<PAGE>
- --------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
Smith Barney
Funds, Inc.
Income Return
Account Portfolio
Short-Term U.S.
Treasury Securities
Portfolio
--------------------------------
June 30, 1996
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Income Return Account and Short-Term
U.S. Treasury Securities Portfolios
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide you with the semi-annual report for Smith Barney
Funds, Inc.-Income Return Account Portfolio and Short-Term U.S. Treasury
Securities Portfolio for the period ended June 30, 1996. For your convenience,
we summarize the period's prevailing economic and market conditions and briefly
report on each Portfolio's investment strategy. A detailed summary of
performance and current holdings can be found in the appropriate sections that
follow in the semi-annual report.
Market Overview
Since January 1996, volatility in the bond market has increased and both
short-and long-term interest rates have risen. One of the main reasons for this
increased bond market volatility was greater than expected U.S. economic growth.
For example, economic data released by the U.S. government between February and
the end of May this year indicated strong U.S. economic growth as evidenced by
increased job creation and higher consumer spending. In addition, new as well as
existing home sales have shown continued momentum, with the Northeast region of
the U.S. the newest region of the country to exhibit growth.
During the first half of 1996, the annual rate of inflation in the U.S. was
approximately 2.9% and economic activity, as measured by Gross Domestic Product
(GDP), grew at an annual rate of roughly 3.0%. Moreover, over the past six
months, retail sales were sporadically stronger and the annual rate of
unemployment in the U.S. held steady at 5.5%.
Increasing investor concerns about the possible re-emergence of inflation
resulting from higher U.S. economic growth has led to an increase in yields,
especially from U.S. Treasury securities with longer-term maturities.
Other factors that have worked to increase bond market volatility include
concerns surrounding Russia's recent national Presidential election, the
uncertainty as to whether and when the Federal Reserve Board might raise
interest rates and greater participation by trading-oriented investors attracted
to recent market opportunities.
Income Return Account Portfolio
Performance Update
For the six months ended June 30, 1996, the Income Return Account Portfolio's
Class A shares had a total return of 1.56% and outperformed its Lipper
Analytical Services, Inc. peer group total return average of 1.18% over
1
<PAGE>
the same time period. (Lipper is a major fund performance tracking
organization.)
Income Return Account Portfolio's
Investment Strategy
The Income Return Account Portfolio invests in money market instruments to help
provide stability, and in longer-term securities (not to exceed 5 years for U.S.
Government securities, and 3 years for corporate debt obligations) to provide
enhanced return. For defensive purposes, the Portfolio also employs an
immunization strategy. (The Portfolio's immunization strategy involves the use
of proprietary technology that helps the portfolio manager forecast the
direction of interest rates.) While minor day-to-day price fluctuations are
unavoidable, this strategy should produce sufficient income during adverse
market conditions to offset any potential decline in the prices of the
Portfolio's longer-term securities. In extremely uncertain or volatile periods
for interest rates, it is possible for the Portfolio to be fully invested in
short-term money market instruments. Unlike money market funds, which generally
seek to maintain a stable net asset value (NAV) of $1.00 per share, the Income
Return Account Portfolio's NAV does fluctuate with market conditions; however,
the Portfolio's immunization strategy has worked well. In the 45 quarters since
the Portfolio's inception, it has posted only two down quarters.
Because the securities in the Portfolio are "laddered" to mature at different
times, we were able to adapt to the changing interest rate environment of the
first half of 1996. By purchasing bonds that mature at set intervals, the
Portfolio will be diversified in case of changes in interest rates.
Short-Term U.S. Treasury Securities Portfolio
Performance Update and Strategy
For the six months ended June 30, 1996, the total return for Class A shares of
Short-Term U.S. Treasury Securities Portfolio was -2.61% versus its Lipper peer
group total return of 0.44% for the same time period. The Portfolio's
performance during this time was negatively affected by positions that modestly
extended the Portfolio's average weighted maturity in a period of rising
interest rates.
The Short-Term U.S. Treasury Securities Portfolio seeks high current income,
liquidity and security of principal by investing in U.S. Government Obligations.
In addition to the Portfolio's short-term maturity structure, it is managed with
a laddered portfolio strategy to help protect it against interest-rate risk. The
Portfolio also employs this laddered approach to take advantage of future policy
moves by the Federal Reserve.
2
<PAGE>
Market Outlook
Although there will continue to be some near-term bond market volatility as
investors sift through confusing U.S. economic data, we remain positive about
the bond market's long-term prospects. We expect that the U.S. economy will
weaken modestly and inflation fears will disappear. Most investors should
therefore remain patient despite the bond market's recent volatility. In our
view, long-term U.S. Treasury yields at or above 7.00% represent good value and
we anticipate that yields from the 30-Year U.S. Treasury Bond will decline and
eventually settle in the 6.25% to 6.50% range.
In closing, we would like to thank you for your investment in the Income Return
Account and Short-Term U.S. Treasury Securities Portfolios. We look forward to
continuing to help you achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
- ------------------------------ ------------------------------
Heath B. McLendon James E. Conroy
Chairman and Portfolio Manager
Chief Executive Officer
/s/ Patrick Sheehan
- ------------------------------
Patrick Sheehan
Portfolio Manager
July 12, 1996
3
<PAGE>
Smith Barney Funds, Inc.
Income Return Account Portfolio
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
<S> <C> <C> <C> <C> <C>
6/30/96 $9.60 $9.50 $0.25 $0.00 1.56%+
- --------------------------------------------------------------------------------
12/31/95 9.34 9.60 0.51 0.00 8.43
- --------------------------------------------------------------------------------
12/31/94 9.59 9.34 0.45 0.00 2.14
- --------------------------------------------------------------------------------
12/31/93 9.68 9.59 0.47 0.00 4.00
- --------------------------------------------------------------------------------
12/31/92 9.65 9.68 0.52 0.00 5.85
- --------------------------------------------------------------------------------
12/31/91 9.38 9.65 0.73 0.00 11.06
- --------------------------------------------------------------------------------
12/31/90 9.31 9.38 0.74 0.00 9.10
- --------------------------------------------------------------------------------
12/31/89 9.12 9.31 0.75 0.00 10.67
- --------------------------------------------------------------------------------
12/31/88 9.26 9.12 0.72 0.00 6.48
- --------------------------------------------------------------------------------
12/31/87 9.43 9.26 0.60 0.06 5.36
- --------------------------------------------------------------------------------
12/31/86 9.51 9.43 0.87 0.01 8.78
================================================================================
Total $6.61 $0.07
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
<S> <C> <C> <C> <C> <C>
6/30/96 $9.60 $9.49 $0.24 $0.00 1.38%+
- --------------------------------------------------------------------------------
12/31/95 9.34 9.60 0.48 0.00 8.06
- --------------------------------------------------------------------------------
12/31/94 9.58 9.34 0.42 0.00 1.86
- --------------------------------------------------------------------------------
12/31/93 9.68 9.58 0.43 0.00 3.53
- --------------------------------------------------------------------------------
Inception*-12/31/92 9.69 9.68 0.04 0.00 0.31+
================================================================================
Total $1.61 $0.00
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
<S> <C> <C> <C> <C> <C>
6/30/96 $9.60 $9.50 $0.26 $0.00 1.67%+
- --------------------------------------------------------------------------------
12/31/95 9.34 9.60 0.51 0.00 8.43
- --------------------------------------------------------------------------------
12/31/94 9.59 9.34 0.44 0.00 2.01
- --------------------------------------------------------------------------------
Inception*-12/31/93 9.72 9.59 0.42 0.00 3.01+
================================================================================
Total $1.63 $0.00
================================================================================
</TABLE>
4
<PAGE>
Smith Barney Funds, Inc.
Income Return Account Portfolio
- --------------------------------------------------------------------------------
Historical Performance -- Class Z Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
<S> <C> <C> <C> <C> <C>
6/30/96 $9.61 $9.51 $0.26 $0.00 1.56%+
- --------------------------------------------------------------------------------
12/31/95 9.35 9.61 0.51 0.00 8.43
Inception*-12/31/94 9.42 9.35 0.12 0.00 0.38+
================================================================================
Total $0.89 $0.00
================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital
gains, if any, annually.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge(1)
--------------------------------------------
Class A Class C Class Y Class Z
================================================================================
<S> <C> <C> <C> <C>
Six Months Ended 6/30/96+ 1.56% 1.38% 1.67% 1.56%
- --------------------------------------------------------------------------------
Year Ended 6/30/96 4.55 4.19 4.66 4.65
- --------------------------------------------------------------------------------
Five Years Ended 6/30/96 5.88 N/A N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/96 6.80 N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/96 7.27 4.25 4.41 6.34
================================================================================
</TABLE>
<TABLE>
<CAPTION>
With Sales Charge(2)
--------------------------------------------
Class A Class C Class Y Class Z
================================================================================
<S> <C> <C> <C> <C>
Six Months Ended 6/30/96+ (0.51)% 0.38% 1.67% 1.56%
- --------------------------------------------------------------------------------
Year Ended 6/30/96 2.41 3.19 4.66 4.65
- --------------------------------------------------------------------------------
Five Years Ended 6/30/96 5.45 N/A N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/96 6.58 N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/96 7.08 4.25 4.41 6.34
================================================================================
</TABLE>
5
<PAGE>
Smith Barney Funds, Inc.
Income Return Account Portfolio
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without
Sales Charge(1)
================================================================================
<S> <C>
Class A (6/30/86 through 6/30/96) 93.04%
- --------------------------------------------------------------------------------
Class C (Inception* through 6/30/96) 15.89
- --------------------------------------------------------------------------------
Class Y (Inception* through 6/30/96) 15.85
- --------------------------------------------------------------------------------
Class Z (Inception* through 6/30/96) 10.65
================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charge with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class 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 2.00% and 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, C, Y and Z shares are March 4, 1985, December
16, 1992, February 1, 1993 and November 7, 1994, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
6
<PAGE>
Smith Barney Funds, Inc.
Income Return Account Portfolio
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of
the Income Return Account Portfolio vs.
Salomon Brothers 1-Year Treasury Index+
- --------------------------------------------------------------------------------
June 1986--June 1996
[The table below was presented as a line graph in the printed document]
<TABLE>
<CAPTION>
Salomon Brothers
Income Return 1-Year
Account Portfolio Treasury Index
----------------- ----------------
<S> <C> <C>
6/30/86 $ 9,754 $10,000
- --------------------------------------------------------------------------------
12/86 9,943 10,804
- --------------------------------------------------------------------------------
12/87 10,416 11,424
- --------------------------------------------------------------------------------
12/88 11,091 12,122
- --------------------------------------------------------------------------------
12/89 12,274 13,343
- --------------------------------------------------------------------------------
12/90 13,355 14,534
- --------------------------------------------------------------------------------
12/91 14,967 15,811
- --------------------------------------------------------------------------------
12/92 15,842 16,571
- --------------------------------------------------------------------------------
12/93 16,475 17,206
- --------------------------------------------------------------------------------
12/94 16,766 17,658
- --------------------------------------------------------------------------------
12/95 18,239 19,085
- --------------------------------------------------------------------------------
6/30/96 18,523 19,659
- --------------------------------------------------------------------------------
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares on June 30,
1986, assuming deduction of the maximum 2.50% sales charge in effect at the
time of investment and the reinvestment of dividends (after deduction of
applicable sales charge through November 7, 1994, and thereafter at net
asset value) and capital gains, if any, at net asset value through June 30,
1996. The Salomon Brothers 1-Year Treasury Index is composed of the most
recently issued twelve month United States Treasury Bill which is used to
track the T-Bill's total return until its maturity. 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 return 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.
7
<PAGE>
Smith Barney Funds, Inc.
Short-Term U.S. Treasury Securities Portfolio
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns
================================================================================
<S> <C> <C> <C> <C> <C>
6/30/96 $4.19 $4.00 $0.12 $0.00 (2.61)%+
- --------------------------------------------------------------------------------
12/31/95 3.91 4.19 0.22 0.00 13.16
- --------------------------------------------------------------------------------
12/31/94 4.16 3.91 0.18 0.00 (2.15)
- --------------------------------------------------------------------------------
12/31/93 4.12 4.16 0.18 0.02 6.01
- --------------------------------------------------------------------------------
12/31/92 4.09 4.12 0.19 0.01 5.92
- --------------------------------------------------------------------------------
Inception*-12/31/91 4.01 4.09 0.03 0.01 2.85+
================================================================================
Total $0.92 $0.04
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returnss
================================================================================
<S> <C> <C> <C> <C> <C>
Inception*-6/30/96 $4.19 $4.00 $0.10 $0.00 (2.89)%+
================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
- --------------------------------------------------------------------------------
Average Annual Total Return -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge
---------------------------
Class A Class Y
================================================================================
<S> <C> <C>
Six Months Ended 6/30/96+ (2.61)% N/A
- --------------------------------------------------------------------------------
Year Ended 6/30/96 1.98 N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/96 5.00 (2.89)%+
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Cumulative Total Return -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without
Sales Charge
================================================================================
<S> <C>
Class A (Inception* through 6/30/96) 25.38%
- --------------------------------------------------------------------------------
Class Y (Inception* through 6/30/96) (2.89)+
================================================================================
</TABLE>
* The inception dates for Class A and Y shares are November 11, 1991 and
February 8, 1996, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
8
<PAGE>
Smith Barney Funds, Inc.
Short-Term U.S. Treasury Securities Portfolio
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of
the Short-Term U.S. Treasury Securities Portfolio vs.
Salomon Brothers 3-Year Treasury Index+
- --------------------------------------------------------------------------------
November 1991--June 1996
[The table below was presented as a line graph in the printed document]
<TABLE>
<CAPTION>
Short-Term Salomon Brothers
U.S. Treasury 3-Year
Securities Portfolio Treasury Index
-------------------- ----------------
<S> <C> <C>
11/11/91 $10,000 $10,000
- --------------------------------------------------------------------------------
12/91 10,283 10,230
- --------------------------------------------------------------------------------
12/92 10,891 10,902
- --------------------------------------------------------------------------------
12/93 11,547 11,653
- --------------------------------------------------------------------------------
12/94 11,361 11,471
- --------------------------------------------------------------------------------
12/95 12,874 13,004
- --------------------------------------------------------------------------------
6/30/96 12,538 13,160
- --------------------------------------------------------------------------------
</TABLE>
+ Hypothetical illustration of $10,000 invested in shares at inception on
November 11, 1991, assuming reinvestment of dividends and capital gains, if
any, at net asset value through June 30, 1996. The Salomon Brothers 3-Year
Treasury Index is composed of the most recently issued 3-year United States
Treasury Note which is used to track the Note's total return until its
maturity. The index is unmanaged and is not subject to the same management
and trading expenses of 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.
9
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Schedules of Investments (unaudited) June 30, 1996
- --------------------------------------------------------------------------------
INCOME RETURN ACCOUNT PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<C> <S> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 82.6%
$ 4,000,000 U.S. Treasury Note, 6.250% due 8/31/96 $ 4,005,680
3,000,000 U.S. Treasury Note, 4.000% due 2/3/97 2,971,740
5,000,000 U.S. Treasury Note, 6.750% due 2/28/97 5,035,750
3,000,000 U.S. Treasury Note, 5.750% due 9/30/97 2,994,690
5,000,000 U.S. Treasury Note, 5.500% due 11/15/98 4,924,550
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost-- $19,964,339) 19,932,410
================================================================================
REPURCHASE AGREEMENT -- 17.4%
4,212,000 Chase Manhattan Corp., 5.330% due 7/1/96;
Proceeds at maturity -- $4,213,870; (Fully
collateralized by U.S. Treasury Notes,
5.750% due 9/30/97; Market value -- $4,298,017)
(Cost -- $4,212,000) 4,212,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $24,176,339*) $24,144,410
================================================================================
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Schedules of Investments (unaudited) (continued) June 30, 1996
- --------------------------------------------------------------------------------
SHORT-TERM U.S. TREASURY SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<C> <S> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 79.4%
$10,500,000 U.S. Treasury Note, 6.500% due 4/30/99 $ 10,563,105
20,000,000 U.S. Treasury Note, 6.750% due 5/31/99 20,240,000
11,000,000 U.S. Treasury Note, 6.875% due 7/31/99 11,170,720
4,000,000 U.S. Treasury Note, 6.625% due 6/30/01 4,026,040
16,500,000 U.S. Treasury Note, 6.250% due 2/15/03 16,226,925
19,000,000 U.S. Treasury Note, 6.875% due 5/15/06+ 19,207,670
24,300,000 U.S. Treasury Strip, zero coupon due 2/15/00 19,341,828
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost-- $99,878,848) 100,776,288
================================================================================
REPURCHASE AGREEMENTS -- 20.6%
7,127,000 Citibank, 5.390% due 7/1/96;
Proceeds at maturity -- $7,130,201; (Fully
collateralized by U.S. Treasury Notes,
6.375% due 5/15/99; Market value -- $7,270,296) 7,127,000
19,000,000 Morgan Stanley Group Inc., 5.390% due 7/2/96;
Proceeds at maturity -- $19,022,758; (Fully
collateralized by FNMA, 6.500% due 3/17/18;
Market value -- $19,380,033) 19,000,000
- --------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost-- $26,127,000) 26,127,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $126,005,848*) $126,903,288
================================================================================
</TABLE>
+ Security segregated by custodian for reverse repurchase agreement (See
Note 5).
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
11
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities (unaudited) June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income Short-Term
Return U.S. Treasury
Account Securities
Portfolio Portfolio
================================================================================
<S> <C> <C>
ASSETS:
Investments, at value (Cost -- $19,964,339
and $99,878,848) $19,932,410 $100,776,288
Repurchase agreements (Cost $4,212,000
and $26,127,000) 4,212,000 26,127,000
Cash 150 613
Receivable for Fund shares sold 3,778 --
Interest receivable 295,958 1,207,831
Other assets 117,182 --
- --------------------------------------------------------------------------------
Total Assets 24,561,478 128,111,732
- --------------------------------------------------------------------------------
LIABILITIES:
Reverse repurchase agreement (Note 5) -- 19,047,500
Payable for securities purchased -- 3,991,875
Dividends payable 110,072 234,876
Management fee payable 4,557 35,291
Distribution costs payable 687 24,285
Accrued expenses 10,928 24,955
- --------------------------------------------------------------------------------
Total Liabilities 126,244 23,358,782
- --------------------------------------------------------------------------------
Total Net Assets $24,435,234 $104,752,950
================================================================================
NET ASSETS:
Par value of capital shares $ 25,726 $ 261,695
Capital paid in excess of par value 26,114,959 113,240,256
Overdistributed net investment income (45,175) --
Accumulated net realized loss on
security transactions (1,628,347) (9,646,441)
Net unrealized appreciation (depreciation)
of investments (31,929) 897,440
- --------------------------------------------------------------------------------
Total Net Assets $24,435,234 $104,752,950
================================================================================
Shares Outstanding:
Class A 1,724,606 22,782,391
-----------------------------------------------------------------------------
Class C 225,958 --
-----------------------------------------------------------------------------
Class Y 71,284 3,387,129
-----------------------------------------------------------------------------
Class Z 550,797 --
-----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $9.50 $4.00
-----------------------------------------------------------------------------
Class C* $9.49 --
-----------------------------------------------------------------------------
Class Y (and redemption price) $9.50 $4.00
-----------------------------------------------------------------------------
Class Z (and redemption price) $9.51 --
-----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 2.04% of net asset
value per share) $9.69 $4.00
================================================================================
</TABLE>
* 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.
12
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1996 (unaudited)
Income Short-Term
Return U.S. Treasury
Account Securities
Portfolio Portfolio
================================================================================
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 705,238 $ 3,782,239
Less: Interest expense -- (365,332)
- --------------------------------------------------------------------------------
Total Investment Income 705,238 3,416,907
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 53,848 230,781
Distribution fees (Note 2) 3,935 171,710
Registration fees 21,864 32,412
Shareholder and system servicing fees 11,253 25,938
Shareholder communications 5,643 6,980
Directors' fees 5,185 1,547
Audit and legal fees 4,506 10,291
Custody 1,533 8,976
Other 2,147 2,593
- --------------------------------------------------------------------------------
Total Expenses 109,914 491,228
- --------------------------------------------------------------------------------
Net Investment Income 595,324 2,925,679
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3):
Realized Gain (Loss) From Security
Transactions (excluding short-term
securities):
Proceeds from sales 12,219,687 67,038,008
Cost of securities sold 12,134,650 68,630,423
- --------------------------------------------------------------------------------
Net Realized Gain (Loss) 85,037 (1,592,415)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
(Depreciation) of Investments:
Beginning of period 261,510 3,923,767
End of period (31,929) 897,440
- --------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (293,439) (3,026,327)
- --------------------------------------------------------------------------------
Net Loss on Investments (208,402) (4,618,742)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations $ 386,922 $(1,693,063)
================================================================================
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1996 (unaudited)
and the Year Ended December 31, 1995
Income Return
Account Portfolio
------------------------
1996 1995
================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 595,324 $ 1,513,388
Net realized gain 85,037 102,837
Increase (decrease) in net unrealized appreciation (293,439) 724,801
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 386,922 2,341,026
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (658,307) (1,510,819)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (658,307) (1,510,819)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 1,919,517 2,507,895
Net asset value of shares issued for
reinvestment of dividends 456,121 1,263,875
Cost of shares reacquired (3,233,534) (11,328,757)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (857,896) (7,556,987)
- --------------------------------------------------------------------------------
Decrease in Net Assets (1,129,281) (6,726,780)
NET ASSETS:
Beginning of period 25,564,515 32,291,295
- --------------------------------------------------------------------------------
End of period* $24,435,234 $25,564,515
================================================================================
* Includes undistributed (overdistributed)
net investment income of: $(45,175) $17,808
================================================================================
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1996 (unaudited)
and the Year Ended December 31, 1995
Short-Term
U.S. Treasury
Securities Portfolio
-------------------------------
1996 1995
================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 2,925,679 $ 4,746,932
Net realized loss (1,592,415) (1,124,138)
Increase (decrease) in net unrealized
appreciation (3,026,327) 7,502,923
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
From Operations (1,693,063) 11,125,717
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,925,679) (4,746,932)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (2,925,679) (4,746,932)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 21,004,111 10,999,038
Net asset value of shares issued in
connection with the transfer of the
Smith Barney Income Trust--Smith
Barney Limited Maturity Treasury
Fund's net assets (Note 7) -- 53,909,184
Net asset value of shares issued for
reinvestment of dividends 2,206,343 3,983,544
Cost of shares reacquired (20,937,856) (56,878,050)
- --------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 2,272,598 12,013,716
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (2,346,144) 18,392,501
NET ASSETS:
Beginning of period 107,099,094 88,706,593
- --------------------------------------------------------------------------------
End of period $104,752,950 $107,099,094
================================================================================
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Income Return Account Portfolio ("Income Return Account") and the
Short-Term U.S. Treasury Securities Portfolio ("Short-Term U.S. Treasury") are
separate investment portfolios ("Portfolios") of the Smith Barney Funds, Inc.
("Fund"). The Fund, a Maryland corporation, is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The Fund consists of these Portfolios and two other separate
investment portfolios: Equity Income and U.S. Government Securities Portfolios.
The financial statements and financial highlights for the other portfolios are
presented in separate semi-annual reports.
The significant accounting policies consistently followed by the Portfolios
are: (a) security transactions are accounted for on the trade date; (b) U.S.
Government and Agency Obligations are valued at the mean between the bid and
asked prices; (c) short-term investments that have a maturity of more than 60
days are valued at prices based on market quotations for securities of similar
type, yield and maturity; (d) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premiums, which approximates
market value; (e) interest income is recorded on the accrual basis; (f) gains or
losses on the sale of securities are calculated by using the specific
identification method; (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) each portfolio intends to comply with the
applicable provisions of the Internal Revenue Code of 1986, as amended,
pertaining to regulated investment companies to make distributions of taxable
income sufficient to relieve it from substantially all Federal income and excise
taxes; (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 December 31, 1995, reclassifications were made to the
Fund's capital accounts to reflect permanent book/tax differences and income and
gains available for distributions under income tax regulations. Net investment
income, net realized gains and net assets were not affected by this change; and
(k) estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
16
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
2. MANAGEMENT AGREEMENTS
AND TRANSACTIONS WITH AFFILIATED PERSONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc., acts as investment manager to the Fund. The management fee
for the Income Return Account and U.S. Government Securities Portfolios is
determined by aggregating the assets of each Portfolio and applying a formula
calculated at the annual rate of 0.50% on the first $200 million of the
aggregate average daily net assets of the two portfolios and 0.40% on the
aggregate average daily net assets in excess of $200 million; this total is then
allocated to each Portfolio based on their relative average daily net assets.
Short-Term U.S. Treasury pays SBMFM a management fee calculated at the annual
rate of 0.45% of the Portfolio's average daily net assets. These fees are
calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of Smith Barney Holdings Inc.,
acts as distributor of Fund shares. For the six months ended June 30, 1996, SB
received sales charges of approximately $21,000 on sales of Income Return
Account Class A shares.
There is a contingent deferred sales charge ("CDSC") of 1.00% on Class C
shares if redemption occurs less than one year from initial purchase. For the
six months ended June 30, 1996, CDSCs paid to SB for Class C shares were
approximately $2,000.
Pursuant to a Distribution Plan, Income Return Account pays a distribution
fee and service fee with respect to its Class C shares calculated at an annual
rate of 0.20% and 0.15% of average daily net assets, respectively. Short-Term
U.S. Treasury pays a distribution fee and a service fee with respect to Class A
shares calculated at the annual rate of 0.10% and 0.25% of its average daily net
assets, respectively. For the six months ended June 30, 1996, total Distribution
Plan fees were as follows:
<TABLE>
<CAPTION>
Class A Class C
================================================================================
<S> <C> <C>
Income Return Account $ -- $3,935
Short-Term U.S. Treasury 171,710 --
================================================================================
</TABLE>
All officers and three Directors of the Fund are employees of SB.
17
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
3. INVESTMENTS
During the six months ended June 30, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<CAPTION>
Income
Return Short-Term
Account U.S. Treasury
================================================================================
<S> <C> <C>
Purchases $13,143,828 $65,727,109
- --------------------------------------------------------------------------------
Sales 12,219,687 67,038,008
================================================================================
</TABLE>
At June 30, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes by Portfolio were
approximately as follows:
<TABLE>
<CAPTION>
Income
Return Short-Term
Account U.S. Treasury
================================================================================
<S> <C> <C>
Gross unrealized appreciation $ 60,467 $1,317,924
Gross unrealized depreciation (92,396) (420,484)
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) $(31,929) $ 897,440
================================================================================
</TABLE>
4. REPURCHASE AGREEMENTS
The Portfolios purchase (and their custodian take possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolios require
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
5. REVERSE REPURCHASE AGREEMENT
A reverse repurchase agreement involves a sale by the Portfolio of
securities that it holds with an agreement by the Portfolio to repurchase the
same securities at an agreed upon price and date. A reverse repurchase agreement
involves the risk that the market of the securities sold by the Portfolio may
decline below the repurchase price of the securities. The Portfolio will
establish a segregated account with its custodian, in which the Portfolio will
maintain cash, U.S. government securities or other liquid high grade debt
obligations equal in value to its obligations with respect the reverse
repurchase agreements.
18
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At June 30, 1996, the Portfolio had the following reverse repurchase
agreement outstanding:
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<C> <S> <C>
$19,047,500 Reverse Repurchase Agreement with Morgan Stanley
Group, Inc., dated 6/24/96 at 4.740% to be
repurchased at $19,067,563 on 7/2/96, collateralized
by U.S. Treasury Note, 6.875% due 5/15/06 $19,047,500
================================================================================
</TABLE>
During the six months ended June 30, 1996, the maximum and average amount
of reverse repurchase agreements outstanding were as follows:
<TABLE>
================================================================================
<S> <C>
Maximum amount outstanding $22,244,375
- --------------------------------------------------------------------------------
Average amount outstanding $20,716,901
================================================================================
</TABLE>
Interest rates earned on reverse repurchase agreements ranged from 1.375%
to 5.050% during the year. Total market value of the collateral for the reverse
repurchase agreement is $19,207,670.
Interest expense for the six months ended June 30, 1996, on borrowing by
the Portfolio under the reverse repurchase agreement totalled $365,332.
6. CAPITAL SHARES
At June 30, 1996, the Fund had two billion shares of capital stock
authorized with a par value of $0.01 per share. Each Portfolio has the ability
to issue multiple classes of shares. Each share of a class represents an
identical interest in its respective Portfolio and has the same rights, except
that each class bears certain expenses specifically related to the distribution
of its shares.
At June 30, 1996, total paid-in-capital amounted to the following for each
class and respective Portfolio:
<TABLE>
<CAPTION>
Class A Class C Class Y Class Z
================================================================================
<S> <C> <C> <C> <C>
Income Return Account $17,935,989 $2,222,143 $ 822,763 $5,159,790
Short-Term U.S. Treasury 99,868,038 -- 13,633,913 --
================================================================================
</TABLE>
19
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
-------------------- ----------------------
Income Return Account Shares Amount Shares Amount
================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 176,094 $1,679,795 225,444 $ 2,157,394
Shares issued on reinvestment 29,719 283,632 78,208 744,322
Shares redeemed (181,220) (1,733,471) (629,762) (5,998,609)
- --------------------------------------------------------------------------------
Net Increase (Decrease) 24,593 $ 229,956 (326,110) $(3,096,893)
================================================================================
Class C
Shares sold 25,192 $ 239,712 31,564 $ 300,875
Shares issued on reinvestment 3,244 30,965 10,399 98,935
Shares redeemed (64,937) (620,789) (106,686) (1,012,222)
- --------------------------------------------------------------------------------
Net Decrease (36,501) $ (350,112) (64,723) $ (612,412)
================================================================================
Class Y
Shares sold 1 $ 10 -- $ --
Shares issued on reinvestment 1,662 15,855 6,752 64,067
Shares redeemed (29,495) (281,349) (254,016) (2,404,236)
- --------------------------------------------------------------------------------
Net Decrease (27,832) $ (265,484) (247,264) $(2,340,169)
================================================================================
Class Z
Shares sold -- $ -- 5,206 $ 49,626
Shares issued on reinvestment 13,152 125,669 37,427 356,551
Shares redeemed (62,637) (597,925) (200,256) (1,913,690)
- --------------------------------------------------------------------------------
Net Decrease (49,485) $ (472,256) (157,623) $(1,507,513)
================================================================================
</TABLE>
20
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
---------------------- -----------------------
Short-Term U.S. Treasury Shares Amount Shares Amount
================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 1,804,910 $ 7,370,198 2,680,304 $10,999,038
Net asset value of shares
issued in connection with
the transfer of Smith
Barney Income Trust -
Smith Barney Limited
Maturity Treasury Fund's
net assets (Note 7) -- -- 13,207,339 53,909,184
Shares issued on
reinvestment 543,633 2,206,343 973,147 3,983,544
Shares redeemed (5,135,146) (20,937,856) (13,976,062) (56,878,050)
- --------------------------------------------------------------------------------
Net Increase (Decrease) (2,786,603)$(11,361,315) 2,884,728 $12,013,716
================================================================================
Class Y
Shares sold 3,387,129 $13,633,913 -- --
Shares issued on
reinvestment -- -- -- --
Shares redeemed -- -- -- --
- --------------------------------------------------------------------------------
Net Increase 3,387,129 $13,633,913 -- --
================================================================================
</TABLE>
7. TRANSFER OF NET ASSETS
On August 11, 1995, Short-Term U.S. Treasury acquired the assets and
certain liabilities of the Smith Barney Income Trust--Smith Barney Limited
Maturity Treasury Fund ("Limited Maturity Treasury"), pursuant to a plan of
reorganization approved by shareholders on August 11, 1995. Total shares issued
by Short-Term U.S. Treasury and the total net assets of Limited Maturity
Treasury on the date of transfer were:
<TABLE>
<CAPTION>
Total Net
Shares Assets of Total Net
Issued by Acquired Assets of
Acquired Fund the Portfolio Fund the Portfolio
================================================================================
<S> <C> <C> <C>
Limited Maturity Treasury 13,207,339 $53,909,184 $64,271,771
================================================================================
</TABLE>
The total net assets of Limited Maturity Treasury before acquisition
included unrealized appreciation of $331,570 and a net realized loss of
$3,000,291. Total net assets of Short-Term U.S. Treasury immediately after the
transfer were $118,180,955. The transaction was structured for tax purposes to
qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as
amended.
21
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
8. CAPITAL LOSS CARRYFORWARD
At December 31, 1995, Income Return Account and Short-Term U.S. Treasury
had for Federal income tax purposes approximately $1,695,000 and $8,073,000 of
capital loss carryforwards available to offset future realized gains. As a
result of the transfer, Short-Term U.S. Treasury acquired approximately
$3,000,000 of capital loss carryforwards from Limited Maturity Treasury, which
is part of the $8,073,000. To the extent that these capital carryforward losses
are used to offset capital gains, it is probable that the gains so offset will
not be distributed. The amount and year of expiration for each capital
carryforward loss are indicated below:
<TABLE>
<CAPTION>
1996 1997 2001 2002 2003
================================================================================
<S> <C> <C> <C> <C> <C>
Income Return Account $930,000 $218,000 $ -- $ 547,000 $ --
Short-Term U.S. Treasury -- -- 1,477,000 5,472,000 1,124,000
================================================================================
</TABLE>
22
<PAGE>
Smith Barney Funds, Inc.
Income Return Account Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares 1996(1) 1995 1994 1993 1992 1991
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $9.60 $9.34 $9.59 $9.68 $9.65 $9.38
- ----------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.23 0.51 0.46 0.45 0.52 0.67
Net realized and unrealized gain (loss) (0.08) 0.26 (0.26) (0.07) 0.03 0.33
- ----------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.15 0.77 0.20 0.38 0.55 1.00
- ----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.25) (0.51) (0.45) (0.47) (0.52) (0.73)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.25) (0.51) (0.45) (0.47) (0.52) (0.73)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.50 $9.60 $9.34 $9.59 $9.68 $9.65
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return 1.56%++ 8.43% 2.14% 4.00% 5.85% 11.06%
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $16,377 $16,324 $18,918 $50,874 $48,538 $33,682
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.89%+ 0.69% 0.56% 0.53% 0.50% 0.49%
Net investment income 4.89+ 5.38 4.60 4.67 5.33 6.98
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 56.49% 107.30% 126.64% 152.04% 84.15% 30.44%
==================================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
23
<PAGE>
Smith Barney Funds, Inc.
Income Return Account Portfolio
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class C Shares 1996(1) 1995(2) 1994 1993 1992(3)
===============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $9.60 $9.34 $9.58 $9.68 $9.69
- ---------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.22 0.48 0.42 0.45 0.03
Net realized and unrealized gain (loss) (0.09) 0.26 (0.24) (0.12) --
- ---------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.13 0.74 0.18 0.33 0.03
- ---------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.24) (0.48) (0.42) (0.43) (0.04)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions (0.24) (0.48) (0.42) (0.43) (0.04)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.49 $9.60 $9.34 $9.58 $9.68
- ---------------------------------------------------------------------------------------------------------------
Total Return 1.38%++ 8.06% 1.86% 3.53% 0.31%++
- ---------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $2,145 $2,520 $3,055 $3,993 $10
- ---------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.24%+ 1.02% 0.94% 0.90% 0.86%+
Net investment income 4.53+ 4.89 4.40 4.25 5.71+
- ---------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 56.49% 107.30% 126.64% 152.04% 84.15%
===============================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) On November 7, 1994, the former Class B shares were renamed Class C shares.
(3) For the period from December 16, 1992 (inception date) to December 31,
1992.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
24
<PAGE>
Smith Barney Funds, Inc.
Income Return Account Portfolio
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class Y Shares 1996(1) 1995(2) 1994 1993(3)
================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $9.60 $9.34 $9.59 $9.72
- ------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.24 0.51 0.44 0.42
Net realized and unrealized gain (loss) (0.08) 0.26 (0.25) (0.13)
- ------------------------------------------------------------------------------------------------
Total Income From Operations 0.16 0.77 0.19 0.29
- ------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.26) (0.51) (0.44) (0.42)
- ------------------------------------------------------------------------------------------------
Total Distributions (0.26) (0.51) (0.44) (0.42)
- ------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.50 $9.60 $9.34 $9.59
- ------------------------------------------------------------------------------------------------
Total Return 1.67%++ 8.43% 2.01% 3.01%++
- ------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $677 $952 $3,235 $5,412
- ------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.82%+ 0.73% 0.69% 0.75%+
Net investment income 4.95+ 5.43 4.65 4.78+
- ------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 56.49% 107.30% 126.64% 152.04%
================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) On November 7, 1994, the former Class C shares were renamed Class Y shares.
(3) For the period from February 1, 1993 (inception date) to December 31, 1993.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
25
<PAGE>
Smith Barney Funds, Inc.
Income Return Account Portfolio
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class Z Shares 1996(1) 1995 1994(2)
======================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $9.61 $9.35 $9.42
- --------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.24 0.50 0.07
Net realized and unrealized gain (loss) (0.08) 0.27 (0.02)
- --------------------------------------------------------------------------------------
Total Income From Operations 0.16 0.77 0.05
- --------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.26) (0.51) (0.12)
- --------------------------------------------------------------------------------------
Total Distributions (0.26) (0.51) (0.12)
- --------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.51 $9.61 $9.35
- --------------------------------------------------------------------------------------
Total Return 1.56%++ 8.43% 0.38%++
- --------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $5,236 $5,769 $7,083
- --------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.82%+ 0.70% 0.46%+
Net investment income 4.95+ 5.38 5.29+
- --------------------------------------------------------------------------------------
Portfolio Turnover Rate 56.49% 107.30% 126.64%
======================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) For the period from November 7, 1994 (inception date) to December 31, 1994.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
26
<PAGE>
Smith Barney Funds, Inc.
Short-Term U.S. Treasury Securities Portfolio
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares 1996(1) 1995 1994 1993 1992 1991(2)
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $4.19 $3.91 $4.16 $4.12 $4.09 $4.01
- ---------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.12 0.22 0.18 0.18 0.19 0.03
Net realized and unrealized gain (loss) (0.19) 0.28 (0.25) 0.06 0.04 0.09
- ---------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.07) 0.50 (0.07) 0.24 0.23 0.12
- ---------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.12) (0.22) (0.18) (0.18) (0.19) (0.03)
Net realized gains -- -- -- (0.02) (0.01) (0.01)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.12) (0.22) (0.18) (0.20) (0.20) (0.04)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $4.00 $4.19 $3.91 $4.16 $4.12 $4.09
- ---------------------------------------------------------------------------------------------------------------------------------
Total Return (2.61)%++ 13.16% (2.15)% 6.01% 5.92% 2.85%++
- ---------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) 91,191 $107,099 $88,707 $205,758 $130,280 $93,946
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.96%+ 0.98% 0.91% 0.88% 0.91% 0.80%+
Net investment income 6.65+ 5.29 4.54 4.40 4.76 4.89+
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 74.71% 28.62% 24.51% 41.12% 44.99% 4.61%
=================================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) For the period from November 11, 1991 (inception date) to December 31,
1991.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
27
<PAGE>
Smith Barney Funds, Inc.
Short-Term U.S. Treasury Securities Portfolio
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class Y Shares 1996(1)
================================================================================
<S> <C>
Net Asset Value, Beginning of Period $4.19
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.10
Net realized and unrealized loss (0.19)
- --------------------------------------------------------------------------------
Total Loss From Operations (0.09)
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.10)
Net realized gains --
- --------------------------------------------------------------------------------
Total Distributions (0.10)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $4.00
- --------------------------------------------------------------------------------
Total Return++ (2.89)%
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $13,562
- --------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.72%
Net investment income 6.15
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 74.71%
================================================================================
</TABLE>
(1) For the period February 8, 1996 (inception date) through June 30, 1996
(unaudited).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
28
<PAGE>
SMITH BARNEY
- ---------------------------------------
A Member of Travelers Group [LOGO]
Smith Barney
Funds, Inc.
Directors
Jessica M. Bibliowicz
Joseph H. Fleiss
Donald R. Foley
Paul Hardin
Francis P.Martin, M.D.
Heath B. McLendon, Chairman
Roderick C. Rasmussen
Bruce D. Sargent
John P. Toolan
C. Richard Youngdahl
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Bruce D. Sargent
Vice President
Ayako Weissman
Vice President
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Manager
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank, N.A.
Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Funds, Inc.-- Income Return Account and Short-Term U.S. Treasury
Securities Portfolios. It is not authorized for distribution to prospective
investors unless accompanied or preceded by a current Prospectus for the
Portfolio, which contains information concerning the Portfolio's investment
policies and expenses as well as other pertinent information.
Smith Barney Funds, Inc.
388 Greenwich Street
New York, New York 10013
FD0632 8/96
<PAGE>
S E M I - A N N U A L R E P O R T
Smith Barney
Funds, Inc.
U.S. Government
Securities Portfolio
- ---------------------
June 30, 1996
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
U.S. Government Securities Portfolio
Dear Shareholder:
We are pleased to provide you with the semi-annual report for the Smith Barney
Funds, Inc. -- U.S. Government Securities Portfolio (the "Portfolio") for the
period ended June 30, 1996. In this report, we summarize the period's prevailing
economic and market conditions and outline our portfolio strategy. A more
detailed summary of performance can be found in the appropriate sections that
follow in the semi-annual report.
Portfolio Performance Update
For the six months ended June 30, 1996, the Portfolio had a total return of-
1.14% for Class A's shares, which was slightly below its Lipper Analytical
Services, Inc. peer group average total return of-0.80%. (Lipper is an
independent fund tracking organization.) The Fund's reduced exposure in
mortgage-backed securities which tend to perform better in a period of rising
rates, had a negative effect on performance. The Portfolio distributed dividends
totalling $0.426 per share over the past six months.
Market Update and Outlook
Since January 1996, volatility in the bond market has increased and both short-
and long-term interest rates have risen. One of the main reasons why volatility
in the bond market has increased was greater than expected U.S. economic growth.
For example, economic data released by the U.S. government between February and
the end of May of this year indicated strong U.S. economic growth as evidenced
by increased job creation and higher consumer spending. In addition, new as well
as existing home sales have also shown continued momentum, with the Northeast
region of the U.S. the newest region of the country to exhibit growth.
During the first half of 1996, the annual rate of inflation in the U.S. was
approximately 2.9% and economic activity, as measured by Gross Domestic Product
(GDP), grew at an annual rate of roughly 3.0%. Moreover, over the past six
months, retail sales were sporadically stronger and the annual rate of
unemployment in the U.S. held steady at 5.5%.
Increasing investor concerns about the possible re-emergence of inflation
resulting from higher U.S. economic growth has led to an increase in yields,
especially from U.S. Treasury securities with longer-term maturities. The chart
below shows how yields have increased since our last report.
1
<PAGE>
Yields from U.S. Treasuries 12/31/95 6/30/96
-------- -------
3-Month U.S. Treasury Bill 5.07% 5.15%
5-Year U.S. Treasury Bill 5.37 6.46
10-Year U.S. Treasury Note 5.57 6.71
30-Year U.S. Treasury Bond 5.95 6.89
Other factors that have worked to increase bond market volatility include
concerns surrounding Russia's recent national Presidential election, the
uncertainty as to whether and when the Federal Reserve Board might raise
interest rates and greater participation by trading-oriented investors
attracted to recent market opportunities.
Fund's Investment Strategy
Although there will continue to be some near-term bond market volatility as
investors sift through confusing U.S. economic data, we remain positive about
the bond market's long-term prospects. We expect that the U.S. economy will
weaken modestly and inflation fears will disappear. Most investors should
therefore remain patient despite the bond market's recent volatility. In our
view, long-term U.S. Treasury yields at or above 7.00% represent good value and
we anticipate that yields from the 30-Year U.S. Treasury Bond will decline and
eventually settle in the 6.25% to 6.50% range. Therefore, we have slowly become
more aggressive in the Portfolio.
Over the past six months, as interest rates rose, we reduced the Portfolio's
weighting in mortgage-backed securities from 88% to roughly 74% and increased
its positions in longer-maturity Treasury strips, which are Treasury bonds that
make coupon or interest payments. While mortgage-backed securities yielding 7%
to 8% may seem attractive on the surface, these types of bonds may underperform
in the future because of prepayment fears. In an environment of declining
interest rates, homeowners tend to prepay their mortgages, thus reducing the
value of mortgage-backed securities.
As we stated earlier, the Portfolio's reduced exposure in mortgage-backed
securities adversely affected performance because these types of securities
tend to perform better in periods of rising interest rates. However, the
Portfolio should benefit from its lower weighting in mortgage-backed securities
and higher weighting in U.S. Treasuries if interest rates fall, which we expect
in the coming months.
2
<PAGE>
In closing, thank you for investing in the U.S. Government Securities
Portfolio. We look forward to continuing to help you achieve your financial
goals.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman and Vice President and
Chief Executive Officer Investment Officer
July 12, 1996
3
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Historical Performance -- Class A Shares
Net Asset Value
-------------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
=============================================================================
6/30/96 $13.59 $13.02 $0.43 $0.00 (1.14)%+
- -----------------------------------------------------------------------------
12/31/95 12.50 13.59 0.92 0.00 16.52
- -----------------------------------------------------------------------------
12/31/94 13.66 12.50 0.91 0.05 (1.48)
- -----------------------------------------------------------------------------
12/31/93 13.87 13.66 0.98 0.11 6.40
- -----------------------------------------------------------------------------
12/31/92 14.10 13.87 1.08 0.08 6.85
- -----------------------------------------------------------------------------
12/31/91 13.22 14.10 1.13 0.05 16.29
- -----------------------------------------------------------------------------
12/31/90 13.17 13.22 1.18 0.00 9.95
- -----------------------------------------------------------------------------
12/31/89 12.56 13.17 1.21 0.00 15.11
- -----------------------------------------------------------------------------
12/31/88 12.68 12.56 1.20 0.00 8.72
- -----------------------------------------------------------------------------
12/31/87 13.89 12.68 1.31 0.24 2.67
- -----------------------------------------------------------------------------
12/31/86 13.95 13.89 1.44 0.04 10.76
=============================================================================
Total $11.79 $0.57
=============================================================================
Historical Performance -- Class B Shares
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
===============================================================================
6/30/96 $13.61 $13.03 $0.39 $0.00 (1.38)%+
- -------------------------------------------------------------------------------
12/31/95 12.51 13.61 0.86 0.00 16.03
- -------------------------------------------------------------------------------
Inception*-12/ 31/94 12.47 12.51 0.21 0.00 2.04+
===============================================================================
Total $1.46 $0.00
===============================================================================
Historical Performance -- Class C Shares
Net Asset Value
Op --------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
===============================================================================
6/30/96 $13.58 $13.01 $0.40 $0.00 (1.29)%+
- -------------------------------------------------------------------------------
12/31/95 12.50 13.58 0.87 0.00 15.93
- -------------------------------------------------------------------------------
12/31/94 13.66 12.50 0.83 0.04 (2.11)
- -------------------------------------------------------------------------------
12/31/93 13.86 13.66 0.88 0.11 5.74
- -------------------------------------------------------------------------------
Inception*-12/31/92 14.01 13.86 0.30 0.00 1.07+
===============================================================================
Total $3.28 $0.15
===============================================================================
4
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Historical Performance -- Class Y Shares
Net Asset Value
-----------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
===============================================================================
6/30/96 $13.61 $13.04 $0.44 $0.00 (0.94)%+
- -------------------------------------------------------------------------------
12/31/95 12.51 13.61 0.96 0.00 16.88
- -------------------------------------------------------------------------------
12/31/94 13.67 12.51 0.91 0.04 (1.53)
- -------------------------------------------------------------------------------
Inception*-12/31/93 13.97 13.67 0.95 0.11 5.55+
===============================================================================
Total $3.26 $0.15
===============================================================================
Historical Performance -- Class Z Shares
Net Asset Value
-----------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
===============================================================================
6/30/96 $13.60 $13.03 $0.44 $0.00 (1.01)%+
- -------------------------------------------------------------------------------
12/31/95 12.50 13.60 0.95 0.00 16.89
- -------------------------------------------------------------------------------
Inception*-12/31/94 12.47 12.50 0.24 0.00 (2.15)+
===============================================================================
Total $1.63 $0.00
===============================================================================
It is the Fund's policy to distribute dividends monthly and capital gains,
if any, annually.
Average Annual Total Return
Without Sales Charge(1)
----------------------------------------------
Class A Class B Class C Class Y Class Z
==============================================================================
Six Months Ended 6/30/96+ (1.14)% (1.38)% (1.29)% (0.94)% (1.01)%
- ------------------------------------------------------------------------------
Year Ended 6/30/96 4.13 3.70 3.67 4.62 4.47
- ------------------------------------------------------------------------------
Five Years Ended 6/30/96 7.55 N/A N/A N/A N/A
- ------------------------------------------------------------------------------
Inception* through 6/30/96 9.54 9.87 5.14 5.49 9.58
==============================================================================
With Sales Charge(2)
---------------------------------------------
Class A Class B Class C Class Y Class Z
============================================================================
Six Months Ended 6/30/96+ (5.51)% (5.69)% (2.25)% (0.94)% (1.01)%
- ----------------------------------------------------------------------------
Year Ended 6/30/96 (0.57) (0.80) 2.67 4.62 4.47
- ----------------------------------------------------------------------------
Five Years Ended 6/30/96 6.55 N/A N/A N/A N/A
- ----------------------------------------------------------------------------
Ten Years Ended 6/30/96 8.03 N/A N/A N/A N/A
- ----------------------------------------------------------------------------
Inception* through 6/30/96 9.10 7.57 5.14 5.49 9.58
============================================================================
5
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Cumulative Total Return
Without
Sales Charge(1)
=============================================================
Class A (6/30/86 through 6/30/96) 126.67%
Class B (Inception* through 6/30/96) 16.76
Class C (Inception* through 6/30/96) 19.63
Class Y (Inception* through 6/30/96) 20.35
Class Z (Inception* through 6/30/96) 18.19
=============================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the applicable
sales charge with respect to Class A shares or the 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% and 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 by 1.00% per year thereafter 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, Y and Z shares are October 9, 1984,
November 7, 1994, December 2, 1992, January 12, 1993 and November 7, 1994,
respectively.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
6
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Historical Performance (unaudited)
Growth of $10,000 Invested in Class A Shares of the
U.S. Government Securities Portfolio vs.
Lehman Brothers GNMA Index+
- --------------------------------------------------------------------------------
June 1986 -- June 1996
[The table below was presented as a line graph in the printed document]
<TABLE>
<CAPTION>
U.S. Government Lehman Brothers GNMA
Securities Portfolio Mutual Fund Index
-------------------- --------------------
<S> <C> <C>
Jun-86 $ 9,599 $ 10,473
- ---------------------------------------------------------------------
Dec-86 10,245 11,252
- ---------------------------------------------------------------------
Dec-87 10,477 11,738
- ---------------------------------------------------------------------
Dec-88 11,348 12,771
- ---------------------------------------------------------------------
Dec-89 13,015 14,774
- ---------------------------------------------------------------------
Dec-90 14,258 16,337
- ---------------------------------------------------------------------
Dec-91 16,513 18,958
- ---------------------------------------------------------------------
Dec-92 17,599 20,362
- ---------------------------------------------------------------------
Dec-93 18,667 21,701
- ---------------------------------------------------------------------
Dec-94 18,350 21,374
- ---------------------------------------------------------------------
Dec-95 21,382 25,018
- ---------------------------------------------------------------------
Jun-96 21,155 25,118
- ---------------------------------------------------------------------
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares on December
31, 1985, assuming deduction of the maximum 4.00% sales charge in effect at
the time of investment and reinvestment of dividends (after deduction of
applicable sales charge through November 7, 1994, and thereafter at net asset
value) and capital gains, if any, at net asset value through December 31,
1995. The Lehman Brothers GNMA Index is composed of 15-year and 30-year fixed-
rate securities backed by mortgage pools of the Government National Mortgage
Association. The index is unmanaged and is not subject to the 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 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.
7
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Schedule of Investments (unaudited) June 30, 1996
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 80.5%
$17,000,000 U.S. Treasury Note, 6.625% due 6/30/01 $ 17,110,670
49,044,000 U.S. Treasury Note, 6.875% due 5/15/06+ 49,580,051
48,250,000 U.S. Treasury Strips, zero coupon due 5/15/09 19,949,445
49,375,000 U.S. Treasury Strips, zero coupon due 2/15/15 13,369,269
30,000,000 U.S. Treasury Strips, zero coupon due 2/15/15 8,079,300
28,000,000 U.S. Treasury Strips, zero coupon due 2/15/19 5,639,760
55,400,000 FNMA Principal Strips, zero coupon due 10/9/19 10,007,456
7,274,425 FNMA Certificates, 8.000% due 6/1/26++ 7,333,494
44,134,000 FNMA TBA Certificates, 7.500% due 6/1/26* 44,299,502
13,047,264 GNMA Certificates, 8.000% due 7/15/17++ 13,169,517
7,981,047 GNMA Certificates, 9.000% due 11/15/19++ 8,360,148
1,834,684 GNMA Certificates, 10.000% due 7/15/20++ 2,002,099
141,170,974 GNMA Certificates Platinum, 9.000% due 12/15/17++ 150,081,686
3,550,000 GNMA TBA Certificates, 9.000% due 11/15/19* 3,713,051
40,399,995 GNMA II Certificates, 7.500% due 6/20/26++ 39,642,494
942,688 GNMA II Certificates, 10.000% due 1/20/18++ 1,006,904
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost -- $398,431,560) 393,344,846
================================================================================
REPURCHASE AGREEMENTS -- 19.5%
85,000,000 Morgan Stanley Group, Inc., 5.390% due 7/2/96;
Proceeds at maturity -- $85,101,811;
(Fully collateralized by FNMA Certificates,
5.500% to 6.500% due 3/25/08 to 3/25/24;
Market value -- $86,699,439) 85,000,000
10,531,000 Citibank, Inc., 5.396% due 7/1/96;
Proceeds at maturity -- $10,535,735;
(Fully collateralized by U.S. Treasury Notes,
6.375% due 5/15/99; Market value -- $10,742,737) 10,531,000
- --------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $95,531,000) 95,531,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $493,962,560**) $488,875,846
================================================================================
+ Security has been segregated by custodian for reverse repurchase
agreement.
++ Maturity date shown represents the last in the range of maturity dates of
mortgage certificates owned.
* Security is traded on a "to-be-announced" basis (See Note 6).
** Aggregate cost for Federal income tax purposes is substantially the
same.
See Notes to Financial Statements.
8
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Statement of Assets and Liabilities (unaudited) June 30, 1996
ASSETS:
Investments, at value (Cost -- $398,431,560) $393,344,846
Repurchase agreements (Cost -- $95,531,000) 95,531,000
Cash 210
Receivable for securities sold 17,337,590
Receivable for Fund shares sold 147,163
Interest receivable 2,249,741
Other assets 4,491
- -------------------------------------------------------------------------
Total Assets 508,615,041
- -------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 67,659,444
Reverse repurchase agreement (Note 5) 49,166,610
Dividends payable 2,152,493
Management fees payable 178,258
Distribution fees payable 58,210
Interest payable 32,368
Accrued expenses 124,155
- -------------------------------------------------------------------------
Total Liabilities 119,371,538
- -------------------------------------------------------------------------
Total Net Assets $389,243,503
=========================================================================
NET ASSETS:
Par value of capital shares $ 299,008
Capital paid in excess of par value 404,698,895
Overdistributed net investment income (380,726)
Accumulated net realized loss on investments (10,286,960)
Net unrealized depreciation of investments (5,086,714)
- -------------------------------------------------------------------------
Total Net Assets $389,243,503
=========================================================================
Shares Outstanding:
Class A 25,584,923
- -------------------------------------------------------------------------
Class B 878,914
- -------------------------------------------------------------------------
Class C 1,414,805
- -------------------------------------------------------------------------
Class Y 436,408
- -------------------------------------------------------------------------
Class Z 1,585,784
- -------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $13.02
- -------------------------------------------------------------------------
Class B* $13.03
- -------------------------------------------------------------------------
Class C** $13.01
- -------------------------------------------------------------------------
Class Y (and redemption price) $13.04
- -------------------------------------------------------------------------
Class Z (and redemption price) $13.03
- -------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $13.63
=========================================================================
* Redemption price is NAV of Class B shares reduced by 4.50% CDSC if shares are
redeemed within one year from initial purchase (See Note 2).
**Redemption price is NAV of Class C shares reduced by 1.00% CDSC if shares are
redeemed within the first year of purchase.
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Statement of Operations (unaudited)
For the Six Months Ended June 30, 1996
INVESTMENT INCOME:
Interest $ 15,499,853
Less: Interest expense (844,646)
- -------------------------------------------------------------------------------
Total Investment Income 14,655,207
- -------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 911,953
Distribution fees (Note 2) 555,262
Shareholder and system servicing fees 102,646
Registration fees 68,250
Shareholder communications 38,247
Custody 14,017
Audit and legal 9,276
Trustees' fees 4,488
Other 10,813
- -------------------------------------------------------------------------------
Total Expenses 1,714,952
- -------------------------------------------------------------------------------
Net Investment Income 12,940,255
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTE 3):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales 683,654,399
Cost of securities sold 684,262,130
- -------------------------------------------------------------------------------
Net Realized Loss (607,731)
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments:
Beginning of period 12,160,495
End of period (5,086,714)
- -------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (17,247,209)
- -------------------------------------------------------------------------------
Net Loss on Investments (17,854,940)
- -------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (4,914,685)
===============================================================================
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Statements of Changes in Net Assets
For the Six Months Ended June 30, 1996 (unaudited)
and the Year Ended December 31, 1995
<TABLE>
<CAPTION>
1996 1995
=====================================================================================
OPERATIONS:
<S> <C> <C>
Net investment income $ 12,940,255 $ 28,799,812
Net realized gain (loss) (607,731) 9,369,017
Increase in net unrealized appreciation (depreciation) (17,247,209) 26,284,851
- -------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (4,914,685) 64,453,680
- -------------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (13,220,974) (28,927,423)
- -------------------------------------------------------------------------------------
Decrease In Net Assets From Distributions
to Shareholders (13,220,974) (28,927,423)
- -------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sales 6,238,122 29,154,430
Net asset value of shares issued in connection
with the transfer of Smith Barney Funds, Inc.--
Monthly Payment Government Portfolio's
net assets (Note 8) -- 42,151,893
Net asset value of shares issued to shareholders
for reinvestment of dividends 6,769,655 17,079,838
Cost of shares reacquired (50,752,880) (92,097,436)
- -------------------------------------------------------------------------------------
Decrease in Net Assets From Fund
Share Transactions (37,745,103) (3,711,275)
- -------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (55,880,762) 31,814,982
NET ASSETS:
Beginning of period 445,124,265 413,309,283
- -------------------------------------------------------------------------------------
End of period* $389,243,503 $445,124,265
=====================================================================================
* Includes overdistributed net investment income of: $(380,726) $(100,007)
=====================================================================================
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Notes to Financial Statements (unaudited)
1. Significant Accounting Policies
The U.S. Government Securities Portfolio ("Portfolio") is a separate
investment portfolio of the Smith Barney Funds, Inc. ("Fund"). The Fund, a
Maryland corporation, is registered under the Investment Company Act of 1940,
as amended, as a diversified, open-end management investment company. The Fund
consists of this Portfolio and three other separate investment portfolios:
Equity Income, Income Return Account and Short-Term U.S. Treasury Securities
Portfolios. The financial statements and financial highlights for the other
portfolios are presented in separate semi-annual reports.
The significant accounting policies consistently followed by the Fund
are: (a) security transactions are accounted for on trade date; (b) U.S.
Government and Agency Obligations are valued at the mean between the bid and ask
prices; (c) short-term investments that have a maturity of more than 60 days are
valued at prices based on market quotations for securities of similar type,
yield and maturity; (d) securities maturing within 60 days are valued at cost
plus accreted discount, or minus amortized premium, which approximates market
value; (e) interest income is recorded on the accrual basis; (f) gains or losses
on the sale of securities are calculated by using the specific identification
method; (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) each portfolio intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
(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 December 31, 1995, reclassifications were made to the
Fund's capital accounts to reflect permanent book/tax differences and income and
gains available for distributions under income tax regulations. Accordingly, a
portion of accumulated net realized loss amounting to $14,573,486 was
reclassified to paid-in capital. Net investment income, net realized gains and
net assets were not affected by
12
<PAGE>
Smith Barney Funds Inc.
U.S. Government Securities Portfolio
Notes to Financial Statements (unaudited)(continued)
this change; and (k) estimates and assumptions are required to be made
regarding assets, liabilities and changes in net assets resulting from
operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
2. Management Agreement and Transactions
with Affiliated Persons
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of
Smith Barney Holdings Inc. ("SBH"), acts as investment manager to the Fund. The
management fee for the U.S. Government Securities and Income Return Account
Portfolios is determined by aggregating the assets of each Portfolio and
applying a formula calculated at the annual rate of 0.50% on the first $200
million of the aggregate average daily net assets of the two Portfolios and
0.40% on the aggregate average daily net assets in excess of $200 million; this
total is then allocated to each Portfolio based on their relative average daily
net assets. These fees are calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor
of Fund shares. For the six months ended June 30, 1996, SB received sales
charges of approximately $84,000 on sales of the Portfolio's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase. This CDSC declines by 0.50% the first year after purchase and by
1.00% per year thereafter 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 six months ended June 30, 1996, CDSCs paid to SB were
approximately:
Class B Class C
================================================================================
CDSC $11,000 $1,000
================================================================================
13
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Notes to Financial Statements (unaudited)(continued)
Pursuant to a Distribution Plan, the Portfolio pays a service fee with
respect to its Class A, B and C shares calculated at the annual rate of 0.25%
of the average daily net assets for each class, respectively. In addition, the
Portfolio also pays a distribution fee with respect to Class B and Class C
shares calculated at the annual rate of 0.50% and 0.45% of the average daily
net assets for each class, respectively. For the six months ended June 30,
1996, total Distribution Plan fees were as follows:
Class A Class B Class C
=========================================================================
Distribution Plan Fees $444,889 $41,919 $68,454
=========================================================================
All officers and three Directors of the Fund are employees of SB.
3. Investments
During the six months ended June 30, 1996, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
=========================================================================
Purchases $696,985,831
- -------------------------------------------------------------------------
Sales 683,654,399
=========================================================================
At June 30, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
=========================================================================
Gross unrealized appreciation $ 1,412,143
Gross unrealized depreciation (6,498,857)
- -------------------------------------------------------------------------
Net unrealized depreciation $(5,086,714)
=========================================================================
4. Repurchase Agreements
The Portfolio purchases (and its custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements
to resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
14
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Notes to Financial Statements (unaudited)(continued)
5. Reverse Repurchase Agreement
The Portfolio may enter into reverse repurchase agreement transactions
for leveraging purposes. A reverse repurchase agreement involves a sale by the
Portfolio of securities that it holds with an agreement by the Portfolio to
repurchase the same securities at an agreed upon price and date. A reverse
repurchase agreement involves the risk that the market value of the securities
sold by the Portfolio may decline below the repurchase price of the securities.
The Portfolio will establish a segregated account with its custodian, in which
the Portfolio will maintain cash, U.S. government securities or other liquid
high grade debt obligations equal in value to its obligations with respect to
the reverse repurchase agreement.
At June 30, 1996, the Portfolio had the following reverse repurchase
agreement outstanding:
FACE
AMOUNT SECURITY VALUE
================================================================================
$49,044,000 Reverse Repurchase Agreement with Morgan
Stanley Group, Inc., dated 6/24/96 bearing
4.740% to be repurchased at $49,218,399
on 7/2/96, collateralized by U.S. Treasury
Note, 6.875% due 5/15/06 $49,166,610
================================================================================
During the six months ended June 30, 1996, the maximum and average
amount of reverse repurchase agreements outstanding were as follows:
================================================================================
Maximum amount outstanding $49,227,915
- --------------------------------------------------------------------------------
Average amount outstanding $46,834,083
================================================================================
Interest rates earned on reverse repurchase agreements ranged from
1.375% to 5.050% during the year. Total market value of the collateral for the
reverse repurchase agreement is $49,580,051.
Interest expense for the six months ended June 30, 1996, on borrowing by
the Portfolio under the reverse repurchase agreement totalled $844,646.
15
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Notes to Financial Statements (unaudited)(continued)
6. Securities Traded on a When-Issued or
To-Be-Announced Basis
The Portfolio may trade securities, particularly GNMAs, on a "to-be-
announced" ("TBA") basis. In a TBA transaction, the Portfolio commits to
purchasing or selling securities for which specific information is not yet known
at the time of the trade, particularly the face amount and maturity date.
Securities purchased on a TBA basis are not settled until they are delivered to
the Portfolio, normally 15 to 45 days later. These transactions are subject to
market fluctuations and their current value is determined in the same manner as
for other portfolio securities.
As of June 30, 1996, the Portfolio held two TBA securities with a total
cost of $47,572,765.
7. Capital Shares
At June 30, 1996, the Fund had two billion shares of capital stock
authorized with a par value of $0.01 per share. The Portfolio has the ability
to issue multiple classes of shares. Each share of a class represents an
identical interest in the Portfolio and has the same rights, except that each
class bears certain expenses specifically related to the distribution of its
shares.
At June 30, 1996, total paid-in capital amounted to the following for
each class:
Class Amount
================================================================================
A $348,500,941
B 11,427,178
C 19,397,877
Y 6,550,496
Z 19,121,411
================================================================================
16
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Notes to Financial Statements (unaudited)(continued)
Transactions in shares of each class were as follows:
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
---------------------- ----------------------
Shares Amount Shares Amount
================================================================================
Class A
Shares sold 231,315 $ 3,085,631 993,281 $ 13,089,337
Net asset value of shares
issued in connection
with the transfer of
Smith Barneys Funds,
Inc.-- Monthly
Payment Government
Portfolio's net
assets (Note 8) -- -- 2,887,733 38,637,744
Shares issued on reinvestment 394,309 5,227,735 1,073,322 14,209,870
Shares redeemed (3,329,909) (44,193,907) (5,309,396) (70,232,692)
- -------------------------------------------------------------------------------
Net Decrease (2,704,285) $(35,880,541) (355,060) $ (4,295,741)
===============================================================================
Class B
Shares sold 134,993 $ 1,349,579 759,232 $ 10,098,823
Net asset value of shares
issued in
connection with
the transfer of
Smith Barneys
Funds, Inc.--
Monthly Payment
Government Portfolio's
net assets (Note 8) -- -- 40,956 548,705
Shares issued on reinvestment 14,169 632,748 23,845 318,309
Shares redeemed (87,118) (1,163,668) (129,358) (1,718,302)
- -------------------------------------------------------------------------------
Net Increase 62,044 $ 818,659 694,675 $ 9,247,535
===============================================================================
Class C
Shares sold 39,731 $ 523,704 236,768 $ 3,129,915
Net asset value of shares
issued in connection
with the transfer
of Smith Barneys
Funds, Inc.--
Monthly Payment
Government Portfolio's
net assets (Note 8) -- -- 221,615 2,965,444
Shares issued on reinvestment 21,189 280,681 69,690 921,823
Shares redeemed (233,317) (3,104,684) (641,755) (8,524,847)
- -------------------------------------------------------------------------------
Net Decrease (172,397) $(2,300,299) (113,682) $ (1,507,665)
===============================================================================
Class Y
Shares sold 1 $ 14 3,330 $ 44,021
Shares issued on reinvestment 3,469 46,173 12,500 165,457
Shares redeemed (80,760) (1,074,671) (613,583) (8,026,122)
- -------------------------------------------------------------------------------
Net Decrease (77,290) $(1,028,484) (597,753) $ (7,816,644)
===============================================================================
17
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Notes to Financial Statements (unaudited)(continued)
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
---------------------- ----------------------
Shares Amount Shares Amount
===============================================================================
Class Z
Shares sold 95,379 $ 1,279,194 212,929 $ 2,792,334
Shares issued on reinvestment 43,904 582,318 110,569 1,464,379
Shares redeemed (91,968) (1,215,950) (271,382) (3,595,473)
- -------------------------------------------------------------------------------
Net Increase 47,315 $ 645,562 52,116 $ 661,240
===============================================================================
8. Transfer of Net Assets
On October 13, 1995, the Portfolio acquired the assets and certain
liabilities of the Smith Barney Funds, Inc. -- Monthly Payment Government
Portfolio ("Monthly Payment") pursuant to a plan of reorganization approved by
the Monthly Payment shareholders on October 6, 1995. Total shares issued by the
Portfolio and the total net assets of Monthly Payment on the date of transfer
were:
Total Net
Shares Assets of Total Net
Issued by Monthly Assets of
Acquired Portfolio the Portfolio Payment the Portfolio
===============================================================================
Monthly Payment 3,150,304 $42,151,893 $409,850,631
===============================================================================
The total net assets of Monthly Payment before acquisition included
unrealized appreciation of $1,425,657 and a net realized loss of $2,370,573.
Total net assets of the Portfolio immediately after the transfer were
$452,002,524. The transaction was structured for tax purposes to qualify as a
tax-free reorganization under the Internal Revenue Code of 1986, as amended.
9. Capital Loss Carryforward
At December 31, 1995, the Portfolio had for Federal income tax purposes
approximately $4,584,000 of capital loss carryforwards available to offset
future realized gains. As a result of the transfer, U.S. Government Securities
acquired approximately $698,000 of capital loss carryforwards from Monthly
Payment, which is part of the $4,584,000. To the extent that these carryforward
losses are used to offset capital gains, it is probable that the gains so
offset will not be distributed.
The amount and date of expiration for each carryforward loss is indicated
below:
12/31/96 12/31/97 12/31/01 12/31/02
===============================================================================
Carryforward Amounts $392,000 $898,000 $430,000 $2,864,000
===============================================================================
18
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Financial Highlights
<TABLE>
<CAPTION>
For a share of each class of capital stock outstanding throughout each period:
<S> <C> <C> <C> <C> <C> <C>
Class A Shares 1996(1) 1995 1994 1993 1992 1991
========================================================================================================
Net Asset Value, Beginning of Period $13.59 $12.50 $13.66 $13.87 $14.10 $13.22
- --------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.42 0.92 0.91 0.98 1.06 1.26
Net realized and unrealized
gain (loss) (0.56) 1.09 (1.11) (0.10) (0.13) 0.80
- --------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.14) 2.01 (0.20) 0.88 0.93 2.06
- --------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.43) (0.92) (0.91) (0.98) (1.08) (1.13)
Net realized gains -- -- (0.05)* (0.11)* (0.08)* (0.05)*
- --------------------------------------------------------------------------------------------------------
Total Distributions (0.43) (0.92) (0.96) (1.09) (1.16) (1.18)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.02 $13.59 $12.50 $13.66 $13.87 $14.10
- --------------------------------------------------------------------------------------------------------
Total Return (1.14)% 16.52% (1.48)% 6.40% 6.85% 16.29%
- --------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $333,040 $384,534 $358,045 $468,278 $459,380 $394,412
Ratios to Average Net Assets:
Expenses 1.22% 0.79% 0.76%** 0.49% 0.50% 0.44%
Net investment income 6.27 6.82 6.83 7.00 7.65 8.31
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 165.72% 57.39% 40.22% 57.34% 26.18% 9.29%
========================================================================================================
Class B Shares 1996(1) 1995 1994(2)
========================================================================================================
Net Asset Value, Beginning of Period $13.61 $12.51 $12.47
- --------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.39 0.80 0.08
Net realized and unrealized
gain (loss) (0.58) 1.16 0.17
- --------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.19) 1.96 0.25
- --------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.39) (0.86) (0.21)
- --------------------------------------------------------------------------------------------------------
Total Distributions (0.39) (0.86) (0.21)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.03 $13.61 $12.51
- --------------------------------------------------------------------------------------------------------
Total Return (1.38)% 16.03% 2.04%
- --------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $11,454 $11,116 $1,529
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.72% 1.28% 1.21%**
Net investment income 5.78 6.16 6.94
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 165.72% 57.39% 40.22%
========================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) For the period from November 7, 1994 (inception date) to December 31, 1994.
* Represents distributions from paydown gains which are reported as ordinary
income for tax purposes.
** Amount has been restated from the December 31, 1994 annual report.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
19
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Financial Highlights (continued)
For a share of each class of capital stock outstanding throughout each
period:
<TABLE>
<CAPTION>
Class C Shares 1996(1) 1995 1994(2) 1993 1992(3)
=============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $13.58 $12.50 $13.66 $13.86 $14.01
- -------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.38 0.86 0.82 0.89 0.15
Net realized and unrealized gain (loss) (0.55) 1.09 (1.11) (0.10) --
- -------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.17) 1.95 (0.29) 0.79 0.15
- -------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.40) (0.87) (0.83) (0.88) (0.30)
Net realized gains -- -- (0.04)* (0.11)* --
- -------------------------------------------------------------------------------------------------------------
Total Distributions (0.40) (0.87) (0.87) (0.99) (0.30)
- -------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.01 $13.58 $12.50 $13.66 $13.86
- -------------------------------------------------------------------------------------------------------------
Total Return (1.29)%++ 15.93% (2.11)% 5.74% 1.07%++
- -------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $18,401 $21,559 $21,253 $19,938 $1,954
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.70%+ 1.25% 1.21% 1.21% 1.14%+
Net investment income 5.80+ 6.36 6.27 6.23 6.56+
- -------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 165.72% 57.39% 40.22% 57.34% 26.18%
=============================================================================================================
Class Y Shares 1996(1) 1995 1994(4) 1993(5)
=============================================================================================================
Net Asset Value, Beginning of Period $13.61 $12.51 $13.67 $13.97
- -------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.44 1.00 0.89 0.86
Net realized and unrealized gain (loss) (0.57) 1.06 (1.10) (0.10)
- -------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.13) 2.06 (0.21) 0.76
- -------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.44) (0.96) (0.91) (0.95)
Net realized gains -- -- (0.04)* (0.11)*
- -------------------------------------------------------------------------------------------------------------
Total Distributions (0.44) (0.96) (0.95) (1.06)
- -------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.04 $13.61 $12.51 $13.67
- -------------------------------------------------------------------------------------------------------------
Total Return (0.94)%++ 16.88% (1.53)% 5.55%++
- -------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $5,690 $6,992 $13,903 $14,118
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.92%+ 0.49% 0.61% 0.69%+
Net investment income 6.58+ 7.22 6.82 7.29+
- -------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 165.72% 57.39% 40.22% 57.34%
=============================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) On November 7, 1994, the former Class B shares were renamed Class C shares.
(3) For the period from December 2, 1992 (inception date) to December 31, 1992.
(4) On November 7, 1994, the former Class C shares were renamed Class Y shares.
(5) For the period from January 12, 1993 (inception date) to December 31, 1993.
* Represents distributions from paydown gains which are reported as ordinary
income for tax purposes.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
20
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
Financial Highlights (continued)
For a share of each class of capital stock outstanding throughout each
period:
Class Z Shares 1996(1) 1995 1994(2)
============================================================================
Net Asset Value, Beginning of Period $13.60 $12.50 $12.47
- ----------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.44 0.94 0.14
Net realized and unrealized gain (loss) (0.57) 1.11 0.13
- ----------------------------------------------------------------------------
Total Income (Loss) From Operations (0.13) 2.05 0.27
- ----------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.44) (0.95) (0.24)
Net realized gains -- -- --
- ----------------------------------------------------------------------------
Total Distributions (0.44) (0.95) (0.24)
- ----------------------------------------------------------------------------
Net Asset Value, End of Period $13.03 $13.60 $12.50
- ----------------------------------------------------------------------------
Total Return (1.01)% 16.89% (2.15)%++
- ----------------------------------------------------------------------------
Net Assets, End of Period (000s) $20,659 $20,923 $18,580
- ----------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.92%+ 0.50% 0.34%+
Net investment income 6.58+ 7.12 7.55+
- ----------------------------------------------------------------------------
Portfolio Turnover Rate 165.72% 57.39% 40.22%
==============================================================================
(1) For the six months ended June 30, 1996 (unaudited).
(2) For the period from November 7, 1994 (inception date) to December 31, 1994.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
21
<PAGE>
Smith Barney
Funds, Inc.
Directors
Jessica M. Bibliowicz
Joseph H. Fleiss
Donald R. Foley
Paul Hardin
Francis P. Martin, M.D.
Heath B. McLendon, Chairman
Roderick C. Rasmussen
Bruce D. Sargent
John P. Toolan
C. Richard Youngdahl
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Bruce D. Sargent
Vice President
Ayako Weissman
Vice President
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
- -------------------------------
A Member of TravelersGroup[ART]
Investment Manager
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank, N.A.
Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio. It is not
authorized for distribution to prospective investors unless accompanied or
preceded by a current Prospectus for the Portfolio, which contains information
concerning the Portfolio's investment policies and expenses as well as other
pertinent information.
Smith Barney Funds, Inc.
388 Greenwich Street
New York, New York 10013
FD0631 8/96
<PAGE>
SEMI - ANNUAL REPORT
[GRAPHIC APPEARS HERE]
Smith Barney
Funds, Inc.
Equity Income
Portfolio
----------------------------------
June 30, 1996
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Equity Income Portfolio
Dear Shareholder:
We are pleased to provide you with the semi-annual report for Smith Barney
Funds, Inc. -- Equity Income Portfolio for the period ended June 30, 1996. For
your convenience, we summarize the period's prevailing economic and market
conditions and briefly report on the Portfolio's investment strategy. A detailed
summary of performance and current holdings can be found in the appropriate
sections that follow in the annual report.
Portfolio Performance and Investment
Strategy
For the six-month period ended June 30, 1996, the Equity Income Portfolio
had a total return of 8.70% for Class A shares versus the Standard & Poor's 500
Index total return of 10.09% for the same time period. (The Standard & Poor's
500 Index is a capitalization weighted-index of 500 widely held common stocks.)
Since its inception, the Equity Income Portfolio has maintained a consistent
investment strategy. The Portfolio seeks to provide shareholders with current
income and long-term growth of capital by investing primarily in large
capitalization companies which tend to be familiar household names such as
General Electric, Xerox and Mobil Corp. We look for companies with assets that
we believe are undervalued by the marketplace and that pay above-market
dividends. Dividend-paying stocks can help smooth out short-term market
volatility and should provide our shareholders with consistent and competitive
long-term returns.
In selecting stocks for the Portfolio, we use a highly disciplined,
conservative, "bottom-up" approach to investing. As value investors, our main
objective is to identify out-of-favor companies that are either at their lowest
point in the business cycle or that have performed poorly in the past but who,
in our view, are about to turn the corner because of a new management team, new
product, or new business strategy.
We strive to minimize risk in the Equity Income Portfolio in a number of ways.
As of June 30, 1996, no single security makes up more than 5% of the Portfolio
and usually that percentage is much less. In fact, out of the 60 securities we
own as of June 30, 1996, our top holding -- Monsanto Co. -- represents only
approximately 3% of the Portfolio. In addition to the Portfolio's broad
diversification, the stocks we own tend to be highly liquid and the dividends
they generate help to cushion the portfolio from the effects of turbulent
markets.
1
<PAGE>
Market Update and Outlook
During the first half of 1996, the volatility of the stock market increased
significantly. However, rather than declining as a whole, the stock market
experienced a series of rapid rotations from sector to sector. For example,
during the first quarter of 1996, cyclical stocks such as automobiles and
retailers, which were major underperformers in 1995, became the market's new
leaders, replacing more defensive stocks such as utilities, oil companies and
consumer-product companies.
Despite a rise in interest rates and slower corporate earnings growth, the stock
market performed relatively well during the second quarter of 1996 and domestic
stock funds recorded their sixth consecutive quarter of gains. However, towards
the end of June, some of the more speculative sectors of the market, such as
small capitalization companies, went down sharply, raising investor concerns
about the overall direction of the stock market.
Since the end of the second quarter of 1996, a correction has occurred
in the market and it has become apparent that the pace of U.S. economic growth
has slowed. In addition, the recent increase in credit card delinquencies
suggests that consumers, a main driver of economic growth, may be tapped out.
In recent months, small capitalization stocks, particularly in the technology
sector, have become much more volatile. This is not surprising given the fact
that it has been more than six years since the stock market has had a 10%
correction. In our view, speculation in the market had risen to alarming
heights, as small-capitalization stocks with minimal revenues and earnings and
short histories were bid up to excessive valuation levels.
Portfolio Update
Against a backdrop of a few large and highly visible companies announcing
earnings disappointments and historically high stock valuations, it has become
more challenging to find out-of-favor blue-chip companies that meet our strict
investment criteria. Over the past few quarters, we have assumed a more
defensive posture and have raised our cash reserves by taking profits in stocks
that have met our selling price targets. Moreover, we have positioned the
Portfolio for any further market corrections both through the types of
individual securities we own and our current asset allocation.
During the period covered by this report, the Portfolio's industry allocations
remained relatively unchanged. American Home Products, a conservatively managed
drug, consumer and agricultural products company, became one of the Portfolio's
top-ten holdings. Although many people thought American Home Products overpaid
when it acquired American Cyanamid in 1994, we believe the company will
ultimately be successful in accelerating earnings-per-share growth through
merger cost savings at the operational level and an improving pipeline of new
drugs.
2
<PAGE>
In our view, another Portfolio holding with excellent upside potential is
International Paper, the largest paper company in the world and one of the top-
five producers of the other paper grades in which it operates. Faced with
sharply rising prices for most paper grades in late 1994 and early 1995,
customers built up large inventories and bought ahead of each successive
industry price hike. When the economy slowed down in the second half of 1995,
customers began to liquidate their excessive inventories, causing already weak
demand to go down even more. The shares of paper and forest product companies
underperformed the stock market in 1995 and through the beginning of 1996. Even
though mill inventories are still high, they are more than 10% below their
February 1996 peak. Since the middle of March, paper company stocks have staged
a strong rally and International Paper has performed well.
Conclusion
No matter how volatile the stock market may become, we remain committed to our
"bottom-up," value approach which seeks to identify out-of-favor companies with
predictable earnings. Because investment decisions in the Portfolio are
generally made because of company-specific reasons rather than the present state
of the market or economy, we will continue to take advantage of attractive
buying opportunities as they appear.
In closing, thank you for investing in the Equity Income Portfolio. We look
forward to continuing to help you achieve your financial goals.
Sincerely,
/s/Heath B. McLendon /s/ Ayako Weissman
Heath B. McLendon Ayako Weissman
Chairman and Vice President
Chief Executive Officer
July 15, 1996
3
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
6/30/96 $14.59 $15.67 $0.19 $0.00 8.70%+
12/31/95 12.18 14.59 0.39 1.18 33.05
12/31/94 13.31 12.18 0.42 0.14 (4.31)
12/31/93 12.48 13.31 0.46 0.73 16.38
12/31/92 12.51 12.48 0.51 0.40 7.23
12/31/91 10.54 12.51 0.73 0.05 26.57
12/31/90 12.69 10.54 0.70 0.25 (9.46)
12/31/89 11.00 12.69 0.70 0.31 25.11
12/31/88 10.05 11.00 0.63 0.17 17.67
12/31/87 11.40 10.05 0.50 0.63 (2.83)
12/31/86 10.10 11.40 0.67 0.13 21.04
================================================================================
Total $5.90$ $3.99
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
6/30/96 $14.54 $15.62 $0.13 $0.00 8.31%+
12/31/95 12.15 14.54 0.29 1.18 32.07
Inception*-12/31/94 12.54 12.15 0.09 0.14 (1.28)+
================================================================================
Total $0.51 $1.32
================================================================================
4
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
6/30/96 $14.57 $15.64 $0.13 $0.00 8.24%+
12/31/95 12.18 14.57 0.29 1.18 32.01
12/31/94 13.30 12.18 0.34 0.14 (4.91)
12/31/93 12.48 13.30 0.36 0.73 15.46
Inception*-12/31/92 12.87 12.48 0.06 0.40 (0.57)+
Total $1.18 $2.45
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
Inception*- 6/30/96 $15.06 $15.67 $0.21 $0.00 4.91%+
- --------------------------------------------------------------------------------
Historical Performance -- Class Z Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
6/30/96 $14.61 $15.70 $0.21 $0.00 8.92%+
12/31/95 12.19 14.61 0.42 1.18 33.41
Inception*-12/31/94 12.54 12.19 0.12 0.14 (0.73)+
Total $0.75 $1.32
It is the Fund's policy to distribute dividends quarterly and capital gains, if
any, annually.
5
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
-----------------------
Class A Class B Class C Class Y Class Z
================================================================================
Six Months Ended 6/30/96+ 8.70% 8.31% 8.24% N/A 8.92%
Year Ended 6/30/96 24.68 23.71 23.69 N/A 25.14
Five Years Ended 6/30/96 14.01 N/A N/A N/A N/A
Ten Years Ended 6/30/96 11.65 N/A N/A N/A N/A
Inception* through 6/30/96 7.86 23.31 13.59 4.91%+ 24.92
================================================================================
With Sales Charge(2)
--------------------
Class A Class B Class C Class Y Class Z
Six Months Ended 6/30/96+ 3.25% 3.31% 7.24% N/A 8.92%
Year Ended 6/30/96 18.46 18.71 22.69 N/A 25.14
Five Years Ended 6/30/96 12.85 N/A N/A N/A N/A
Ten Years Ended 6/30/96 11.08 N/A N/A N/A N/A
Inception* through 6/30/96 7.63 21.18 13.59 4.91%+ 24.92
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
-----------------------
Class A (6/30/86 through 6/30/96) 200.98%
Class B (Inception* through 6/30/96) 41.21
Class C (Inception* through 6/30/96) 57.75
Class Y (Inception* through 6/30/96) 4.91+
Class Z (Inception* through 6/30/96) 44.25
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions,
if any, at net asset value and does not reflect the deduction of the
applicable sales charge with respect to Class A shares or the
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% and Class B
shares reflect the deduction of a 5.00% CDSC, which applies if shares
are redeemed within one year from initial purchase and declines
thereafter by 1.00% per year until no CDSC is incurred. Class C shares
reflect the deduction of a 1.00% CDSC, which applies if shares are
redeemed within the first year of purchase.
* Inception dates for Class A, B, C, Y and Z shares are January 2, 1972,
November 7, 1994, December 2, 1992, February 6, 1996 and November 7,
1994, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
6
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of
the Equity Income Portfolio vs.
Standard & Poor's 500 Index+
- --------------------------------------------------------------------------------
June 1986 -- June 1996
[GRAPHIC APPEARS HERE]
Equity
Income
Portfolio S & P 500
--------- ---------
6/86 9,428 10,000
12/86 9,998 9,821
12/87 9,534 10,337
12/88 11,367 12,049
12/89 14,175 15,861
12/90 12,789 15,368
12/91 16,186 20,041
12/92 17,355 21,567
12/93 20,198 23,735
12/94 19,327 24,097
12/95 25,714 33,072
6/96 27,951 36,409
+ Hypothetical illustration of $10,000 invested in Class A shares on June 30,
1986, assuming deduction of the maximum 5.75% sales charge in effect at the
time of investment and reinvestment of dividends (after deduction of
applicable sales charge through 1990, and thereafter at net asset value)
and capital gains, if any, at net asset value through June 30, 1996. The
Standard & Poor's 500 Index is an index of widely held common stocks listed
on the New York and American Stock Exchanges and the over-the-counter
markets. Figures for the index include reinvestment of dividends. 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 value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
7
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 87.8%
Capital Goods -- 5.0%
<S> <C> <C>
100,000 Emerson Electric Co. $ 9,037,500
250,000 General Electric Co. 21,625,000
250,000 National Services Industries, Inc. 9,781,250
- --------------------------------------------------------------------------------
40,443,750
- --------------------------------------------------------------------------------
Conglomerates -- 7.4%
225,000 Minnesota Mining & Manufacturing Co. 15,525,000
400,000 Tenneco, Inc. 20,450,000
200,000 United Technologies Corp. 23,000,000
- --------------------------------------------------------------------------------
58,975,000
- --------------------------------------------------------------------------------
Consumer Cyclicals -- 9.4%
300,000 Deluxe Corp. 10,650,000
250,000 Ford Motor Co. 8,093,750
100,000 Knight-Ridder, Inc. 7,250,000
200,000 McGraw Hill Cos., Inc. 9,150,000
330,000 New York Times Co., Class A Shares 10,766,250
180,000 Readers Digest Association, Inc. 7,650,000
250,000 Sears, Roebuck & Co. 12,156,250
330,000 Stanley Works 9,817,500
- --------------------------------------------------------------------------------
75,533,750
- --------------------------------------------------------------------------------
Consumer Staples -- 12.7%
375,000 American Home Products Corp. 22,546,875
350,000 Baxter International 16,537,500
200,000 Eli Lilly & Co. 13,000,000
280,000 H&R Block, Inc. 9,135,000
205,200 Tambrands, Inc. 8,387,550
125,000 Unilever, N.V. 18,140,625
250,000 U.S. Healthcare Inc. 13,750,000
- --------------------------------------------------------------------------------
101,497,550
- --------------------------------------------------------------------------------
Energy -- 11.8%
144,300 Ashland, Inc. 5,717,888
215,000 Chevron Corp. 12,685,000
300,000 Dresser Industries, Inc. 8,850,000
160,000 Enron Global Power & Pipelines, L.L.C. 3,880,000
130,000 Exxon Corp. 11,293,750
190,000 Mobil Corp. 21,303,750
100,000 Royal Dutch Petroleum Co. ADR 15,375,000
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Energy -- 11.8% (continued)
1,000 Texaco, Inc. $ 83,875
450,000 Unocal Corp. 15,187,500
- --------------------------------------------------------------------------------
94,376,763
- --------------------------------------------------------------------------------
Financial Services -- 10.7%
150,000 Aetna Life & Casualty Co. 10,725,000
499,165 Allstate Corp. 22,774,403
70,000 Aon Corp. 3,552,500
150,000 Bankers Trust of New York Corp. 11,081,250
208,000 Chase Manhattan Corp. 14,690,000
200,000 Household International, Inc. 15,200,000
150,000 St. Paul Cos., Inc. 8,025,000
- --------------------------------------------------------------------------------
86,048,153
- --------------------------------------------------------------------------------
Raw & Intermediate Materials -- 10.0%
50,000 Aluminum Co. of America 2,868,750
190,000 Carpenter Technology Corp. 6,080,000
250,000 International Paper Co. 9,218,750
200,000 Kimberly-Clark Corp. 15,450,000
750,000 Monsanto Co. 24,375,000
250,000 Olin Corp. 22,312,500
- --------------------------------------------------------------------------------
80,305,000
- --------------------------------------------------------------------------------
Technology -- 9.3%
250,000 AMP Inc. 10,031,250
300,000 Eastman Kodak Co. 23,325,000
200,000 Lockheed Martin Corp. 16,800,000
450,000 Xerox Corp. 24,075,000
- --------------------------------------------------------------------------------
74,231,250
- --------------------------------------------------------------------------------
Transportation -- 2.0%
80,000 Alexander Baldwin, Inc. 1,930,000
200,000 Union Pacific Corp. 13,975,000
- --------------------------------------------------------------------------------
15,905,000
- --------------------------------------------------------------------------------
Utilities -- 9.5%
250,000 Consolidated Natural Gas Co. 13,062,500
305,300 Entergy Corp. 8,662,887
400,000 GTE Corp. 17,900,000
250,000 NYNEX Corp. 11,875,000
225,000 Sprint Corp. 9,450,000
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Utilities -- 9.5% (continued)
350,000 Texas Utilities Co. $14,962,500
- --------------------------------------------------------------------------------
75,912,887
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $521,132,926) 703,229,103
================================================================================
CONVERTIBLE PREFERRED STOCKS -- 1.5%
Financial Services -- 1.5%
185,000 Banc One Corp., Series C, Exchange $3.50
(Cost -- $11,974,125) 12,348,750
================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<S> <C> <C>
CONVERTIBLE DEBENTURES -- 3.0%
Consumer Cyclicals -- 1.3%
$ 9,000,000 Price Co., 6.75% due 3/1/01 10,023,750
- --------------------------------------------------------------------------------
Energy-- 0.6%
5,800,000 Oryx Energy, 7.50% due 5/15/14 5,118,500
- --------------------------------------------------------------------------------
Vehicle Supply -- 1.1%
6,907,000 Titan Wheel International, 4.75% due 12/1/00 8,840,960
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE DEBENTURES
(Cost -- $22,655,914) 23,983,210
================================================================================
REPURCHASE AGREEMENTS -- 7.7%
33,648,000 CS First Boston Corp., 5.30% due 7/1/96;
Proceeds at maturity -- $33,662,845; (Fully
collateralized by U.S. Treasury Notes,
7.50% due 12/31/96; Market value -- $34,337,064) 33,648,000
28,092,000 Chase Manhattan Bank, 5.33% due 7/1/96;
Proceeds at maturity -- $28,104,472; (Fully
collateralized by U.S. Treasury Notes,
5.75% due 9/30/97; Market value -- $28,665,692) 28,092,000
- --------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $61,740,000) 61,740,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $617,502,965*) $801,301,063
================================================================================
</TABLE>
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments, at value (Cost --- $617,502,965) $801,301,063
Cash 927
Receivable for Fund shares sold 732,086
Receivable for securities sold 1,199,860
Dividend and interest receivable 1,704,363
Other assets 80,411
- --------------------------------------------------------------------------------
Total Assets 805,018,710
- --------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 4,382,422
Payable for securities purchased 630,786
Management fees payable 388,148
Distribution fees payable 250,157
Accrued expenses 251,032
- --------------------------------------------------------------------------------
Total Liabilities 5,902,545
- --------------------------------------------------------------------------------
Total Net Assets $799,116,165
================================================================================
NET ASSETS:
Par value of capital shares $ 509,939
Capital paid in excess of par value 568,337,498
Overdistributed net investment income (861,665)
Accumulated net realized gain from security transactions 47,332,295
Net unrealized appreciation of investments 183,798,098
- --------------------------------------------------------------------------------
Total Net Assets $799,116,165
================================================================================
Shares Outstanding:
Class A 40,579,338
Class B 709,008
Class C 2,041,085
Class Y 794,034
Class Z 6,870,423
Net Asset Value:
Class A (and redemption price) $15.67
Class B * $15.62
Class C ** $15.64
Class Y (and redemption price) $15.67
Class Z (and redemption price) $15.70
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $16.49
================================================================================
</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.
11
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Interest $ 2,113,777
Dividends 10,422,999
Less: Foreign witholding tax (121,051)
- --------------------------------------------------------------------------------
Total Investment Income 12,415,725
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 2,258,564
Distribution fees (Note 2) 982,267
Shareholder and system servicing fees 296,724
Registration fees 165,680
Shareholder communications 32,782
Audit and legal 15,740
Custody 12,855
Directors' fees 11,946
Other 20,897
- --------------------------------------------------------------------------------
Total Expenses 3,797,455
- --------------------------------------------------------------------------------
Net Investment Income 8,618,270
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 167,616,156
Cost of securities sold 120,655,794
- --------------------------------------------------------------------------------
Net Realized Gain 46,960,362
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Begining of period 174,298,184
End of period 183,798,098
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 9,499,914
- --------------------------------------------------------------------------------
Net Gain on Investments 56,460,276
Increase in Net Assets From Operations $ 65,078,546
</TABLE>
================================================================================
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
Statements of Changes in Net Assets
For the Six Months Ended June 30, 1996 (unaudited)
and the Year Ended December 31, 1995
<TABLE>
<CAPTION>
1996 1995
================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 8,618,270 $ 19,447,507
Net realized gain 46,960,362 56,593,756
Increase in net unrealized appreciation 9,499,914 123,193,695
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 65,078,546 199,234,958
- --------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (9,479,935) (19,458,013)
Net realized gains -- (56,277,355)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (9,479,935) (75,735,368)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sales 42,577,903 35,334,789
Net asset value of shares issued for
reinvestment of dividends 4,572,775 70,023,680
Cost of shares reacquired (55,547,876) (129,386,207)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (8,397,198) (24,027,738)
- --------------------------------------------------------------------------------
Increase in Net Assets 47,201,413 99,471,852
NET ASSETS:
Beginning of period 751,914,752 652,442,900
- --------------------------------------------------------------------------------
End of period* $799,116,165 $751,914,752
================================================================================
* Includes overdistributed net
investment income of: $(861,665) --
================================================================================
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Equity Income Portfolio ("Portfolio"), formerly known as "Income and
Growth Portfolio", is a separate investment portfolio of the Smith Barney Funds,
Inc. ("Fund"). The Fund, a Maryland corporation, is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company and consists of this Portfolio and three other
separate investment portfolios: U.S. Government Securities, Income Return
Account, and Short-Term U.S. Treasury Securities Portfolios. The financial
statements and financial highlights for the other portfolios are presented in
separate semi-annual reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing prices on such
markets; securities for which no sales price was reported and U.S. Government
and Agency Obligations are valued at the mean between the bid and ask prices;
(c) securities that have a maturity of more than 60 days are valued at prices
based on market quotations for securities of similar type, yield and maturity;
(d) securities maturing within 60 days or less are valued at cost plus accreted
discount, or minus amortized premium, which approximates market value; (e)
dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis; (f) gains or losses on the sale of securities are
calculated by using the specific identification method; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) direct
expenses are charged to each class; management fees and general portfolio
expenses are allocated on the basis of relative net assets; (i) the accounting
records are maintained in U.S. dollars. All assets and liabilities denominated
in foreign currencies are translated into U.S. dollars based on the rate of
exchange of such currencies against U.S. dollars on the date of valuation.
Purchases and sales of securities, and income and expenses are translated at the
rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are adjusted when reported by the custodian bank; (j) the Portfolio
intends to comply with the applicable provisions of the Internal Revenue Code of
1986, as amended, pertaining to regulated investment companies to make
14
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes; (k) the character of income and gains to be
distributed are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. At December 31, 1995,
reclassifications were made to the Portfolio's capital accounts to reflect
permanent book/tax differences and income and gains available for distributions
under income tax regulations. Net investment income, net realized gains and net
assets were not affected by this change; and (l) estimates and assumptions are
required to be made regarding assets, liabilities and changes in net assets
resulting from operations when financial statements are prepared. Changes in the
economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ.
2. 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 Equity
Income Portfolio pays SBMFM a management fee calculated at an annual rate of
0.60% on the Portfolio's average daily net assets up to $500 million, 0.55% on
the next $500 million and 0.50% on average daily net assets in excess of $1.0
billion. These fees are calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
six months ended June 30, 1996, SB received brokerage commissions of $200,162
and sales charges of approximately $338,000 on sales of the Portfolio's Class A
shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase and declines thereafter by 1.00% per year until no CDSC is incurred.
Class C shares have a 1.00% CDSC, which applies if redemption occurs within the
first year of purchase. For the six months ended June 30, 1996, CDSCs paid to SB
were:
Class B Class C
================================================================================
CDSCs $26,000 $1,000
================================================================================
15
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Pursuant to a Distribution Plan the Portfolio pays a service fee with
respect to its Class A, B and C shares calculated at the annual rate of 0.25% of
the average daily net assets of each respective class. In addition, the
Portfolio also pays a distribution fee with respect to Class B and C shares
calculated at the annual rate of 0.75% of the average daily net assets of each
class. For the six months ended June 30, 1996, total Distribution Plan fees were
as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $783,999 $43,185 $155,083
================================================================================
All officers and three Directors of the Fund are employees of SB.
3. Investments
During the six months ended June 30, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<CAPTION>
================================================================================
<S> <C>
Purchases $144,723,925
Sales 167,616,156
================================================================================
At June 30, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
<CAPTION>
================================================================================
<S> <C>
Gross unrealized appreciation $191,243,715
Gross unrealized depreciation (7,445,617)
Net unrealized appreciation $183,798,098
</TABLE>
================================================================================
4. Repurchase Agreements
The Portfolio purchases (and its custodian take possession of) U.S.
Government Securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
16
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
5. Capital Shares
At June 30, 1996, the Fund had two billion shares of capital stock
authorized with a par value of $0.01 per share. The Portfolio has the ability to
issue multiple classes of shares. Each share of a class represents an identical
interest in the Portfolio and has the same rights, except that each class bears
certain expenses specifically related to the distribution of its shares.
At June 30, 1996, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y Class Z
=========================================================================================
<S> <C> <C> <C> <C> <C>
Total Paid-in
Capital $432,588,670 $ 10,303,400 $ 27,490,037 $ 12,191,676 $ 86,273,654
=========================================================================================
<CAPTION>
Transactions in shares of each class were as follows:
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
-------------------- ---------------------
Shares Amount Shares Amount
=========================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 1,081,434 $ 16,123,498 1,257,466 $ 17,631,623
Shares issued on
reinvestment 240,639 3,638,456 3,940,421 56,723,635
Shares redeemed (3,067,005) (46,360,454) (7,565,480) 103,786,681)
- -----------------------------------------------------------------------------------------
Net Decrease (1,744,932) $ (26,598,500) (2,367,593) $ (29,431,423)
=========================================================================================
Class B
Shares sold 370,104 $ 5,579,372 383,746 $ 5,468,312
Shares issued on
reinvestment 2,677 40,346 32,917 476,304
Shares redeemed (80,856) (1,220,411) (28,716) (399,167)
- -----------------------------------------------------------------------------------------
Net Increase 291,925 $ 4,399,307 387,947 $ 5,545,449
=========================================================================================
Class C
Shares sold 193,929 $ 2,923,389 240,559 $ 3,375,523
Shares issued on
reinvestment 9,439 142,428 180,858 2,604,330
Shares redeemed (205,052) (3,107,111) (636,749) (8,570,732)
- -----------------------------------------------------------------------------------------
Net Decrease (1,684) $ (41,294) $(215,332) $(2,590,879)
=========================================================================================
</TABLE>
17
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
Notes to Financial Statements (unaudited) (continued)
Six Months Ended Year Ended
June 30, 1996* December 31, 1995
-------------------- ---------------------
Shares Amount Shares Amount
================================================================================
Class Y
Shares sold 794,034 $12,191,676 -- --
Shares issued on
reinvestment -- -- -- --
Shares redeemed -- -- -- --
- --------------------------------------------------------------------------------
Net Increase 794,034 $12,191,676 -- --
================================================================================
Class Z
Shares sold 383,455 $ 5,759,968 665,866 $ 8,859,331
Shares issued on
reinvestment 49,607 751,545 709,558 10,219,411
Shares redeemed (315,232) (4,859,900) (1,185,176) (16,629,627)
- --------------------------------------------------------------------------------
Net Increase 117,830 $ 1,651,613 190,248 $ 2,449,115
================================================================================
* Transactions for Class Y shares are for the period from February 6, 1996
(inception date) to June 30, 1996.
18
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
Financial Highlights
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares 1996(1) 1995 1994(2) 1993 1992 1991
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $14.59 $12.18 $13.31 $12.48 $12.51 $10.54
Income (Loss) From Operations:
Net investment income 0.17 0.39 0.43 0.46 0.50 0.56
Net realized and unrealized gain (loss) 1.10 3.59 (1.00) 1.56 0.38 2.19
Total Income (Loss) From Operations 1.27 3.98 (0.57) 2.02 0.88 2.75
Less Distributions From:
Net investment income (0.19) (0.39) (0.42) (0.46) (0.51) (0.73)
Net realized gains(3) -- (1.18) (0.14) (0.73) (0.40) (0.05)
Total Distributions (0.19) (1.57) (0.56) (1.19) (0.91) (0.78)
Net Asset Value, End of Period $15.67 $14.59 $12.18 $13.31 $12.48 $12.51
Total Return 8.70%++ 33.05% (4.31)% 16.38% 7.23% 26.57%
Net Assets, End of Period (000s) $635,833 $617,431 $544,572 $627,870 $573,085 $583,686
Ratios to Average Net Assets:
Expenses 1.02%+ 1.02% 0.96% 0.91% 0.92% 0.84%
Net investment income 2.22+ 2.78 3.31 3.42 3.97 4.80
Portfolio Turnover Rate 19.77% 51.27% 26.77% 46.10% 39.16% 44.50%
Average commissions per share
paid on equity transactions(4) $0.06 $0.06 -- -- -- --
====================================================================================================================================
<CAPTION>
Class B Shares 1996(1) 1995 1994(5)
====================================================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $14.54 $12.15 $12.54
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.11 0.24 0.03
Net realized and unrealized gain (loss) 1.10 3.62 (0.19)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.21 3.86 (0.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.13) (0.29) (0.09)
Net realized gains(3) -- (1.18) (0.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.13) (1.47) (0.23)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $15.62 $14.54 $12.15
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 8.31%++ 32.07% (1.28)%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $11,075 $6,065 $354
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.78%+ 1.73% 1.59%+*
Net investment income 1.52+ 1.83 2.11+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 19.77% 51.27% 26.77%
====================================================================================================================================
Average commissions per share
paid on equity transactions(4) $0.06 $0.06 --
====================================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) On October 10, 1994 the former Class C shares were exchanged into Class A
shares; therefore for the period from January 1, 1994 to October 9, 1994
the Class C share activity is included with the Class A share activity.
(3) Net short term gains, if any, are included and reported as ordinary income
for income tax purposes.
(4) As of October 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(5) For the period from November 7, 1994 (inception date) to December 31, 1994.
* Figure has been restated from December 31, 1994 annual report.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
19
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class C Shares 1996(1) 1995 1994(2) 1993 1992(3)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $14.57 $12.18 $13.30 $12.48 $12.87
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.11 0.27 0.31 0.38 0.17
Net realized and unrealized gain (loss) 1.09 3.59 (0.95) 1.53 (0.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.20 3.86 (0.64) 1.91 0.07
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.13) (0.29) (0.34) (0.36) (0.06)
Net realized gains(4) -- (1.18) (0.14) (0.73) (0.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.13) (1.47) (0.48) (1.09) (0.46)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $15.64 $14.57 $12.18 $13.30 $ 12.48
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 8.24%++ 32.01% (4.91)% 15.46% (0.57)%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $31,929 $29,758 $27,507 $15,408 $1,504
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.81%+ 1.79% 1.75% 1.65% 1.58%+
Net investment income 1.43+ 2.00 2.49 2.59 1.80+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 19.77% 51.27% 26.77% 46.10% 39.16
====================================================================================================================================
Average commissions per share
paid on equity transactions(5) $0.06 $0.06 -- -- --
<CAPTION>
Class Y Shares Class Z Shares
-------------- --------------------------------------
1996(6) 1996(1) 1995 1994(7)
====================================================================================================================================
<S> <C> <C> <C> C>
Net Asset Value, Beginning of Period $15.06 $14.61 $12.19 $12.54
Income (Loss) From Operations:
Net investment income 0.14 0.19 0.43 0.07
Net realized and unrealized gain (loss) 0.68 1.11 3.59 (0.16)
Total Income (Loss) From Operations 0.82 1.30 4.02 (0.09)
Less Distributions From:
Net investment income (0.21) (0.21) (0.42) (0.12)
Net realized gains(4) -- -- (1.18) (0.14)
Total Distributions (0.21) (0.21) (1.60) (0.26)
Net Asset Value, End of Period $15.67 $15.70 $14.61 $12.19
Total Return 4.91%++ 8.92%++ 33.41% (0.73)%++
Net Assets, End of Period (000s) $12,443 $107,836 $98,661 $80,010
Ratios to Average Net Assets:
Expenses 0.60%+ 0.69%+ 0.69% 0.42%+
Net investment income 2.33+ 2.58+ 3.11 3.88+
Portfolio Turnover Rate 19.77% 19.77% 51.27% 26.77
Average commissions per share
paid on equity transactions(5) $0.06 $0.06 $0.06 --
====================================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) On November 7, 1994, the former Class B shares were renamed Class C shares.
(3) For the period from December 2, 1992 (inception date) to December 31, 1992.
(4) Net short term gains, if any, are included and reported as ordinary income
for income tax purposes.
(5) As of October 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(6) For the period from February 6, 1996 (inception date) to June 30, 1996
(unaudited).
(7) For the period from November 7, 1994 (inception date) to December 31, 1994.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
20
<PAGE>
Smith Barney
Funds, Inc.
Directors
Jessica M. Bibliowicz
Joseph H. Fleiss
Donald R. Foley
Paul Hardin
Francis P. Martin, M.D.
Heath B. McLendon, Chairman
Roderick C. Rasmussen
Bruce D. Sargent
John P. Toolan
C. Richard Youngdahl
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Bruce D. Sargent
Vice President
Ayako Weissman
Vice President
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Smith Barney
- ------------
A Member of TravelersGroup [LOGO]
Investment Manager
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank, N.A.
Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Funds, Inc. -- Equity Income Portfolio. It is not authorized for
distribution to prospective investors unless accompanied or preceded by a
current Prospectus for the Portfolio, which contains information concerning the
Portfolio's investment policies and expenses as well as other pertinent
information.
Smith Barney Funds, Inc.
388 Greenwich Street
New York, New York 10013
FD0628 8/96
