local currency.
++ U.S. dollar denominated security.
+++ Security is segregated by Custodian for open forward foreign currency
contracts.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
22 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedule of Investments (continued) October 31, 1997
====================================================================================================================================
INTERNATIONAL EQUITY PORTFOLIO
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
STOCKS -- 98.4%
Australia -- 1.4%
2,455,287 Coca-Cola Amatil Ltd. $ 18,518,843
- ------------------------------------------------------------------------------------------------------------------------------------
Austria -- 1.6%
86,180 VA Technologie AG 15,316,620
85,000 Wolford AG 6,174,674
- ------------------------------------------------------------------------------------------------------------------------------------
21,491,294
- ------------------------------------------------------------------------------------------------------------------------------------
Belgium -- 1.3%
85,000 Barco NV 16,397,944
- ------------------------------------------------------------------------------------------------------------------------------------
Brazil -- 3.0%
507,100 Petroleo Brasileiro SA ADR 10,073,440
200,000 Telecomunicacoes Brasileiras SA ADR 20,300,000
325,000 Uniao de Banco Brasileiro SA GDR* 8,856,250
- ------------------------------------------------------------------------------------------------------------------------------------
39,229,690
- ------------------------------------------------------------------------------------------------------------------------------------
Finland -- 3.9%
80,000 Nokia Corp., Class A Shares ADR 7,060,000
500,000 Nokia Oyj, Class A Shares 44,125,000
- ------------------------------------------------------------------------------------------------------------------------------------
51,185,000
- ------------------------------------------------------------------------------------------------------------------------------------
France -- 0.7%
230,000 Companie Generale de Geophysique SA* 6,440,000
300,000 EDAP TMS SA ADR* 2,100,000
- ------------------------------------------------------------------------------------------------------------------------------------
8,540,000
- ------------------------------------------------------------------------------------------------------------------------------------
Germany -- 7.8%
198,360 Leica Camera AG 4,581,261
200,000 SAP AG Preferred ADR 19,900,000
67,000 SAP AG, Preferred Non-Voting Shares 20,028,761
225,000 SGL Carbon AG 32,094,300
55,000 Volkswagen AG, Preferred Non-Voting Shares 25,341,351
- ------------------------------------------------------------------------------------------------------------------------------------
101,945,673
- ------------------------------------------------------------------------------------------------------------------------------------
Hong Kong -- 4.1%
4,133,000 China Resources Enterprises Ltd. 11,335,740
11,088,350 Hong Kong & China Gas Co. Ltd. 20,944,422
3,000,000 Hutchison Whampoa Ltd. 20,764,603
- ------------------------------------------------------------------------------------------------------------------------------------
53,044,765
- ------------------------------------------------------------------------------------------------------------------------------------
India -- 1.7%
20,000 The India Magnum Fund, Class B Shares* 950,000
900,000 Larsen & Toubro Ltd. GDR 9,450,000
166,667 Mahindra & Mahindra Ltd. GDR 1,750,003
990,877 Mahindra & Mahindra Ltd. GDR++ 10,032,630
- ------------------------------------------------------------------------------------------------------------------------------------
22,182,633
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 23
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedules of Investments (continued) October 31, 1997
====================================================================================================================================
INTERNATIONAL EQUITY PORTFOLIO
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Ireland -- 9.4%
2,254,421 Bank of Ireland $ 28,556,723
1,411,976 Grafton Group PLC 28,145,207
3,081,248 Greencore Group PLC 14,462,471
5,483,227 Independent Newspapers PLC 32,170,817
1,569,263 Irish Continental Group PLC 19,122,383
- ------------------------------------------------------------------------------------------------------------------------------------
122,457,601
- ------------------------------------------------------------------------------------------------------------------------------------
Israel -- 2.0%
550,000 Teva Pharmaceutical Industries Ltd. ADR 25,712,500
- ------------------------------------------------------------------------------------------------------------------------------------
Italy -- 1.8%
2,000 Luxottica Group S.p.A. ADR 127,750
6,250,000 Telecom Italia Mobile S.p.A. 23,111,854
- ------------------------------------------------------------------------------------------------------------------------------------
23,239,604
- ------------------------------------------------------------------------------------------------------------------------------------
Japan -- 10.9%
833,000 Canon, Inc. 20,224,162
500 Matsushita-Kotobuki Electronics Industries Ltd. 15,548
472,000 Murata Manufacturing Co., Ltd. 19,151,576
308,000 Noritsu Koki Co. Ltd. 10,243,619
600 NTT Data Corp. 28,685,458
260,000 Rohm Co. Ltd. 25,725,451
67,000 Shohkoh Fund & Co., Ltd. 21,726,116
2,163,000 Sumitomo Realty & Development Co., Ltd. 15,808,406
- ------------------------------------------------------------------------------------------------------------------------------------
141,580,336
- ------------------------------------------------------------------------------------------------------------------------------------
Malaysia -- 0.4%
1,500,000 Pacific & Orient Berhad 1,432,836
6,600,000 Sungei Way Holdings Berhad 4,334,328
517,750 Sungei Way Holdings Berhad Warrants, Expire 6/29/99* 102,004
- ------------------------------------------------------------------------------------------------------------------------------------
5,869,168
- ------------------------------------------------------------------------------------------------------------------------------------
Mexico -- 2.2%
2,550,644 Gruma SA, Class B Shares* 9,935,998
600,000 Panamerican Beverages Inc. 18,600,000
- ------------------------------------------------------------------------------------------------------------------------------------
28,535,998
- ------------------------------------------------------------------------------------------------------------------------------------
Netherlands -- 7.1%
602,777 Getronics NV 19,909,314
420,936 Hunter Douglas NV 17,351,925
406,349 IHC Caland NV 25,000,294
2,000,000 ING Groep NV Warrants, Expire 3/15/01* 20,600,814
38,900 Royal Dutch Petroleum Co. 2,058,551
61,100 Royal Dutch Petroleum Co., N.Y. Registered Shares 3,215,388
185,000 Unique International NV 4,604,267
- ------------------------------------------------------------------------------------------------------------------------------------
92,740,553
- ------------------------------------------------------------------------------------------------------------------------------------
Norway -- 3.7%
750,000 Smedvig ASA, Class B Shares 22,069,537
1,000,000 Tomra Systems ASA 25,712,082
- ------------------------------------------------------------------------------------------------------------------------------------
47,781,619
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
- --------------------------------------------------------------------------------
24 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedules of Investments (continued) October 31, 1997
====================================================================================================================================
INTERNATIONAL EQUITY PORTFOLIO
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Poland -- 2.4%
112,849 Bank Slaski SA $ 6,573,414
429,418 Debica SA 11,336,142
1,500,000 Elektrim Spolka Akcyjna SA 14,117,647
- ------------------------------------------------------------------------------------------------------------------------------------
32,027,203
- ------------------------------------------------------------------------------------------------------------------------------------
Singapore -- 0.4%
2,067,000 Cerebos Pacific Ltd. 5,282,479
- ------------------------------------------------------------------------------------------------------------------------------------
South Africa -- 3.0%
2,735,000 Dimension Data Holdings Ltd.* 11,366,234
90,000 Investec Group Ltd. 3,497,143
622,400 Investec Holdings Ltd. 23,951,892
- ------------------------------------------------------------------------------------------------------------------------------------
38,815,269
- ------------------------------------------------------------------------------------------------------------------------------------
Spain -- 1.5%
700,000 Telefonica de Espana 19,118,052
- ------------------------------------------------------------------------------------------------------------------------------------
Sweden -- 9.1%
1,342,853 Astra AB, Class A Shares 21,710,437
625,000 Autoliv Inc. 24,648,438
200,000 Munters AB* 2,030,945
1,025,000 Nobel Biocare AB 13,284,653
300,000 Pricer AB, Class B Shares* 6,974,693
1,144,000 Telefonaktiebolaget LM Ericsson, Class B Shares 50,442,265
- ------------------------------------------------------------------------------------------------------------------------------------
119,091,431
- ------------------------------------------------------------------------------------------------------------------------------------
Switzerland -- 5.0%
29,866 Novartis AG, Registered Shares 46,903,565
2,000 Roche Holdings AG 17,623,890
2,000 Roche Holdings AG Warrants, Expire 5/5/98* 128,903
- ------------------------------------------------------------------------------------------------------------------------------------
64,656,358
- ------------------------------------------------------------------------------------------------------------------------------------
Thailand -- 0.0%
1,307,800 Finance One Public Co. Ltd.* 108,386
31 Saha Pathana International Holding Public Co. Ltd. 47
- ------------------------------------------------------------------------------------------------------------------------------------
108,433
- ------------------------------------------------------------------------------------------------------------------------------------
United Kingdom -- 14.0%
2,500,000 Compass Group PLC 26,306,302
2,029,147 Dixons Group PLC 23,631,529
752,500 Hays PLC 8,795,192
290,886 Misys Jersey Ltd.* 7,231,420
1,023,067 Misys PLC 25,776,540
1,198,557 Powerscreen International PLC 14,018,739
7,000,000 Rentokil Initial PLC 28,054,466
400,000 Reuters Holdings PLC ADR 26,300,000
1,600,000 Serco Group PLC 22,202,099
- ------------------------------------------------------------------------------------------------------------------------------------
182,316,287
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKS
(Cost -- $920,223,055) 1,281,868,733
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 25
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedules of Investments (continued) October 31, 1997
====================================================================================================================================
INTERNATIONAL EQUITY PORTFOLIO
FACE AMOUNE SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
REPURCHASE AGREEMENT-- 1.6%
$21,270,000 CIBC Wood Gundy Securities Inc., 5.590% due 11/3/97;
Proceeds at maturity -- $21,279,908; (Fully collateralized
by U.S. Treasury Notes, 6.125% due 5/15/98;
Market value -- $21,695,619) (Cost -- $21,270,000) $ 21,270,000
====================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $941,493,055**) $1,303,138,733
====================================================================================================================================
</TABLE>
* Non-income producing security.
++ Security is exempt from registration under Rule 144A of the Securities
Exchange Act of 1933. This security may be resold in transactions that are
exempt from registration to qualified institutional buyers.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
26 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedules of Investments (continued) October 31, 1997
====================================================================================================================================
INTERNATIONAL BALANCED PORTFOLIO
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
STOCKS -- 66.6%
Australia -- 2.9%
122,596 Coca-Cola Amatil Ltd. $ 924,672
237,000 Henry Walker Group Ltd. 359,182
300,000 Portman Mining Ltd. 475,808
- ------------------------------------------------------------------------------------------------------------------------------------
1,759,662
- ------------------------------------------------------------------------------------------------------------------------------------
Austria -- 3.3%
7,000 VA Technologie AG 1,244,098
10,000 Wolford AG 726,432
- ------------------------------------------------------------------------------------------------------------------------------------
1,970,530
- ------------------------------------------------------------------------------------------------------------------------------------
Brazil -- 4.5%
25,000 Petroleo Brasileiro SA ADR 496,620
15,000 Telecomunicacoes Brasileiras SA ADR 1,522,500
25,000 Uniao de Banco Brasileiro SA ADR* 681,250
- ------------------------------------------------------------------------------------------------------------------------------------
2,700,370
- ------------------------------------------------------------------------------------------------------------------------------------
Cayman Islands -- 2.9%
35,000 Santa Fe International Corp. 1,721,563
- ------------------------------------------------------------------------------------------------------------------------------------
Finland -- 1.8%
12,000 Nokia Oyj, Class A Shares 1,059,000
- ------------------------------------------------------------------------------------------------------------------------------------
France -- 1.5%
10,000 Schlumberger Ltd. 875,000
- ------------------------------------------------------------------------------------------------------------------------------------
Germany -- 3.5%
2,000 ProSieben Media AG Preferred* 99,355
6,000 SGL Carbon AG 855,848
2,500 Volkswagen AG Preferred 1,151,880
- ------------------------------------------------------------------------------------------------------------------------------------
2,107,083
- ------------------------------------------------------------------------------------------------------------------------------------
Hong Kong -- 3.1%
209,000 China Resources Enterprises Ltd. 573,232
237,607 Hong Kong & China Gas Co. Ltd. 448,808
125,000 Hutchison Whampoa Ltd. 865,192
- ------------------------------------------------------------------------------------------------------------------------------------
1,887,232
- ------------------------------------------------------------------------------------------------------------------------------------
Ireland -- 3.9%
75,000 Bank of Ireland 950,024
560 CRH PLC 6,740
102,722 Greencore Group PLC 482,147
150,000 Independent Newspapers PLC 880,070
- ------------------------------------------------------------------------------------------------------------------------------------
2,318,981
- ------------------------------------------------------------------------------------------------------------------------------------
Italy -- 2.5%
400,000 Telecom Italia Mobile S.p.A. 1,479,159
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 27
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedules of Investments (continued) October 31, 1997
====================================================================================================================================
INTERNATIONAL BALANCED PORTFOLIO
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Japan -- 6.5%
30,000 Canon Inc. $ 728,361
15,000 Murata Manufacturing Co. Ltd. 608,631
15,000 Noritsu Koki Co. Ltd. 498,878
29 NTT Data Corp. 1,386,464
90,000 Sumitomo Realty & Development Co., Ltd. 657,770
- ------------------------------------------------------------------------------------------------------------------------------------
3,880,104
- ------------------------------------------------------------------------------------------------------------------------------------
Malaysia -- 0.7%
400,000 Bandar Raya Developments Berhad 175,522
358,000 Sungei Way Holdings Berhad 235,104
- ------------------------------------------------------------------------------------------------------------------------------------
410,626
- ------------------------------------------------------------------------------------------------------------------------------------
Mexico -- 1.2%
180,000 Gruma SA de CV, Class B Shares* 701,188
- ------------------------------------------------------------------------------------------------------------------------------------
Netherlands -- 6.1%
20,312 Hunter Douglas NV 837,306
22,238 IHC Caland NV 1,368,175
25,656 ING Groep NV 1,077,428
3,000 Wolters Kluwer NV 368,527
- ------------------------------------------------------------------------------------------------------------------------------------
3,651,436
- ------------------------------------------------------------------------------------------------------------------------------------
Norway -- 3.2%
40,000 Smedvig ASA, Class B Shares 1,177,042
30,000 Tomra Systems ASA 771,362
- ------------------------------------------------------------------------------------------------------------------------------------
1,948,404
- ------------------------------------------------------------------------------------------------------------------------------------
Singapore -- 0.4%
100,000 Cerebos Pacific Ltd. 255,563
583 Jardine Matheson Holdings Ltd.* 3,731
- ------------------------------------------------------------------------------------------------------------------------------------
259,294
- ------------------------------------------------------------------------------------------------------------------------------------
Spain -- 1.0%
10,000 Banco Popular Espanol SA 590,947
- ------------------------------------------------------------------------------------------------------------------------------------
Sweden -- 5.3%
26,667 Astra AB, Class A Shares 431,130
20,000 Autoliv Inc. 788,750
10,000 Munters AB* 101,547
15,000 Pricer AB, Class B Shares* 348,735
15,000 Prosolvia AB, Class B Shares* 517,089
22,000 Telefonaktiebolaget LM Ericsson ADR 973,500
- ------------------------------------------------------------------------------------------------------------------------------------
3,160,751
- ------------------------------------------------------------------------------------------------------------------------------------
Switzerland -- 2.6%
1,000 Novartis AG, Registered Shares 1,570,467
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
28 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedules of Investments (continued) October 31, 1997
====================================================================================================================================
INTERNATIONAL BALANCED PORTFOLIO
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
United Kingdom -- 9.7%
150,000 Boxmore International PLC $ 690,462
100,000 Compass Group PLC 1,052,252
33,500 Hays PLC 391,547
8,571 Misys Jersey Ltd.* 213,075
30,146 Misys PLC 759,539
101,123 Powerscreen International PLC 1,182,770
7,500 Reuters Holdings PLC ADR 493,125
75,000 Serco Group PLC 1,040,723
- ------------------------------------------------------------------------------------------------------------------------------------
5,823,493
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKS
(Cost -- $36,532,114) 39,875,290
====================================================================================================================================
<CAPTION>
FACE
AMOUNT+ SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
BONDS -- 25.4%
Australia -- 1.0%
800,000 Australian Government, 8.750% due 1/15/01 620,876
- ------------------------------------------------------------------------------------------------------------------------------------
Finland -- 0.4%
1,000,000 Finnish Government, 7.250% due 4/18/06 211,901
- ------------------------------------------------------------------------------------------------------------------------------------
Germany -- 3.6%
3,600,000 Deutschland Republic, 6.000% due 7/4/07+++ 2,150,880
- ------------------------------------------------------------------------------------------------------------------------------------
Ireland -- 1.8%
700,000 Ireland Treasury, 6.250% due 4/1/99 1,064,731
- ------------------------------------------------------------------------------------------------------------------------------------
Italy -- 3.3%
Buoni Poliennali del Tesoro:
2,480,000,000 6.000% due 2/15/00 1,486,107
830,000,000 6.750% due 2/1/07 510,920
- ------------------------------------------------------------------------------------------------------------------------------------
1,997,027
- ------------------------------------------------------------------------------------------------------------------------------------
Japan -- 6.1%
420,000,000 Japanese Government, Series 195, 2.400% due 6/20/07+++ 3,659,416
- ------------------------------------------------------------------------------------------------------------------------------------
Spain -- 0.6%
45,000,000 Bonos Y Oblig de Estado, 8.800% due 4/30/06+++ 367,761
- ------------------------------------------------------------------------------------------------------------------------------------
Sweden -- 0.8%
3,500,000 Swedish Government, 6.000% due 2/9/05 461,619
- ------------------------------------------------------------------------------------------------------------------------------------
United Kingdom -- 2.4%
800,000 United Kingdom Treasury, 7.250% due 12/7/07+++ 1,409,012
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
SMITH BARNEY WORLD FUNDS, INC. 29
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedules of Investments (continued) October 31, 1997
====================================================================================================================================
INTERNATIONAL BALANCED PORTFOLIO
FACE
AMOUNT+ SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
United States -- 5.4%
1,081,215 Russia GKO Loan Participation, zero coupon due 4/8/98++ $ 1,032,860
U.S. Treasury Notes:
1,550,000 6.125% due 8/15/07+++ 1,584,705
600,000 6.375% due 8/15/27+++ 618,258
- ------------------------------------------------------------------------------------------------------------------------------------
3,235,823
- ------------------------------------------------------------------------------------------------------------------------------------
Venezuela -- 0.0%
7,140 Republic of Venezuela, Warrants due 4/15/20 0
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BONDS
(Cost -- $14,937,585) 15,179,046
====================================================================================================================================
SUB-TOTAL INVESTMENTS
(Cost -- $51,469,699) 55,054,336
====================================================================================================================================
REPURCHASE AGREEMENT -- 8.0%
4,790,000 CIBC Wood Gundy Securities Inc., 5.590% due 11/3/97;
Proceeds at maturity -- $4,792,231; (Fully collateralized
by U.S. Treasury Notes, 6.125% due 5/15/98;
Market value -- $4,885,912) (Cost -- $4,790,000) 4,790,000
====================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $56,259,699**) $59,844,336
====================================================================================================================================
</TABLE>
* Non-income producing security.
+ Represents local currency.
+++ Security is segregated by Custodian for open forward foreign currency
contracts.
++ U.S. dollar denominated security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
1997 Annual Report to Shareholders 30
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Statments of Assets and Liabilities October 31, 1997
====================================================================================================================================
Global
Government International International
Bond Equity Balanced
Portfolio Portfolio Portfolio
====================================================================================================================================
<S> <C> <C> <C>
ASSETS:
Investments -- Cost $128,307,372 $ 920,223,055 $51,469,699
Repurchase agreements -- Cost 19,350,000 21,270,000 4,790,000
Foreign currency -- Cost 272,084 42,246 --
- ------------------------------------------------------------------------------------------------------------------------------------
Investments, at value $129,519,906 $1,281,868,733 $55,054,336
Repurchase agreements, at value 19,350,000 21,270,000 4,790,000
Foreign currency, at value 277,824 41,361 --
Cash 50,940 82,174 119,030
Receivable for Fund shares sold 11,066,547 23,124,965 1,627,921
Receivable for securities sold 8,949,694 15,217,848 4,196,033
Dividends and interest receivable 2,428,296 1,571,518 341,476
Receivable for open forward foreign currency contracts (Note 4) 684,104 26,795 366,345
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets 172,327,311 1,343,203,394 66,495,141
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 23,532,907 8,756,092 4,035,500
Payable for open forward foreign currency contracts (Note 4) 1,713,399 64,843 403,847
Dividend payable 430,525 -- --
Management fees payable 95,245 1,033,706 45,872
Payable for Fund shares purchased 85,290 1,140,625 17,193
Foreign currency payable to bank, at value -- -- 6,696
Distribution fees payable 8,857 300,581 2,769
Accrued expenses 460,405 1,553,195 76,328
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 26,326,628 12,849,042 4,588,205
- ------------------------------------------------------------------------------------------------------------------------------------
Total Net Assets $146,000,683 $1,330,354,352 $61,906,936
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Par value of capital shares $ 11,982 $ 65,617 $ 4,639
Capital paid in excess of par value 140,975,795 1,056,417,906 59,193,886
Overdistributed net investment income (38,960) (13,763,580) --
Accumulated net realized gain (loss) from security
transactions, options and foreign currencies 5,345,595 (73,986,082) (842,942)
Net unrealized appreciation (depreciation) of investments
and foreign currencies (293,729) 361,620,491 3,551,353
- ------------------------------------------------------------------------------------------------------------------------------------
Total Net Assets $146,000,683 $1,330,354,352 $61,906,936
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
Class A 7,768,799 22,828,652 831,246
-------------------------------------------------------------------------------------------------------------------------------
Class B 1,611,342 11,429,950 359,856
-------------------------------------------------------------------------------------------------------------------------------
Class C 267,085 10,079,153 272,843
-------------------------------------------------------------------------------------------------------------------------------
Class Y 2,335,045 14,811,154 3,174,625
-------------------------------------------------------------------------------------------------------------------------------
Class Z -- 6,468,269 --
-------------------------------------------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $12.22 $20.36 $13.32
-------------------------------------------------------------------------------------------------------------------------------
Class B* $12.22 $20.22 $13.38
-------------------------------------------------------------------------------------------------------------------------------
Class C** $12.19 $19.93 $13.35
-------------------------------------------------------------------------------------------------------------------------------
Class Y (and redemption price) $12.03 $20.38 $13.35
-------------------------------------------------------------------------------------------------------------------------------
Class Z (and redemption price) -- $20.36 --
-------------------------------------------------------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $12.80 -- --
(net asset value plus 5.26% of net asset value per share) -- $21.43 $14.02
====================================================================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC for
Global Government Bond Portfolio, and by a 5.00% CDSC for International
Equity and International Balanced Portfolios 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.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 31
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Statments of Operations October 31, 1997
====================================================================================================================================
Global
Government International International
Bond Equity Balanced
Portfolio Portfolio Portfolio
====================================================================================================================================
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 9,097,438 $ 1,042,920 $ 1,308,980
Dividend 5,130 16,523,842 427,159
Less: Foreign withholding tax -- (1,689,178) (39,433)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Income 9,102,568 15,877,584 1,696,706
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 1,123,627 11,766,569 471,084
Distribution fees (Note 2) 444,509 5,919,905 133,470
Shareholder and system servicing fees 151,035 1,272,711 44,498
Registration fees 90,001 246,633 97,000
Custody 53,999 808,216 56,296
Audit and Legal 32,501 70,846 32,500
Shareholder communications 26,399 161,813 18,513
Directors' fees 7,500 44,897 4,651
Other 6,902 32,610 18,498
- ------------------------------------------------------------------------------------------------------------------------------------
Total Expenses 1,936,473 20,324,200 876,510
- ------------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 7,166,095 (4,446,616) 820,196
- ------------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS AND FOREIGN
CURRENCIES (NOTES 3, 4 AND 5):
Net Realized Gain (Loss) From:
Security transactions 5,040,925 8,376,599 (779,177)
Options purchased 51,000 -- 87,977
Options written -- -- 24,650
Foreign currency transactions 2,536,849 (2,031,792) (719,784)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) 7,628,774 6,344,807 (1,386,334)
- ------------------------------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments and Foreign Currencies:
Beginning of year 2,729,431 236,284,616 4,042,657
End of year (293,729) 361,620,491 3,551,353
- ------------------------------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation) (3,023,160) 125,335,875 (491,304)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Gain (Loss) on Investments, Options and Foreign Currencies 4,605,614 131,680,682 (1,877,638)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations $11,771,709 $127,234,066 $(1,057,442)
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
32 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Statments of Changes in Net Assets October 31, 1997
====================================================================================================================================
Global
Government International International
Bond Equity Balanced
Portfolio Portfolio Portfolio
====================================================================================================================================
<S> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ 7,166,095 $ (4,446,616) $ 820,196
Net realized gain (loss) 7,628,774 6,344,807 (1,386,334)
Increase (decrease) in net unrealized appreciation (3,023,160) 125,335,875 (491,304)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations 11,771,709 127,234,066 (1,057,442)
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (14,761,484) (1,479,385) (584,276)
Net realized gains (895,628) -- --
Capital -- -- (771,507)
- ------------------------------------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (15,657,112) (1,479,385) (1,355,783)
- ------------------------------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares 48,612,809 1,530,238,808 27,220,805
Net asset value of shares issued
for reinvestment of dividends 8,530,565 1,110,321 442,806
Cost of shares reacquired (58,854,085) (1,602,262,084) (8,973,657)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
From Fund Share Transactions (1,710,711) (70,912,955) 18,689,954
- -------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (5,596,114) 54,841,726 16,276,729
NET ASSETS:
Beginning of year 151,596,797 1,275,512,626 45,630,207
- ------------------------------------------------------------------------------------------------------------------------------------
End of year* $146,000,683 $1,330,354,352 $61,906,936
====================================================================================================================================
* Includes overdistributed net
investment income of: $(38,960) $(13,763,580) --
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 33
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Statments of Changes in Net Assets October 31, 1997
====================================================================================================================================
Global
Government International International
Bond Equity Balanced
Portfolio Portfolio Portfolio
====================================================================================================================================
<S> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ 8,559,776 $ (269,174) $ 653,494
Net realized gain 9,468,200 6,128,621 582,875
Increase (decrease) in net unrealized appreciation (4,222,849) 98,809,008 2,640,474
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 13,805,127 104,668,455 3,876,843
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (10,527,150) (8,277,473) (813,403)
- ------------------------------------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (10,527,150) (8,277,473) (813,403)
- ------------------------------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares 22,772,237 947,882,501 23,961,742
Net asset value of shares issued
for reinvestment of dividends 6,565,761 7,626,220 554,791
Cost of shares reacquired (44,297,898) (823,699,952) (6,997,464)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
From Fund Share Transactions (14,959,900) 131,808,769 17,519,069
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (11,681,923) 228,199,751 20,582,509
NET ASSETS:
Beginning of year 163,278,720 1,047,312,875 25,047,698
- ------------------------------------------------------------------------------------------------------------------------------------
End of year* $151,596,797 $1,275,512,626 $45,630,207
====================================================================================================================================
* Includes undistributed (overdistributed)
net investment income of: $4,968,580 $(14,136,552) $334,918
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
34 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
1. Significant Accounting Policies
The Global Government Bond, International Equity and International Balanced
Portfolios ("Portfolios") are separate investment 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: Emerging Markets, European and Pacific Portfolios. The
financial statements and financial highlights for the other portfolios are
presented in a separate annual report.
The significant accounting policies consistently followed by the Portfolios are:
(a) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing prices on the primary
exchange on which they are traded; securities listed or traded on certain
foreign exchanges or other markets whose operations are similar to the U.S.
over-the-counter market (including securities listed on exchanges where the
primary market is believed to be over-the-counter) and securities for which no
sales price 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 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 an accrual
basis; (f) dividend income is recorded on the ex-dividend date; foreign dividend
income is recorded on the ex-dividend date or as soon as practical after the
Portfolio determines the existence of a dividend declaration after exercising
reasonable due diligence; (g) direct expenses are charged to each Portfolio and
each class; management fees and general Fund 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 each Portfolio
are maintained in U.S. dollars. All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars on the date of valuation.
Purchases and sales of securities, and income and expenses are translated at the
rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income or expense amounts recorded and collected
or paid are adjusted when reported by the custodian; (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, 1997, reclassifications were made to the capital accounts of the
Portfolios to reflect permanent book/tax differences and income and gains
available for distributions under tax regulations. Net investment income, net
realized gains and net assets were not affected by these changes; (k) each
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 each Portfolio
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
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 35
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
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 Global
Government Bond Portfolio pays SBMFM a management fee calculated at an annual
rate of 0.75% of the average daily net assets of the portfolio. The
International Equity and International Balanced Portfolios pay SBMFM a
management fee calculated at an annual rate of 0.85% of the average daily net
assets of each respective portfolio. These fees are calculated daily and paid
monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of the
Fund's shares. SB received sales charges of approximately $656,000 on sales of
the Portfolios' Class A shares for the year ended October 31, 1997. In addition,
SB received total brokerage commissions of $52,098 from the International Equity
and International Balanced Portfolios.
For the Global Government Portfolio, 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. For the
International Equity and International Balanced Portfolios, there is a CDSC of
5.00% on Class B shares, which applies if redemption occurs within one year from
initial purchase. Thereafter this CDSC declines by 1.00% per year until no CDSC
is incurred. Class C shares for each Portfolio have a 1.00% CDSC, which applies
if redemption occurs within the first year of purchase. In addition, Class A
shares for each Portfolio 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 that equal or exceed $500,000 in the aggregate. These purchases
do not incur an initial sales charge.
For the year ended October 31, 1997, CDSCs paid to SB were approximately:
<TABLE>
<CAPTION>
Portfolio Class A Class B Class C
- ------------------------------------------------------------------
<S> <C>
Global Government Bond -- $ 41,000 --
- ------------------------------------------------------------------
International Equity $2,000 608,000 $15,000
- ------------------------------------------------------------------
International Balanced -- 17,000 --
- ------------------------------------------------------------------
</TABLE>
Pursuant to a Distribution Plan, the Portfolios pay a service fee with respect
to Class A, B and C shares calculated at an annual rate of 0.25% of the average
daily net assets of each respective class's shares. The Global Government Bond
Portolio pays a distribution fee with respect to Class B and C shares calculated
at the annual rates of 0.50% and 0.45% of the average daily net assets of each
class, respectively. The International Equity and International Balanced
Portfolios pay a distribution fee with respect to Class B and C shares
calculated at an annual rate of 0.75% of the average daily net assets for each
respective Portfolio and class. For the year ended October 31, 1997, total
Distribution Plan fees incurred by the Portfolios were:
<TABLE>
<CAPTION>
Portfolio Class A Class B Class C
- ------------------------------------------------------------------
<S> <C> <C> <C>
Global Government Bond $ 249,862 $ 169,569 $ 25,078
- ------------------------------------------------------------------
International Equity 1,282,917 2,375,547 2,261,441
- ------------------------------------------------------------------
International Balanced 34,903 56,286 42,281
- ------------------------------------------------------------------
</TABLE>
All officers and two Directors of the Fund are employees of SB.
- --------------------------------------------------------------------------------
36 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
3. Investments
During the year ended October 31, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<CAPTION>
Portfolio Purchases Sales
================================================================================
<S> <C> <C>
Global Government Bond $491,891,621 $504,150,639
- --------------------------------------------------------------------------------
International Equity 469,863,382 572,295,776
- --------------------------------------------------------------------------------
International Balanced 116,598,465 100,096,430
================================================================================
</TABLE>
At October 31, 1997, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
<TABLE>
<CAPTION>
Net Unrealized
Portfolio Appreciation Depreciation Appreciation
================================================================================
<S> <C> <C> <C>
Global Government Bond $ 3,407,014 $ (2,194,480) $ 1,212,534
- --------------------------------------------------------------------------------
International Equity 427,548,771 (65,903,093) 361,645,678
- --------------------------------------------------------------------------------
International Balanced 7,785,817 (4,201,180) 3,584,637
================================================================================
</TABLE>
4. Forward Foreign Currency Contracts
At October 31, 1997, 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 were as follows:
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
================================================================================================
<S> <C> <C> <C> <C> <C>
Global Government Bond Portfolio
To Buy:
Danish Krone 28,180,000 $ 4,304,720 11/14/97 $ 88,050
German Deutschemark 26,337,600 15,309,019 11/7/97 309,019
German Deutschemark 17,300,000 10,059,921 11/14/97 100,221
Irish Punt 300,000 451,200 11/14/97 11,700
Swedish Krona 24,660,000 3,296,534 11/14/97 27,278
- ------------------------------------------------------------------------------------------------
536,268
- ------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 37
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Notes to Financial Statements (continued)
====================================================================================================================================
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
====================================================================================================================================
<S> <C> <C> <C> <C>
Global Government Bond Portfolio
To Sell:
Australian Dollar 4,550,000 $ 3,208,198 11/14/97 $ 147,836
Belgian Franc 235,400,000 6,630,044 11/14/97 (104,208)
British Pound 5,610,000 9,401,698 11/14/97 (311,030)
Danish Krone 30,000,000 4,582,739 11/14/97 (75,866)
Finnish Markka 14,300,000 2,769,867 11/14/97 (43,824)
German Deutschemark 14,507,625 8,432,716 11/7/97 (182,716)
German Deutschemark 10,548,720 6,131,559 11/7/97 (131,559)
German Deutschemark 18,500,000 10,757,720 11/14/97 (170,622)
Irish Punt 4,500,000 6,767,997 11/14/97 (217,797)
Italian Lira 13,700,000,000 8,102,098 11/14/97 (154,725)
Japanese Yen 2,520,000,000 20,994,850 11/14/97 (63,053)
Spanish Peseta 945,000,000 6,502,218 11/14/97 (106,105)
Swedish Krona 33,870,000 4,527,721 11/14/97 (151,894)
- ------------------------------------------------------------------------------------------------------------------------------------
(1,565,563)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Unrealized Loss on
Forward Foreign Currency Contracts $(1,029,295)
====================================================================================================================================
International Equity Portfolio
To Buy:
British Pound 833,246 $ 1,397,085 11/3/97 $ 9,981
British Pound 1,968,969 3,301,042 11/5/97 6,367
British Pound 1,201,091 2,013,582 11/6/97 7,040
British Pound 1,218,302 2,038,522 11/7/97 (1,160)
- ------------------------------------------------------------------------------------------------------------------------------------
22,228
- ------------------------------------------------------------------------------------------------------------------------------------
To Sell:
Dutch Guilder 10,625,946 5,476,304 11/3/97 (40,954)
Dutch Guilder 6,973,173 3,593,770 11/3/97 (22,729)
Dutch Guilder 9,434,769 4,862,698 11/4/97 3,407
- ------------------------------------------------------------------------------------------------------------------------------------
(60,276)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Unrealized Loss on
Forward Foreign Currency Contracts $ (38,048)
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
38 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Notes to Financial Statements (continued)
====================================================================================================================================
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
====================================================================================================================================
<S> <C> <C> <C> <C>
International Balanced Portfolio
To Buy:
British Pound 36,228 $ 60,743 11/3/97 $ 434
British Pound 85,608 143,524 11/5/97 277
British Pound 54,907 92,049 11/6/97 322
British Pound 55,694 93,190 11/7/97 (53)
British Pound 220,000 368,630 11/18/97 14,430
Canadian Dollar 1,700,000 1,207,596 11/18/97 (24,288)
German Deutschemark 7,600,000 4,420,419 11/18/97 67,613
German Deutschemark 1,750,000 1,017,860 11/18/97 10,375
German Deutschemark 14,140,000 8,234,918 12/10/97 234,918
Italian Lira 910,000,000 538,099 11/18/97 16,106
Japanese Yen 240,000,000 2,000,655 11/18/97 655
Spanish Peseta 64,000,000 440,383 11/18/97 7,600
Swedish Krona 2,870,000 383,713 11/18/97 3,179
- ------------------------------------------------------------------------------------------------------------------------------------
331,568
- ------------------------------------------------------------------------------------------------------------------------------------
To Sell:
Australian Dollar 520,000 366,681 11/18/97 9,747
Dutch Guilder 218,650 112,686 11/3/97 (713)
Dutch Guilder 318,007 163,892 11/3/97 (1,226)
Dutch Guilder 392,741 202,419 11/4/97 142
Finnish Markka 1,140,000 220,871 11/18/97 (2,647)
German Deutschemark 960,000 558,369 11/18/97 (16,394)
German Deutschemark 14,278,400 8,315,520 12/10/97 (315,520)
Irish Punt 730,000 1,097,838 11/18/97 (29,118)
Italian Lira 1,200,000,000 709,581 11/18/97 (13,888)
Swedish Krona 3,200,000 427,833 11/18/97 547
- ------------------------------------------------------------------------------------------------------------------------------------
(369,070)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Unrealized Loss on
Forward Foreign Currency Contracts $ (37,502)
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 39
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
5. Option 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 amount of the premium originally paid. When the Portfolio exercises a call
option, the cost of the security that the Portfolio purchases upon exercise will
be increased by the permium originally paid.
At October 31, 1997, the Portfolios had no open purchased options.
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. When the Portfolio enters into a closing purchase transaction, the
Portfolio realizes a gain or loss depending upon whether the cost of the closing
transaction is greater or less than the premium originally received, without
regard to any unrealized gain or loss on the underlying security, and the
liability related to such option is eliminated. When a written call option is
exercised the cost of the security sold will be decreased by the premium
originally received. When a written put option is exercised, the amount of the
premium originally received will reduce the cost of the security which the
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, 1997:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
========================================================================================
<S> <C> <C>
Global Government Bond Portfolio
Options written, outstanding at October 31, 1996 0 $ --
Options written during the year ended October 31, 1997 1 60,000
Options cancelled in closing purchase transactions (1) (60,000)
- ----------------------------------------------------------------------------------------
Options written, outstanding at October 31, 1997 0 $--
========================================================================================
International Balanced Portfolio
Options written, outstanding at October 31, 1996 0 $ --
Options written during the year ended October 31, 1997 2 28,175
Options cancelled in closing purchase transactions (2) (28,175)
- ----------------------------------------------------------------------------------------
Options written, outstanding at October 31, 1997 0 $--
========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
40 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
6. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized
as assets. Securities equal to the initial margin amount are segregated by the
custodian in the name of the broker. Additional securities are also segregated
up to the current market value of the futures contract. During the period the
futures contract is open, changes in the value of the contract are recognized as
unrealized gains or losses by "marking-to-market" on a daily basis to reflect
the market value of the contract at the end of each day's trading. Variation
margin payments are received or made and recognized as assets due from or
liabilities due to broker, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Portfolio records a realized gain or
loss equal to the difference between the proceeds from (or cost of) the closing
transactions and the Portfolio's basis in the contract.
The Portfolio enters into such contracts to hedge a portion of its portfolio.
The Portfolio bears the market risk that arises from changes in the value of the
financial instruments and securities indices (futures contracts).
At October 31, 1997, the Portfolios had no open futures contracts.
7. Concentration of Risk
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.
In addition to the risks described above, risks may arise from forward foreign
currency contracts with respect to the potential inability of counterparties to
meet the terms of their contracts.
8. Capital Loss Carryforwards
At October 31, 1997, the International Equity and International Balanced
Portfolios had, for Federal income tax purposes, approximately $73,386,000 and
$855,000, 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 be distributed. The
amount and date of expiration of the carryforward losses for each Portfolio is
indicated below:
<TABLE>
<CAPTION>
Portfolio 10/31/03 10/31/04 10/31/05 Total
====================================================================================================================
<S> <C> <C> <C> <C>
International Equity $73,386,000 -- -- $73,386,000
- --------------------------------------------------------------------------------------------------------------------
International Balanced 176,000 $2,000 $677,000 855,000
====================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 41
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
9. Capital Shares
At October 31, 1997, 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.
At October 31, 1997, total paid-in capital amounted to the following for each
Portfolio:
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Portfolio Class A Class B Class C Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Global Government Bond $ 90,922,788 $ 18,055,523 $ 3,517,283 $ 28,492,183 --
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity 300,944,682 194,705,514 171,629,552 277,150,312 $112,053,463
- ------------------------------------------------------------------------------------------------------------------------------------
International Balanced 8,866,439 4,373,557 3,079,646 42,878,883 --
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1997 October 31, 1996
-------------------------------------- -----------------------------------
Shares Amount Shares Amount
====================================================================================================================================
<S> <C> <C> <C> <C>
Global Government Bond Portfolio
Class A
Shares sold 265,104 $ 3,204,232 489,319 $ 6,083,120
Shares issued on reinvestment 541,805 6,590,007 396,504 4,899,900
Shares redeemed (1,524,120) (18,624,678) (2,475,502) (30,710,185)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Decrease (717,211) $ (8,830,439) (1,589,679) $(19,727,165)
====================================================================================================================================
Class B
Shares sold 64,923 $ 793,716 121,679 $ 1,505,000
Shares issued on reinvestment 135,302 1,645,186 117,711 1,449,119
Shares redeemed (666,502) (8,130,886) (1,030,724) (12,706,817)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Decrease (466,277) $ (5,691,984) (791,334) $ (9,752,698)
====================================================================================================================================
Class C
Shares sold 10,626 $ 129,906 33,934 $ 417,363
Shares issued on reinvestment 24,330 295,171 17,412 213,650
Shares redeemed (87,408) (1,058,665) (70,458) (867,055)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Decrease (52,452) $ (633,588) (19,112) $ (236,042)
====================================================================================================================================
Class Y
Shares sold 3,699,552 $ 44,484,955 1,214,448 $ 14,766,754
Shares issued on reinvestment 16 201 253 3,092
Shares redeemed (2,583,197) (31,039,856) (1,138) (13,841)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 1,116,371 $ 13,445,300 1,213,563 $ 14,756,005
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
42 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Notes to Financial Statements (continued)
====================================================================================================================================
Year Ended Year Ended
October 31, 1997 October 31, 1996
-------------------------------------- -----------------------------------
Shares Amount Shares Amount
====================================================================================================================================
<S> <C> <C> <C> <C>
International Equity Portfolio
Class A
Shares sold 57,094,304 $ 1,163,554,103 29,809,743 $ 540,225,017
Shares issued on reinvestment 17,813 341,833 270,352 4,617,617
Shares redeemed 61,845,885) (1,267,607,993) (31,054,593) (565,101,407)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Decrease (4,733,768) $ (103,712,057) (974,498) $ (20,258,773)
====================================================================================================================================
Class B
Shares sold 9,244,231 $ 186,954,945 12,723,350 $ 229,942,996
Shares issued on reinvestment -- -- 19,196 330,185
Shares redeemed (9,196,821) (187,319,844) (8,709,898) (158,190,577)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) 47,410 $ (364,899) 4,032,648 $ 72,082,604
====================================================================================================================================
Class C
Shares sold 2,741,869 $ 54,441,240 2,740,842 $ 48,948,469
Shares issued on reinvestment -- -- 34,000 576,308
Shares redeemed (5,148,932) (102,729,446) (4,471,834) (79,543,267)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Decrease (2,407,063) $ (48,288,206) (1,696,992) $ (30,018,490)
====================================================================================================================================
Class Y
Shares sold 5,446,442 $ 109,870,065 5,706,318 $ 105,704,162
Shares issued on reinvestment 19,699 377,231 54,561 928,635
Shares redeemed (1,408,249) (29,325,663) (676,092) (12,631,569)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 4,057,892 $ 80,921,633 5,084,787 $ 94,001,228
====================================================================================================================================
Class Z
Shares sold 773,118 $ 15,418,455 1,285,495 $ 23,061,857
Shares issued on reinvestment 20,453 391,257 68,987 1,173,475
Shares redeemed (737,233) (15,279,138) (455,720) (8,233,132)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 56,338 $ 530,574 898,762 $ 16,002,200
====================================================================================================================================
International Balanced Portfolio
Class A
Shares sold 61,050 $ 843,398 136,189 $ 1,791,427
Shares issued on reinvestment 23,664 326,084 29,395 391,488
Shares redeemed (412,944) (5,716,189) (403,806) (5,337,395)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Decrease (328,230) $ (4,546,707) (238,222) $ (3,154,480)
====================================================================================================================================
Class B
Shares sold 105,395 $ 1,461,573 211,895 $ 2,785,875
Shares issued on reinvestment 4,766 65,979 5,840 78,180
Shares redeemed (128,598) (1,788,817) (81,609) (1,097,160)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (18,437) $ (261,265) 136,126 $ 1,766,895
====================================================================================================================================
Class C
Shares sold 24,414 $ 338,448 45,360 $ 593,585
Shares issued on reinvestment 3,674 50,743 6,383 85,123
Shares redeemed (106,214) (1,468,651) (42,497) (562,896)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (78,126) $ (1,079,460) 9,246 $ 115,812
====================================================================================================================================
Class Y
Shares sold 1,782,664 $ 24,577,386 1,391,962 $ 18,790,855
Shares redeemed -- -- (1) (13)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 1,782,664 $ 24,577,386 1,391,961 $ 18,790,842
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 43
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================================
Financial Highlights
==================================================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class A Shares
------------------------------------------------------------------
Global Government Bond Portfolio 1997(1) 1996(1) 1995 1994(2) 1993
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.55 $12.30 $11.68 $12.92 $11.84
- ----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.59 0.70 0.92* 0.69 0.83
Net realized and unrealized gain (loss) 0.38 0.42 0.48 (1.28) 1.36
- ----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.97 1.12 1.40 (0.59) 2.19
- ----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income(3) (1.22) (0.87) (0.78) (0.23) (0.52)
Net realized gains (0.08) -- -- -- (0.59)
Capital -- -- -- (0.42) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.30) (0.87) (0.78) (0.65) (1.11)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.22 $12.55 $12.30 $11.68 $12.92
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return 8.21% 9.41% 12.40% (4.64)%++ 19.13%
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $94,957 $106,536 $123,917 $77,961 $107,415
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 1.26% 1.26% 1.38% 1.32%+ 1.30%
Net investment income 4.82 5.69 7.44 6.57+ 6.67
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 367% 133% 195% 179% 119%
==================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from January 1, 1994 to October 31, 1994.
(3) Distributions from net investment income include short-term capital gains,
if any, for Federal income tax purposes.
(4) During the years ended October 31, 1996 and October 31, 1995, the Portfolio
had earned credits from the custodian which reduced service fees incurred.
If the credits are taken into consideration, the expense ratios for Class A
would have been 1.24% and 1.32%, respectively; numbers prior to October 31,
1995 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.
- --------------------------------------------------------------------------------
44 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================
Financial Highlights (continued)
=====================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class B Shares
-----------------------------------------------
Global Government Bond Portfolio 1997(1) 1996(1) 1995(2)
=====================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $ 12.50 $ 12.26 $ 11.57
- -------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.52 0.63 0.78*
Net realized and unrealized gain 0.38 0.42 0.57
- -------------------------------------------------------------------------------------
Total Income From Operations 0.90 1.05 1.35
- -------------------------------------------------------------------------------------
Less Distributions From:
Net investment income(3) (1.10) (0.81) (0.66)
Net realized gains (0.08) -- --
- -------------------------------------------------------------------------------------
Total Distributions (1.18) (0.81) (0.66)
- -------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.22 $ 12.50 $ 12.26
- -------------------------------------------------------------------------------------
Total Return 7.62% 8.83% 11.97%++
- -------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 19,690 $ 25,970 $ 35,159
- -------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 1.80% 1.81% 1.92%+
Net investment income 4.24 5.15 6.65+
- -------------------------------------------------------------------------------------
Portfolio Turnover Rate 367% 133% 195%
=====================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from November 18, 1994 (inception date) to October 31, 1995.
(3) Distributions from net investment income include short-term capital gains,
if any, for Federal income tax purposes.
(4) During the year ended October 31, 1996 and the period ended October 31,
1995, the Portfolio had earned credits from the custodian which reduced
service fees incurred. If the credits are taken into consideration, the
expense ratios for Class B would have been 1.78% and 1.86% (annualized),
respectively; numbers prior to October 31, 1995 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.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 45
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================
Financial Highlights (continued)
=================================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class C Shares
--------------------------------------------------------------------
Global Government Bond Portfolio 1997(1) 1996(1) 1995(2) 1994(3) 1993(4)
=================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 12.47 $ 12.23 $ 11.68 $ 12.93 $ 11.83
- -----------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.53 0.64 0.85* 0.90 0.79
Net realized and unrealized gain (loss) 0.38 0.41 0.42 (1.55) 1.37
- -----------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.91 1.05 1.27 (0.65) 2.16
- -----------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income(5) (1.11) (0.81) (0.72) (0.21) (0.47)
Net realized gains (0.08) -- -- -- (0.59)
Capital -- -- -- (0.39) --
- -----------------------------------------------------------------------------------------------------------------
Total Distributions (1.19) (0.81) (0.72) (0.60) (1.06)
- -----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.19 $ 12.47 $ 12.23 $ 11.68 $ 12.93
- -----------------------------------------------------------------------------------------------------------------
Total Return 7.73% 8.90% 11.25% (5.09)%++ 18.89%++
- -----------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 3,257 $ 3,986 $ 4,141 $ 5,835 $ 4,972
- -----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(6) 1.69% 1.74% 1.84% 1.80%+ 1.74%+
Net investment income 4.33 5.22 7.15 6.05+ 6.28+
- -----------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 367% 133% 195% 179% 119%
=================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(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,
if any, for Federal income tax purposes.
(6) During the years ended October 31, 1996 and October 31, 1995, the Portfolio
had earned credits from the custodian which reduced service fees incurred.
If the credits are taken into consideration, the expense ratios for Class C
would have been 1.71% and 1.78%, respectively; numbers prior to October 31,
1995 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.
- -------------------------------------------------------------------------------
46 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================
Financial Highlights (continued)
=================================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class Y Shares
--------------------------------------------------------------------
Global Government Bond Portfolio 1997(1) 1996(1) 1995(2) 1994(3) 1993(4)
=================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 12.39 $ 12.14 $ 11.68 $ 12.93 $ 11.97
- -----------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.63 0.73 0.78* 0.76 0.69
Net realized and unrealized gain (loss) 0.37 0.42 0.49 (1.35) 1.23
- -----------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.00 1.15 1.27 (0.59) 1.92
- -----------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income(5) (1.28) (0.90) (0.81) (0.23) (0.37)
Net realized gains (0.08) -- -- -- (0.59)
Capital -- -- -- (0.43) --
- -----------------------------------------------------------------------------------------------------------------
Total Distributions (1.36) (0.90) (0.81) (0.66) (0.96)
- -----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.03 $ 12.39 $ 12.14 $ 11.68 $ 12.93
- -----------------------------------------------------------------------------------------------------------------
Total Return 8.61% 9.82% 11.27% (4.62)%++ 16.49%++
- -----------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 28,097 $ 15,105 $ 62 $ 3,202 $ 371
- -----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(6) 0.89% 0.84% 0.98% 1.23%+ 1.20%+
Net investment income 5.19 6.12 6.38 6.76+ 6.73+
- -----------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 367% 133% 195% 179% 119%
=================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(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 income include short-term capital gains,
if any, for Federal income tax purposes.
(6) During the years ended October 31, 1996 and October 31, 1995, the Portfolio
had earned credits from the custodian which reduced service fees incurred.
If the credits are taken into consideration, the expense ratios for Class Y
would have been 0.81% and 0.93%, respectively; numbers prior to October 31,
1995 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.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 47
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
Financial Highlights (continued)
===========================================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class A Shares
------------------------------------------------------------------------------
International Equity Portfolio 1997(1) 1996(1) 1995 1994(2)(3) 1993
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 18.64 $ 17.15 $ 18.79 $ 18.71 $ 12.35
- ---------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss) (0.04) 0.01 0.08* (0.01) (0.01)
Net realized and unrealized gain (loss) 1.77 1.65 (1.50) 0.09 6.53
- ---------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.73 1.66 (1.42) 0.08 6.52
- ---------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income(4) (0.01) (0.17) (0.12) -- --
Net realized gains (0.10) -- (0.16)
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.01) (0.17) (0.22) -- (0.16)
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 20.36 $ 18.64 $ 17.15 $ 18.79 $ 18.71
- ---------------------------------------------------------------------------------------------------------------------------
Total Return 9.30% 9.78% (7.44)% 0.43%++ 52.78%
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 464,796 $ 513,870 $ 489,533 $ 591,598 $ 355,926
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(5) 1.31% 1.35% 1.36% 1.35%+ 1.35%
Net investment income (loss) (0.18) 0.17 0.50 (0.05)+ (0.10)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 35% 46% 42% 35% 27%
- ---------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(6)(7) $ 0.03 $ 0.02 $ 0.01 -- --
===========================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(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,
if any, for Federal income tax purposes.
(5) During the years ended October 31, 1996 and October 31, 1995, the Portfolio
had earned credits from the custodian which reduced service fees incurred.
If the credits are taken into consideration, the expense ratios for Class A
would have been 1.29% and 1.28%, respectively; numbers prior to October 31,
1995 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.
(7) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commission on trades executed outside these
countries are generally executed as a percentage of cost or proceeds
ranging from 0.5% to 1.0%.
* 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.
- --------------------------------------------------------------------------------
48 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================
Financial Highlights (continued)
===============================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class B Shares
--------------------------------------------------
International Equity Portfolio 1997(1) 1996(1) 1995(2)
===============================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $ 18.65 $ 17.17 $ 18.38
- -----------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss) (0.20) (0.08) 0.06*
Net realized and unrealized gain (loss) 1.77 1.60 (1.17)
- -----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.57 1.52 (1.11)
- -----------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income(3) -- (0.04) --
Net realized gains -- -- (0.10)
- -----------------------------------------------------------------------------------------------
Total Distributions -- (0.04) (0.10)
- -----------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 20.22 $ 18.65 $ 17.17
- -----------------------------------------------------------------------------------------------
Total Return 8.42% 8.89% (6.00)%++
- -----------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 231,148 $ 212,294 $ 126,171
- -----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 2.11% 2.11% 2.13%+
Net investment income (loss) (0.95) (0.58) 0.34+
- -----------------------------------------------------------------------------------------------
Portfolio Turnover Rate 35% 46% 42%
- -----------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(5)(6) $ 0.03 $ 0.02 $ 0.01
===============================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from November 7, 1994 (inception date) to October 31, 1995.
(3) Distributions from net investment income included short-term capital gains,
if any, for Federal income tax purposes.
(4) During the year ended October 31, 1996 and the period ended October 31,
1995, the Portfolio had earned credits from the custodian which reduced
service fees incurred. If the credits are taken into consideration, the
expense ratios for Class B would have been 2.04% and 2.04% (annualized),
respectively.
(5) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(6) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commission on trades executed outside these
countries are generally executed as a percentage of cost or proceeds
ranging from 0.5% to 1.0%.
* 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.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 49
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
Financial Highlights (continued)
===========================================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class C Shares
------------------------------------------------------------------------------
International Equity Portfolio 1997(1) 1996(1) 1995(2) 1994(3) 1993(4)
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 18.38 $ 16.93 $ 18.54 $ 18.58 $ 12.35
- ---------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss) (0.22) (0.13) (0.06)* (0.11) 0.14
Net realized and unrealized gain (loss) 1.77 1.62 (1.45) 0.07 6.25
- ---------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.55 1.49 (1.51) (0.04) 6.39
- ---------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income(5) -- (0.04) -- -- --
Net realized gains -- -- (0.10) -- (0.16)
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions -- (0.04) (0.10) -- (0.16)
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 19.93 $ 18.38 $ 16.93 $ 18.54 $ 18.58
- ---------------------------------------------------------------------------------------------------------------------------
Total Return 8.43% 8.85% (8.11)% (0.22)%++ 51.73%++
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 200,849 $ 229,514 $ 240,090 $ 287,458 $ 114,951
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(6) 2.12% 2.15% 2.16% 2.10%+ 2.14%+
Net investment loss (0.97) (0.63) (0.34) (0.77)+ (1.08)+
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 35% 46% 42% 35% 27%
- ---------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(7)(8) $ 0.03 $ 0.02 $ 0.01 -- --
===========================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(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,
if any, for Federal income tax purposes.
(6) During the years ended October 31, 1996 and October 31, 1995, the Portfolio
had earned credits from the custodian which reduced service fees incurred.
If the credits are taken into consideration, the expense ratios for Class C
would have been 2.09% and 2.08%, respectively; numbers prior to October 31,
1995 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.
(8) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commission on trades executed outside these
countries are generally executed as a percentage of cost or proceeds
ranging from 0.5% to 1.0%.
* 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.
- --------------------------------------------------------------------------------
50 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================================
Financial Highlights (continued)
==========================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class Y Shares
-------------------------------------------------------------
International Equity Portfolio 1997(1) 1996(1) 1995(2) 1994(3)
==========================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 18.64 $ 17.13 $ 18.80 $ 17.64
- ----------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.04 0.18 0.10* 0.01
Net realized and unrealized gain (loss) 1.76 1.54 (1.50) 1.15
- ----------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.80 1.72 (1.40) 1.16
- ----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income(4) (0.06) (0.21) (0.17) --
Net realized gains -- -- (0.10) --
- ----------------------------------------------------------------------------------------------------------
Total Distributions (0.06) (0.21) (0.27) --
- ----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 20.38 $ 18.64 $ 17.13 $ 18.80
- ----------------------------------------------------------------------------------------------------------
Total Return 9.68% 10.19% (7.11)% 6.58%++
- ----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 301,852 $ 200,427 $ 97,132 $ 48,765
- ----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(5) 0.94% 0.96% 1.06% 1.09%+
Net investment income 0.23 0.56 0.91 0.29+
- ----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 35% 46% 42% 35%
- ----------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(6)(7) $ 0.03 $ 0.02 $ 0.01 --
==========================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(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) Distributions from net investment income include short-term capital gains,
if any, for Federal income tax purposes.
(5) During the years ended October 31, 1996 and October 31, 1995, the Portfolio
had earned credits from the custodian which reduced service fees incurred.
If the credits are taken into consideration, the expense ratios for Class Y
would have been 0.90% and 0.98%, respectively; numbers prior to October 31,
1995 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.
(7) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commission on trades executed outside these
countries are generally executed as a percentage of cost or proceeds
ranging from 0.5% to 1.0%.
* 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.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 51
<PAGE>
<TABLE>
<CAPTION>
============================================================================================
Financial Highlights (continued)
============================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class Z Shares
-----------------------------------------------
International Equity Portfolio 1997(1) 1996(1) 1995(2)
============================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $ 18.62 $ 17.12 $ 18.38
- --------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.05 0.14 0.13*
Net realized and unrealized gain (loss) 1.75 1.57 (1.12)
- --------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.80 1.71 (0.99)
- --------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income(3) (0.06) (0.21) (0.17)
Net realized gains -- -- (0.10)
- --------------------------------------------------------------------------------------------
Total Distributions (0.06) (0.21) (0.27)
- --------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 20.36 $ 18.62 $ 17.12
- --------------------------------------------------------------------------------------------
Total Return 9.69% 10.13% (5.03)%++
- --------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 131,709 $ 119,408 $ 94,387
- --------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 0.94% 0.97% 1.10%+
Net investment income 0.22 0.55 1.06+
- --------------------------------------------------------------------------------------------
Portfolio Turnover Rate 35% 46% 42%
- --------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(5)(6) $ 0.03 $ 0.02 $ 0.01
============================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from November 7, 1994 (inception date) to October 31, 1995.
(3) Distributions from net investment income include short-term capital gains,
if any, for Federal income tax purposes.
(4) During the year ended October 31, 1996 and the period ended October 31,
1995, the Portfolio had earned credits from the custodian which reduced
service fees incurred. If the credits are taken into consideration, the
expense ratios for Class Z would have been 0.91% and 1.02% (annualized),
respectively.
(5) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(6) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commission on trades executed outside these
countries are generally executed as a percentage of cost or proceeds
ranging from 0.5% to 1.0%.
* 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.
- --------------------------------------------------------------------------------
52 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
Financial Highlights (continued)
========================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class A Shares
-----------------------------------------------------------
International Balanced Portfolio 1997(1) 1996(1) 1995 1994(2)
========================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 13.90 $ 12.64 $ 12.20 $ 12.00
- --------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(3) 0.18 0.26 0.35 0.07
Net realized and unrealized gain (loss) (0.41) 1.35 0.48 0.13
- --------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.23) 1.61 0.83 0.20
- --------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.15) (0.35) (0.39) --
Capital (0.20) -- -- --
- --------------------------------------------------------------------------------------------------------
Total Distributions (0.35) (0.35) (0.39) --
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 13.32 $ 13.90 $ 12.64 $ 12.20
- --------------------------------------------------------------------------------------------------------
Total Return (1.71)% 12.89% 7.05% 1.67%++
- --------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 11,072 $ 16,116 $ 17,667 $ 20,634
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.71% 1.81% 1.62% 1.34%+
Net investment income 1.32 1.94 2.89 1.37+
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 197% 189% 42% 6%
- --------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4)(5) $ 0.03 $ 0.03 $ 0.02 --
========================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from August 25, 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. If such fees were not waived,
the per share effect on net investment income and the expense ratios would
have been as follows:
<TABLE>
<CAPTION>
Expense Ratios
Per Share Decreases to Without Fee Waivers
Net Investment Income and Custody Credits
---------------------- -------------------
1995 1994 1995 1994
----- ----- ---- ----
<S> <C> <C> <C> <C>
Class A $0.04 $0.02 1.96% 2.03%+
</TABLE>
In addition, during the years ended October 31, 1996 and October 31, 1995,
the Portfolio had earned credits from the custodian which reduced service
fees incurred. If the credits are taken into consideration, the expense
ratios for Class A would have been 1.72% and 1.52%, respectively; numbers
prior to October 31, 1995 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.
(5) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commission on trades executed outside these
countries are generally executed as a percentage of cost or proceeds
ranging from 0.5% to 1.0%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 53
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================
Financial Highlights (continued)
=====================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class B Shares
----------------------------------------
International Balanced Portfolio 1997(1) 1996(1) 1995(2)
=====================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $ 13.90 $ 12.65 $ 12.08
- -------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(3) 0.07 0.15 0.36
Net realized and unrealized gain (loss) (0.41) 1.36 0.50
- -------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.34) 1.51 0.86
- -------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.08) (0.26) (0.29)
Capital (0.10) -- --
- -------------------------------------------------------------------------------------
Total Distributions (0.18) (0.26) (0.29)
- -------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 13.38 $ 13.90 $ 12.65
- -------------------------------------------------------------------------------------
Total Return (2.45)% 12.05% 7.33%++
- -------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 4,813 $ 5,258 $ 3,064
- -------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 2.48% 2.62% 2.49%+
Net investment income 0.53 1.14 3.11+
- -------------------------------------------------------------------------------------
Portfolio Turnover Rate 197% 189% 42%
- -------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4)(5) $ 0.03 $ 0.03 $ 0.02
=====================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(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 period ended October 31,
1995. If such fees were not waived, the per share effect on net investment
income and the expense ratio would have been as follows:
<TABLE>
<CAPTION>
Expense Ratio
Per Share Decrease to Without Fee Waivers
Net Investment Income and Custody Credits
--------------------- -------------------
1995 1995
---- ----
<S> <C> <C>
Class B $0.04 2.86%+
</TABLE>
In addition, during the year ended October 31, 1996 and the period ended
October 31, 1995, the Portfolio had earned credits from the custodian which
reduced service fees incurred. If the credits are taken into consideration,
the expense ratios for Class B would have been 2.53% and 2.39%
(annualized), respectively; numbers prior to October 31, 1995 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.
(5) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commission on trades executed outside these
countries are generally executed as a percentage of cost or proceeds
ranging from 0.5% to 1.0%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
54 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================
Financial Highlights (continued)
===================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class C Shares
------------------------------------------------------
International Balanced Portfolio 1997(1) 1996(1) 1995(2) 1994(3)
===================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 13.87 $ 12.63 $ 12.18 $ 12.00
- ---------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(4) 0.08 0.15 0.28 0.05
Net realized and unrealized gain (loss) (0.42) 1.35 0.46 0.13
- ---------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.34) 1.50 0.74 0.18
- ---------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.08) (0.26) (0.29) --
Capital (0.10) -- -- --
- ---------------------------------------------------------------------------------------------------
Total Distributions (0.18) (0.26) (0.29) --
- ---------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 13.35 $ 13.87 $ 12.63 $ 12.18
- ---------------------------------------------------------------------------------------------------
Total Return (2.46)% 11.99% 6.29% 1.50%++
- ---------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 3,642 $ 4,869 $ 4,317 $ 4,310
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 2.51% 2.62% 2.37% 2.03%+
Net investment income 0.60 1.14 2.33 0.79+
- ---------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 197% 189% 42% 6%
- ---------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(5)(6) $ 0.03 $ 0.03 $ 0.02 --
===================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(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) 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:
<TABLE>
<CAPTION>
Expense Ratios
Per Share Decreases to Without Fee Waivers
Net Investment Income and Custody Credits
---------------------- -------------------
1995 1994 1995 1994
---- ----- ---- ----
<S> <C> <C> <C> <C>
Class C $0.04 $0.02 2.71% 2.74%+
</TABLE>
In addition, during the years ended October 31, 1996 and October 31, 1995,
the Portfolio had earned credits from the custodian which reduced service
fees incurred. If the credits are taken into consideration, the expense
ratios for Class C would have been 2.53% and 2.27%; numbers prior to October
31, 1995 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.
(6) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commission on trades executed outside these
countries are generally executed as a percentage of cost or proceeds
ranging from 0.5% to 1.0%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 55
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class Y Shares
-------------------------------
International Balanced Portfolio 1997(1) 1996(1)(2)
================================================================================
<S> <C> <C>
Net Asset Value, Beginning of Year $ 13.93 $ 13.15
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.25 0.32
Net realized and unrealized gain (loss) (0.42) 0.75
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.17) 1.07
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.18) (0.29)
Capital (0.23) --
- --------------------------------------------------------------------------------
Total Distributions (0.41) (0.29)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $ 13.35 $ 13.93
- --------------------------------------------------------------------------------
Total Return (1.28)% 8.21%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 42,380 $ 19,387
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.24% 1.21%+
Net investment income 1.83 2.55+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 197% 189%
- --------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4)(5) $ 0.03 $ 0.03
================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from February 7, 1996 (inception date) to October 31, 1996.
(3) During the period ended October 31, 1996, the Portfolio had earned credits
from the custodian which reduced service fees incurred. If the credits are
taken into consideration, the expense ratio for Class Y would have been
1.12% (annualized).
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(5) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commission on trades executed outside these
countries are generally executed as a percentage of cost or proceeds
ranging from 0.5% to 1.0%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
================================================================================
Tax Information (unaudited)
================================================================================
For Federal tax purposes the Global Government Bond Portfolio hereby designates
for the fiscal year ended October 31, 1997:
-- long term capital gain distributions paid of $572,938.
The total foreign sourced income received by International Equity Portfolio and
International Balanced Portfolio, respectively, are $0.3701 per share (or a
total amount of $24,283,449) and $0.3142 per share (or a total amount of
$1,457,499). The total amounts of foreign taxes paid, respectively, are $0.0257
per share (or a total amount of $1,689,178) and $0.0085 per share (or a total
amount of $39,433).
- --------------------------------------------------------------------------------
56 1997 Annual Report to Shareholders
<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 Global Government Bond, International
Equity and International Balanced Portfolios of Smith Barney World Funds, Inc.
as of October 31, 1997, the related statements 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 three-year period then ended, the period from January 1, 1994 to October 31,
1994 and the year ended December 31, 1993 with respect to the Global Government
Bond and International Equity 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, 1997, 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
Global Government Bond, International Equity and International Balanced
Portfolios of Smith Barney World Funds, Inc. as of October 31, 1997, the results
of their operations for the year then ended, the statements of changes in their
net assets for the each of the years in the two-year period then ended, and the
financial highlights for each of the years in the three-year period then ended,
the period from January 1, 1994 to October 31, 1994 and the year ended December
31, 1993 with respect to the Global Government Bond and International Equity
Portfolios and 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 18, 1997
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. 57
<PAGE>
Smith Barney
World Funds, Inc.
DIRECTORS
Victor Atkins
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
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
Irving P. David
Controller
Christina T. Sydor
Secretary
INVESTMENT MANAGER AND ADMINISTRATOR
Smith Barney Mutual Funds Management Inc.
DISTRIBUTOR
Smith Barney Inc.
CUSTODIAN
Chase Manhattan Bank
SHAREHOLDER
SERVICING AGENT
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is for the information of shareholders of Smith Barney World Fund,
Inc. -- Global Government, International Equity and International Balanced
Portfolios, but it may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details about charges,
expenses, investment objectives and operating policies of the Fund. If used as
sales material after December 31, 1997, this report must be accompanied by
performance for the most recently completed calendar quarter.
SMITH BARNEY
- ----------------------------------
A Member of Travelers Group [LOGO]
SMITH BARNEY
WORLD FUNDS, INC.
Smith Barney Mutual Funds
388 Greenwich Street
New York, New York 10013
FD01359 12/97
