<PAGE>
ANNUAL REPORT
Smith Barney
Funds, Inc.
Equity Income
Portfolio
__________________________
December 31, 1995
Smith Barney Mutual Funds
INVESTING FOR YOUR FUTURE.
EVERY DAY.
<PAGE>
Equity Income Portfolio
Dear Shareholder:
We are pleased to provide you with the annual report and audited financial
statements for Smith Barney Funds, Inc. - Equity Income Portfolio. Last year,
the U.S. stock market produced a total return of 36.94% for the 12 months ended
on December 31, 1995, based on the widely followed Standard & Poor's 500 Index,
an unmanaged capitalization-weighted measure of 500 widely held common stocks.
This is the largest single-year gain since 1958. The popular Dow Jones
Industrial Average (DJIA), which is a price-weighted average of 30 actively
traded blue chip stocks, saw two major milestones reached, and passed, as the
DJIA rose through 4000 and then 5000, ending the year at 5117. The Equity Income
Portfolio participated in these strong returns, with Class A shares generating
an annual total return of 33.05%. A more detailed summary of performance and
current holdings can be found in the appropriate sections that follow in the
annual report.
Last year, the Portfolio's name was changed from the Income and Growth Portfolio
to the Equity Income Portfolio. While the Portfolio's investment strategy was
not changed, the Portfolio's Board of Directors recommended this change as more
representative of the Portfolio's investment strategy. An interview with
Portfolio Manager Ayako Weissman follows this annual letter.
Portfolio Strategy
At the end of 1994, there was a broad consensus, based on fourth quarter
economic indicators, that the U.S. economy was growing too quickly. In response,
the Federal Reserve Board was tightening monetary policy by increasing short-
term interest rates. This increased our concerns that the economy and higher
interest rates would have a negative effect on the markets. Therefore, at the
beginning of 1995, we maintained a cautious position by keeping over 12% of the
Portfolio's assets in cash.
In retrospect, our fears about the economy growing too fast proved to be
unfounded. The economy declined in the first quarter of 1995 and the Federal
Reserve stopped tightening monetary policy. It appeared that the Federal Reserve
had engineered the long-heralded, but seldom achieved, soft landing. Our outlook
for the stock market changed from cautious to very positive. We resumed looking
for companies that were likely to restructure, continuing a key theme for the
Portfolio that began in 1994. The Portfolio's top-ten holdings at the end of
1995 were all related in some way to this restructuring theme. Among the
Portfolio's top holdings were Sears Roebuck & Co., Eastman Kodak Co., and Xerox,
all of which have undergone major restructuring in recent years.
1
<PAGE>
In 1995, we also increased the Portfolio's exposure to the insurance industry.
At the end of 1994, attention on this sector was focused on concerns regarding
the potentially enormous environmental liability of many insurance companies,
resulting in massive claims to clean up hazardous waste sites. Initial estimates
in 1994 placed the potential liability in the range of $250 billion over a 30-
year period, which put a damper on many insurance stocks. However, the initial
estimate was cut in half as insurers had an opportunity to realistically assess
their potential liabilities during 1995. Further enhancing the attractiveness of
the insurance sector was the purchase of Continental Corporation, which had one
of the industries largest potential environmental liabilities, by Chicago-based
CNA for $1.1 billion. CNA, a part of Loews Corp, is widely regarded as a well-
managed company and this type of consolidation was seen as positive for the
entire insurance industry.
Two stocks in the insurance sector that we added to the Portfolio in 1995 were
Aetna and Allstate. The introduction of a new management team at Aetna was our
signal to take another and closer look at that company. What we found was a
classic value investment opportunity -- a stock that was worth owning because
the market had overlooked its inherent value. Allstate was also undervalued due
to recent setbacks from natural disasters such as Hurricane Andrew.
In the first half of the year, we reduced or eliminated our holdings in cyclical
companies such as Dow Chemical and International Paper, even though investor
enthusiasm was high for these types of stocks while commodity prices were going
up. We sold these holdings primarily because of the slowdown in the U.S.
economy, the high level of interest rates and slower rates of growth in the
international economy, factors that negatively affect cyclical companies.
OUTLOOK FOR 1996
Last year provided such high returns that few market observers expect a repeat
of this banner performance. However, we believe that current market conditions
are generally positive for stock prices. Inflation continues to be low and the
Federal Reserve continues to ease monetary policy. For investors, this
translates into lower rates on short-term fixed income investments such as FDIC-
insured, fixed-rate Certificates of Deposit (CDs) and money market funds. We
believe that investors faced with relatively low returns will continue to direct
money into the stock market in the hopes of achieving higher returns. On the
negative side, as the U.S. economy slows down, so will corporate profits, which
may have a negative effect on stock prices.
2
<PAGE>
In 1996, we believe careful selection of stocks will be more important than in
1995. One investment strategy that the Portfolio will continue to pursue is
companies that are restructuring candidates, especially those located in Europe.
We believe that some of the most attractive investments will be found in this
area.
We thank you for your investment in the Smith Barney Funds, Inc. - Equity Income
Portfolio and appreciate your continued support.
Sincerely,
/s/ Heath McLendon /s/ Ayako Weissman
Heath B. McLendon Ayako Weissman
Chairman and Vice President and
Chief Executive Officer Investment Officer
January 15, 1996
On December 11, 1995, Smith Barney Funds, Inc./Income and
Growth Portfolio got...
- -- A New Name (Smith Barney Funds, Inc./Equity Income Portfolio)
- -- New Symbols (EQINA for Class A shares and EQINC for Class C shares in most
major newspapers)
However, the Equity Income Portfolio will continue to be managed
conservatively with a bottom-up value approach that has, over time,
delivered consistent results with low risk.
3
<PAGE>
An Interview with Ayako Weissman
Ayako Weissman is a Managing Director of Smith Barney and Senior Equity
Portfolio Manager. She joined Smith Barney Capital Management Division in 1987
and has been associated with the Equity Income Portfolio since that time. Ms.
Weissman assumed day-to-day responsibility for the Portfolio in 1994, and works
closely with Smith Barney Capital Management Chairman and CEO Bruce Sargent, who
continues to take an active role in the management of the Portfolio. Ms.
Weissman currently manages approximately $1.1 billion of equity assets in mutual
funds and institutional accounts. She received her B.A. in Liberal Arts from the
International Christian University in Tokyo, Japan and her M.B.A. from IMEDE in
Lausanne, Switzerland.
Q. Why was the Income and Growth Portfolio's name recently changed?
A. We believe that although the Portfolio's investment style has not changed,
the growth and income category has become very broad in terms of the
investment objectives and policies of funds covered under the category since
the Portfolio began in the late 1960s. We think the equity income
classification is more representative of the Portfolio's objectives and will
provide a better benchmark going forward.
Q. Can you elaborate further?
A. I would be happy to. When the Smith Barney Funds, Inc. - Income and Growth
Portfolio was created in the late 1960s, there were approximately 350 mutual
funds. These funds were classified among a few broad investment categories.
Equity mutual funds, for example, were largely defined as either growth
funds or growth and income funds. With a relatively small group of funds to
evaluate, investors then were able to make choices based on simple
investment objectives.
In the twenty-seven years since the Income and Growth Portfolio was created,
the number of mutual funds has grown to approximately 7,000. During this
time, mutual funds have become increasingly popular with investors and in
response the mutual fund industry has greatly expanded its product line to
provide them with a broader range of choices. Investors can now choose
between over twenty-one different types of mutual funds. In fact, these
categories are only the general classifications used to define a fund's
objective. Many investment subcategories also exist.
The Equity Income Portfolio has maintained a consistent investment strategy
since its inception. The Portfolio seeks to provide shareholders with
current income and long-term growth of income and capital by investing
primarily in common stocks. In the relatively simple investment world of
1968, this meant the Portfolio was classified as a growth and income fund.
Even at that time,
4
<PAGE>
the name was Income and Growth to emphasize the importance of the
Portfolio's income objectives. In 1996, this means the Portfolio should be
classified as an equity income fund.
Q. You mentioned the Equity Income Portfolio's investment strategy. Can you
tell us more about it?
A. We are value investors who pursue these objectives primarily by investing in
the dividend-paying common stocks of large-capitalization companies that
tend to be familiar household names such as Sears, Chevron and General
Electric. In selecting stocks for the Portfolio, we seek to employ a
conservative, highly disciplined and bottom-up approach to investing. This
means that the individual stock selection is more influential to the overall
performance of the Portfolio rather than the present state of the economy.
The Portfolio's conservative strategy is designed to seek high returns while
managing risk.
Q. How do you select stocks for the Portfolio?
A. As value investors, our primary goal is to identify out-of-favor companies
that are either at their lowest point in the business cycle or that have
been poorly managed in the past but who, in our view, are about to turn the
corner because of a new management team or a promising product introduction.
Because the Portfolio seeks to manage risk, we focus our search on out-of-
favor blue-chip companies.
Our approach also involves visiting hundreds of companies each year and
meeting regularly with their managements to understand a company's business
and industry, identify outstanding managements and target promising long-
term investment opportunities.
Q. What is the role of dividend-p aying stocks in the Equity Income Portfolio?
A. Dividend-paying stocks are an important aspect of our investment strategy.
Every stock we own must provide at least the same or a higher dividend than
the average of the S&P 500. If you look at the historical performance record
of the market since World War II, dividend yield and dividend-reinvested
returns make up approximately 47% of the market's overall total return.
Dividend-paying stocks can help smooth out short-term market volatility and
should provide our shareholders with consistent and competitive long-term
returns.
5
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
Historical Performance -- Class A Shares
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 0.4 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 $5.71 $ 3.99
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Historical Performance -- Class B Shares
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 $0.38 $1.32
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
Historical Performance - Class C Shares
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 $1.05 $2.45
Historical Performance - Class Z Shares
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
- -------------------------------------------------------------------------------------------------------------------------
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 $0.54 $1.32
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
It is the Fund's policy to distribute dividends quarterly
and capital gains, if any, annually.
Average Annual Total Return
<TABLE>
<CAPTION>
Without Sales Charge(1)
---------------------------------------------------
Class A Class B Class C Class Z
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended 12/31/95 33.05% 32.07% 32.01% 33.41%
Five Years Ended 12/31/95 14.99 N/A N/A N/A
Ten Years Ended 12/31/95 12.17 N/A N/A N/A
Inception* through 12/31/95 7.65 25.99 13.01 27.72
- -------------------------------------------------------------------------------------------------------------------------
With Sales Charge(2)
---------------------------------------------------
Class A Class B Class C Class Z
Year Ended 12/31/95 26.40% 27.07% 31.01% 33.41%
Five Years Ended 12/31/95 13.82 N/A N/A N/A
Ten Years Ended 12/31/95 11.59 N/A N/A N/A
Inception* through 12/31/95 7.42 22.62 13.01 27.72
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
Cumulative Total Return
<TABLE>
<CAPTION>
Without Sales Charge(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Class A (12/31/85 through 12/31/95) 215.24%
Class B (Inception* through 12/31/95) 30.37
Class C (Inception* through 12/31/95) 45.75
Class Z (Inception* through 12/31/95) 32.43
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect a 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 less than
one year from initial purchase and declines thereafter by 1.00% per year
until no CDSC is incurred. Class C shares reflect the deduction of a 1.00%
CDSC, which applies if shares are redeemed within the first year of
purchase.
* Inception dates for Class A, B, C and Z shares are January 1, 1972,
November 7, 1994, December 2, 1992 and November 7, 1994, 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.
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+
----------------------------------------------------------------------------
December 1985 -- December 1995
Label A B
Label Equity Income Portfolio S&P 500
1 12/85 9422 10000
2 6/86 10719 12083
3 12/86 11367 11867
4 6/87 12977 15123
5 12/87 11018 12490
6 6/88 12607 14076
7 12/88 12724 14559
8 6/89 14723 16964
9 12/89 16116 19165
10 6/90 15806 19755
11 12/90 14539 18569
12 6/91 16500 21212
13 12/91 18401 24216
14 6/92 19026 24053
15 12/92 19731 26059
16 6/93 21732 27326
17 12/93 21780 28678
18 6/94 22045 27709
19 12/94 21972 29056
20 6/95 25487 34922
21 12/95 29234 39961
+ Hypothetical illustration of $10,000 invested in Class A shares on December
31, 1985, 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 December 31, 1995. The
Standard & Poor's 500 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.
9
<PAGE>
<TABLE>
<CAPTION>
Smith Barney Funds, Inc.
Equity Income Portfolio
Schedule of Investments December 31, 1995
SHARE SECURITY VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- 88.6%
Capital Goods -- 3.5%
100,000 Emerson Electric Co. $ 8,175,000
250,000 General Electric Co. 18,000,000
- ------------------------------------------------------------------------------------------------
26,175,000
- ------------------------------------------------------------------------------------------------
Conglomerates -- 4.3%
200,000 Minnesota Mining & Manufacturing Co. 13,250,000
375,000 Tenneco Inc. 18,609,375
- -----------------------------------------------------------------------------------------------
31,859,375
- ----------------------------------------------------------------------------------------------
Consumer Cyclicals -- 8.8%
100,000 Deluxe Corp. 2,900,000
100,000 Knight-Ridder Inc. 6,250,000
100,000 McGraw Hill Inc. 8,712,500
330,000 New York Times Co., Class A Shares 9,776,250
208,000 Readers Digest Association Inc. 10,660,000
500,000 Sears, Roebuck & Co. 19,500,000
165,000 Stanley Works 8,497,500
- ----------------------------------------------------------------------------------------------
66,296,250
- ----------------------------------------------------------------------------------------------
Consumer Staples -- 13.0%
300,000 American Brands Inc. 13,387,500
150,000 American Home Products Corp. 14,550,000
177,500 Clorox Co. 12,713,437
200,000 Eli Lilly & Co. 11,250,000
360,000 Glaxo Holdings PLC 10,170,000
180,000 H&R Block Inc. 7,290,000
100,000 Merck and Co., Inc. 6,575,000
205,200 Tambrands Inc. 9,798,300
250,000 U.S. Healthcare Inc. 11,625,000
- ----------------------------------------------------------------------------------------------
97,359,237
- ----------------------------------------------------------------------------------------------
Energy -- 13.4%
215,000 Chevron Corp. 11,287,500
300,000 Dresser Industries Inc. 7,312,500
215,000 Exxon Corp. 17,226,875
190,000 Mobil Corp. 21,280,000
115,000 Royal Dutch Petroleum Co. 16,229,375
215,000 Texaco Inc. 16,877,500
350,000 Unocal Corp. 10,193,750
- ----------------------------------------------------------------------------------------------
100,407,500
- ----------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Smith Barney Funds, Inc.
Equity Income Portfolio
Schedule of Investments (continued) December 31, 1995
SHARES SECURITY VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial Services -- 10.4%
150,000 Aetna Life & Casualty Co. $ 10,387,500
499,165 Allstate Corp. 20,528,161
70,000 Aon Corp. 3,491,250
150,000 Bankers Trust of New York Corp. 9,975,000
200,000 Chase Manhattan Corp. 12,125,000
400,000 Equifax Inc. 8,550,000
200,000 Household International Inc. 11,825,000
20,000 St. Paul Companies, Inc. 1,112,500
- ------------------------------------------------------------------------------------------------
77,994,411
- ------------------------------------------------------------------------------------------------
Raw & Intermediate Materials -- 8.6%
150,000 Aluminum Co. of America 7,931,250
200,000 Carpenter Technology Corp. 8,225,000
141,000 Kimberly-Clark Corp. 11,667,750
150,000 Monsanto Corp. 18,375,000
250,000 Olin Corp. 18,562,500
- ------------------------------------------------------------------------------------------------
64,761,500
- ------------------------------------------------------------------------------------------------
Technology -- 11.0%
350,000 Eastman Kodak Co. 23,450,000
250,000 Lockheed Martin Corp. 19,750,000
200,000 United Technologies Corp. 18,975,000
150,000 Xerox Corp. 20,550,000
- ------------------------------------------------------------------------------------------------
82,725,000
- ------------------------------------------------------------------------------------------------
Transportation -- 3.2%
80,000 Alexander Baldwin Inc. 1,840,000
100,000 Canadian National Railway Co.* 1,500,000
125,000 Illinois Central Corp. 4,796,875
200,000 Norfolk Southern Corp. 15,875,000
- ------------------------------------------------------------------------------------------------
24,011,875
- ------------------------------------------------------------------------------------------------
Utilities -- 12.4%
250,000 American Telephone & Telegraph Corp. 16,187,500
250,000 Consolidated Natural Gas Co. 11,343,750
145,300 Enron Global Power & Pipeline L.L.C. 3,614,337
305,300 Entergy Corp. 8,930,025
400,000 GTE Corp. 17,600,000
275,000 Pinnacle West Capital Corp. 7,906,250
150,000 Sprint Corp. 5,981,250
275,000 Texas Utilities Co. 11,309,375
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Smith Barney Funds, Inc.
Equity Income Portfolio
Schedule of Investments (continued) December 31, 1995
SHARES SECURITY VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Utilities -- 12.4% (continued)
310,000 Unicom Corp. $ 10,152,500
- ------------------------------------------------------------------------------------------------
93,024,987
- ------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $489,474,586) 664,615,135
- ------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS -- 1.6%
Financial Services -- 1.6%
185,000 Banc One Corp., Exchange $3.50, Series C
(Cost -- $11,974,125) 12,140,625
- ------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE DEBENTURES --4.0%
Consumer Cyclicals -- 2.9%
$7,000,000 Hechinger, 5.500% due 4/1/12 3,255,000
9,000,000 Price Company, 6.750% due 3/1/01 9,180,000
6,907,000 Titan Wheel International, 4.750% due 12/1/00 8,927,298
- ------------------------------------------------------------------------------------------------
21,362,298
- ------------------------------------------------------------------------------------------------
Energy -- 0.7%
5,800,000 Oryx Energy, 7.500% due 5/15/14 5,220,000
- ------------------------------------------------------------------------------------------------
Waste Management -- 0.4%
3,300,000 Browning Ferris, 6.750% due 7/18/05 3,316,500
- ------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE DEBENTURES
(Cost -- $30,907,663) 29,898,798
- ------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 5.8%
43,606,000 Citibank, 5.800% due 1/2/96; Proceeds at
maturity -- $43,634,081; (Fully collateralized
by U.S. Treasury Notes, 5.500% due 11/15/98;
Market value -- $44,480,292) (Cost --$43,606,000) 43,606,000
- ------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $575,962,374)+ $ 750,260,558
- ------------------------------------------------------------------------------------------------
* Non-income producing security.
+ Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Smith Barney Funds, Inc.
Equity Income Portfolio
Statement of Assets and Liabilities December 31, 1995
- ------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value (Cost -- $575,962,374) $ 750,260,558
Cash 381
Receivable for Fund shares sold 796,561
Dividends and interest receivable 2,137,127
Other assets 80,411
- ------------------------------------------------------------------------------------------------
Total Assets 753,275,038
- ------------------------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 506,612
Management fees payable 376,463
Distribution fees payable 160,181
Payable for Fund shares purchased 119,553
Accrued expenses and other liabilities 197,477
- ------------------------------------------------------------------------------------------------
Total Liabilities 1,360,286
- ------------------------------------------------------------------------------------------------
Total Net Assets $ 751,914,752
- ------------------------------------------------------------------------------------------------
NET ASSETS:
Par value of capital shares $ 515,367
Capital paid in excess of par value 576,729,268
Accumulated net realized gain on security transactions 371,933
Net unrealized appreciation of investments 174,298,184
- ------------------------------------------------------------------------------------------------
Total Net Assets $ 751,914,752
- ------------------------------------------------------------------------------------------------
Shares Outstanding:
Class A 42,324,270
- ------------------------------------------------------------------------------------------------
Class B 417,083
- ------------------------------------------------------------------------------------------------
Class C 2,042,769
- ------------------------------------------------------------------------------------------------
Class Z 6,752,593
- ------------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $14.59
- ------------------------------------------------------------------------------------------------
Class B* $14.54
- ------------------------------------------------------------------------------------------------
Class C** $14.57
- ------------------------------------------------------------------------------------------------
Class Z (and redemption price) $14.61
- ------------------------------------------------------------------------------------------------
Class A Maximium Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $15.36
- ------------------------------------------------------------------------------------------------
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares are redeemed less than
one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares are redeemed within the
first year of purchase.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Smith Barney Funds, Inc.
Equity Income Portfolio
Statement of Operations For the Year Ended December 31, 1995
- ------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends $ 21,517,038
Interest 4,714,644
- ------------------------------------------------------------------------------------------------
Total Investment Income 26,231,682
- ------------------------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 4,093,396
Distribution fees (Note 2) 1,740,910
Shareholder and system servicing fees 486,867
Shareholder communications 190,000
Registration fees 170,000
Custody 39,000
Audit and legal 30,002
Directors' fees 14,000
Other 20,000
- ------------------------------------------------------------------------------------------------
Total Expenses 6,784,175
- ------------------------------------------------------------------------------------------------
Net Investment Income 19,447,507
- ------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Note 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 380,497,378
Cost of securities sold 323,903,622
- ------------------------------------------------------------------------------------------------
Net Realized Gain 56,593,756
- ------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 51,104,489
End of year 174,298,184
- ------------------------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 123,193,695
- ------------------------------------------------------------------------------------------------
Net Gain on Investments 179,787,451
- ------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 199,234,958
- ------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Smith Barney Funds, Inc.
Equity Income Portfolio
Statements of Changes in Net Assets For the Year Ended December 31,
- ------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 19,447,507 $ 22,461,726
Net realized gain 56,593,756 7,232,686
Increase (decrease) in net unrealized appreciation 123,193,695 (43,420,036)
- ------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
From Operations 199,234,958 (13,725,624)
- ------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (19,458,013) (22,551,312)
Net realized gains (56,277,355) (7,455,252)
- ------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions
to Shareholders (75,735,368) (30,006,564)
- ------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 35,334,789 135,017,510
Net asset value of shares issued in connection
with the transfer of the Smith Barney
Equity Fund's net assets (Note 6) -- 88,308,192
Net asset value of shares issued for reinvestment of
dividends 70,023,680 27,216,070
Cost of shares reacquired (129,386,207) (199,254,008)
- ------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions (24,027,738) 51,287,764
- ------------------------------------------------------------------------------------------------
Increase in Net Assets 99,471,852 7,555,576
NET ASSETS:
Beginning of year 652,442,900 644,887,324
- ------------------------------------------------------------------------------------------------
End of year* $ 751,914,752 $ 652,442,900
- ------------------------------------------------------------------------------------------------
* Includes undistributed net investment income of: -- $10,506
- ------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
15
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
Notes to Financial Statements
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 annual reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) securities 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 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; short-term investments and securities maturing within 60 days or less
are valued at cost plus accreted discount, or minus amortized premium, which
approximates market value; (d) dividend income is recorded on the ex-dividend
date and interest income is recorded on the accrual basis; (e) gains or losses
on the sale of securities are calculated by using the specific identification
method; (f) direct expenses are charged to each portfolio and each class;
management fees and general portfolio expenses are allocated on the basis of
relative net assets; (g) 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; (h) 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 distributions of taxable income
sufficient to relieve it from substantially all Federal
16
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
Notes to Financial Statements (continued)
income and excise taxes; (i) 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 (j) 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 from these
amounts.
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 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
year ended December 31, 1995, SB received brokerage commissions of $312,572 and
sales charges of approximately $47,000 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 year ended December 31, 1995, CDSCs
of approximately $1,000 were paid to SB.
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
17
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
Notes to Financial Statements (continued)
net assets for each class, respectively. For the year ended December 31, 1995,
total Distribution Plan fees were as follows:
Class A Class B Class C
- --------------------------------------------------------------------------------
Distribution Plan Fees $1,442,402 $23,501 $275,007
- --------------------------------------------------------------------------------
All officers and three Directors of the Fund are employees of SB.
3. Investments
During the year ended December 31, 1995, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
- --------------------------------------------------------------------------------
Purchases $331,687,737
- --------------------------------------------------------------------------------
Sales 380,497,378
- --------------------------------------------------------------------------------
At December 31, 1995, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were as follows:
- --------------------------------------------------------------------------------
Gross unrealized appreciation $177,973,098
Gross unrealized depreciation (3,674,914)
- --------------------------------------------------------------------------------
Net unrealized appreciation $174,298,184
- --------------------------------------------------------------------------------
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.
5. Capital Shares
At December 31, 1995, 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. Effective November 7, 1994, the Fund adopted
18
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
Notes to Financial Statements (continued)
a new class structure, renaming existing Class B shares as Class C shares and
exchanging former Class C shares into Class A shares.
At December 31, 1995, total paid-in capital amounted to the following for
each class:
Class A Class B Class C Class Z
- --------------------------------------------------------------------------------
Total Paid-in Capital $459,187,170 $5,904,093 $27,531,331 $84,622,041
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Transactions in shares of each class were as follows:
Year Ended Year Ended
December 31, 1995 December 31, 1994*
--------------------- ---------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A++
Shares sold 1,257,466 $17,631,623 3,925,141 $ 33,508,255
Net asset value of shares
issued in connection with
the transfer of Smith
Barney Equity Fund's net
assets (Note 6) -- -- 6,640,327 87,697,961
Shares issued on
reinvestment 3,940,421 56,723,635 1,963,191 24,707,770
Shares redeemed (7,565,480) (103,786,681)(15,128,995) (191,764,655)
- ------------------------------------------------------------------------------------------
Net Decrease (2,367,593) $ (29,431,423) (2,600,336) $ (45,850,669)
- ------------------------------------------------------------------------------------------
Class B
Shares sold 383,746 $ 5,468,312 31,333 $ 385,206
Shares issued on reinvestment 32,917 476,304 406 4,935
Shares redeemed (28,716) (399,167) (2,603) (31,497)
- ------------------------------------------------------------------------------------------
Net Increase 387,947 $ 5,545,449 29,136 $ 358,644
- ------------------------------------------------------------------------------------------
Class C+
Shares sold 240,559 $ 3,375,523 1,382,439 $ 18,194,922
Net asset value of shares
issued in connection with
the transfer of Smith
Barney Equity Fund's net
assets (Note 6) -- -- 46,193 610,231
Shares issued on reinvestment 180,858 2,604,330 74,754 936,415
Shares redeemed (636,749) (8,570,732) (403,684) (5,134,706)
- ------------------------------------------------------------------------------------------
Net Increase (Decrease) (215,332) $ (2,590,879) 1,099,702 $ 14,606,862
- ------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
Notes to Financial Statements (continued)
<TABLE><CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994*
--------------------- ---------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class Z
Shares sold 665,866 $ 8,859,331 6,623,375 $ 82,929,127
Shares issued on reinvestment 709,558 10,219,411 128,353 1,566,950
Shares redeemed (1,185,176) (16,629,627) (189,383) (2,323,150)
- ------------------------------------------------------------------------------------------
Net Increase 190,248 $ 2,449,115 6,562,345 $ 82,172,927
- ------------------------------------------------------------------------------------------
* For Class B and Class Z shares, transactions are for the period from November 7, 1994 (inception
date) to December 31, 1994.
++ 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.
+ On November 7, 1994, the former Class B shares were renamed Class C shares.
</TABLE>
6. Transfer of Net Assets
On March 4, 1994, the Portfolio acquired the net assets and certain
liabilities of the Smith Barney Equity Fund, Inc. ("Equity Fund") pursuant
to a plan of reorganization approved by the Equity Fund shareholders on February
25, 1994. Total shares issued by the Portfolio and the total net assets of
Equity Fund on the date of the transfer were:
Total Net
Shares Assets of Total Net
Issued by Acquired Assets of
Acquired Fund the Portfolio Fund the Portfolio
- --------------------------------------------------------------------------
Equity Fund 6,686,520 $88,308,192 $647,328,273
- --------------------------------------------------------------------------
The total net assets of the Equity Fund before acquisition included
unrealized appreciation of $17,574,361. The transaction was structured for tax
purposes to qualify as a tax-free reorganization under the Internal Revenue
Code of 1986, as amended.
20
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
Financial Highlights
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares(1) 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 12.18 $ 13.31 $ 12.48 $ 12.51 $ 10.54
- ----------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.39 0.43 0.46 0.50 0.56
Net realized and unrealized gain (loss) 3.59 (1.00) 1.56 0.38 2.19
- ----------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 3.98 (0.57) 2.02 0.88 2.75
- ----------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.39) (0.42) (0.46) (0.51) (0.73)
Net realized gains(2) (1.18) (0.14) (0.73) (0.40) (0.05)
- ----------------------------------------------------------------------------------------------------
Total Distributions (1.57) (0.56) (1.19) (0.91) (0.78)
- ----------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 14.59 $ 12.18 $ 13.31 $ 12.48 $ 12.51
- ----------------------------------------------------------------------------------------------------
Total Return 33.05% (4.31)% 16.38% 7.23% 26.57%
- ----------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $617,431 $ 544,572 $627,870 $573,085 $583,686
- ----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.02% 0.96% 0.91% 0.92% 0.84%
Net investment income 2.78 3.31 3.42 3.97 4.80
- ----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 51.27% 26.77% 46.10% 39.16% 44.50%
- ----------------------------------------------------------------------------------------------------
Class B Shares 1995 1994(3)
- ----------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $ 12.15 $ 12.54
Income (Loss) From Operations:
Net investment income 0.24 0.03
Net realized and unrealized gain (loss) 3.62 (0.19)
- ----------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 3.86 (0.16)
- ----------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.29) (0.09)
Net realized gains(2) (1.18) (0.14)
- ----------------------------------------------------------------------------------------------------
Total Distributions (1.47) (0.23)
- ----------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 14.54 $ 12.15
- ----------------------------------------------------------------------------------------------------
Total Return 32.07% (1.28)%++
- ----------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 6,065 $ 354
- ----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.73% 1.15%+
Net investment income 1.83 2.11+
- ----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 51.27% 26.77%
</TABLE>
(1) 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.
(2) Net short term gains, if any, are included and reported as ordinary income
for income tax purposes.
(3) 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.
Equity Income Portfolio
Financial Highlights (continued)
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares(1) 1995 1994 1993 1992(2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 12.18 $ 13.30 $ 12.48 $ 12.87
- ----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.27 0.31 0.38 0.17
Net realized and unrealized gain (loss) 3.59 (0.95) 1.53 (0.10)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 3.86 (0.64) 1.91 0.07
- ----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.29) (0.34) (0.36) (0.06)
Net realized gains(3) (1.18) (0.14) (0.73) (0.40)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.47) (0.48) (1.09) (0.46)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 14.57 $ 12.18 $ 13.30 $ 12.48
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return 32.01% (4.91)% 15.46% (0.57)%++
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $29,758 $ 27,507 $15,408 $ 1,504
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.79% 1.75% 1.65% 1.58%+
Net investment income 2.00 2.49 2.59 1.80+
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 51.27% 26.77% 46.10% 39.16%
- ----------------------------------------------------------------------------------------------------------------------------------
Class Z Shares 1995 1994(4)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $ 12.19 $ 12.54
- ----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.43 0.07
Net realized and unrealized gain (loss) 3.59 (0.16)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 4.02 (0.09)
- ----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.42) (0.12)
Net realized gains(3) (1.18) (0.14)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.60) (0.26)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 14.61 $ 12.19
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return 33.41% (0.73)%++
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $98,661 $ 80,010
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.69% 0.42%+
Net investment income 3.11 3.88+
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 51.27% 26.77%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On November 7, 1994, the former Class B shares were renamed Class C shares.
(2) For the period from December 2, 1992 (inception date) to December 31, 1992.
(3) Net short term gains, if any, are included and reported as ordinary income
for income tax purposes.
(4) 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.
22
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
Independent Auditors' Report
To the Board of Directors and Shareholders of
Smith Barney Funds, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Equity Income Portfolio of Smith
Barney Funds, Inc., as of December 31, 1995, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended and the financial highlights
for each of the years in the five-year period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures include confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Equity Income Portfolio of Smith Barney Funds, Inc. as of December 31, 1995, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
February 13, 1996
23
<PAGE>
Smith Barney Funds, Inc.
Equity Income Portfolio
Tax Information (unaudited)
The amount of long-term capital gains paid by the Fund to its shareholders for
the fiscal year ended December 31, 1995, was $55,423,063.
24
<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 Travelers Group [ART]
Investment Manager
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
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
FD0853 2/96
<PAGE>
Annual Report
1995
1995
1995
1995
1995
Smith Barney
Funds, Inc.
Income Return
Account Portfolio
Short-Term U.S.
Treasury Securities
Portfolio
- ---------------------
December 31, 1995
[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 annual report for Smith Barney Funds,
Inc.--Income Return Account Portfolio and Short-Term U.S. Treasury Securities
Portfolio for the year ended December 31, 1995. For your convenience, we have
briefly summarized this period's prevailing economic and market conditions
below. A more detailed summary of performance and current holdings can be found
in the appropriate sections that follow in the annual report.
1995: The Year In Review
When 1995 began, the Federal Reserve had already raised interest rates six times
in 1994. The year started with signs that the U.S. economy, as measured by gross
domestic product (GDP), would continue its recovery. In fact, various economic
indicators showed strength and it appeared that the U.S. economy was growing at
an annual rate of roughly 5.0%. This rapid economic growth, combined with strong
employment, was seen by the Federal Reserve as a sign of a possible increase in
the rate of inflation. In an effort to head off any such increase, the Federal
Reserve raised the federal funds rate from 5.50% to 6.00% in early 1995,
effectively slowing economic growth.
As early as March, automobile manufacturers, for example, began reporting
sluggish demand and responded with production cuts. This contributed to slower
economic growth and the Federal Reserve Board's concerns were allayed. The
Federal Reserve eased monetary policy on July 6, 1995 by lowering the federal
funds rate from 6.00% to 5.75%. Following its July meeting, the Federal Reserve
held firm and did not lower short-term interest rates until its final meeting of
the year. Citing subdued inflation, the Federal Reserve lowered the federal
funds rate another 25 basis points to 5.50% in December.
Income Return Account Portfolio Performance
The Income Return Account Portfolio seeks high current income from a portfolio
of high-quality debt obligations and employs an immunization strategy to
minimize the risk of loss of account value. For the year ended December 31,
1995, the annual total return of the Portfolio's Class A shares was 8.43%, which
compares favorably to the 8.09% total return from its benchmark, the Salomon
Brothers 1-Year Treasury Index.
Portfolio Strategy
The Income Return Account Portfolio invests in money market instruments to help
provide stability, and short- and intermediate-term securities to provide
1
<PAGE>
enhanced return. While intermediate-term securities are normally defined as
issues maturing within ten years, the Income Return Account Portfolio limits the
maturities of the securities it holds to five years. For defensive purposes, the
Portfolio also employs an immunization strategy. (The Portfolio's immunizations
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 prices of
the Portfolio's intermediate-term issues. In extremely uncertain or volatile
periods for interest rates, it's 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 immunization strategy has worked well. In the 43 quarters since the
Portfolio's inception, it has only posted one down quarter--the first quarter
of 1992, when the Portfolio posted a negative total return of--0.13%.
Because the Portfolio invests in short- and intermediate-term fixed income
issues, it has the flexibility to take advantage of changing opportunities. And
because the securities in the Portfolio are "laddered" to mature at different
times, we were able to adapt to the changing interest rate environment during
1995. A laddered portfolio is one with bonds that have varying maturities. By
purchasing bonds that mature at set intervals, the Portfolio is diversified in
case of changes in interest rates.
At the beginning of the year, the Portfolio's average-weighted maturity was
approximately one year. At the end of July 1995 however, we had extended the
maturity to 1.02 years. We shortened the Portfolio's average weighted maturity
to 0.82 years in September, increased it slightly at the end of October to 0.93
years and ended 1995 with an average-weighted maturity of 0.90 years.
Short-Term U.S. Treasury Securities
Portfolio Performance and Strategy
For the year ended December 31, 1995, Class A shares of Smith Barney Funds, Inc.
- --Short Term U.S. Treasury Securities Portfolio posted a total return of 13.16%,
in line with the total return of 13.36% for the Salomon Brothers 3-Year Treasury
Index for the same time period. At year end, the Portfolio's average-weighted
maturity was 3.14 years.
The Short-Term U.S. Treasury Securities Portfolio is also managed with a
laddered portfolio strategy to protect against interest-rate risk. Currently,
the Portfolio is employing this laddered approach to take advantage of any
future monetary easing by the Federal Reserve and to benefit from any further
declines in longer maturity bonds.
2
<PAGE>
Market Outlook
There are both positive and negative factors to consider as we enter 1996. On
the negative side, the stalled budget negotiations in Washington, D.C., a
potential debt default by the U.S. government and the situation in Bosnia are,
in our view, developing situations that investors should watch closely.
While there are always negative factors that may adversely affect the market,
our outlook for the next six months is positive because of strong economic
fundamentals such as moderate economic growth with low inflation and the rise of
fiscal conservatism and the likelihood of an eventual budget compromise in
Washington, D.C. In addition, the strengthening U.S. dollar, declining interest
rates and changing demographics such as the aging of America that should act to
spur more savings and investing are also positive factors worth noting.
In closing, we would like to thank you for your investment in Smith Barney
Funds, Inc. --Income Return Account Portfolio and Short-Term U.S. Treasury
Securities Portfolio.
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
January 15, 1996
3
<PAGE>
Smith Barney Funds, Inc.
Income Return Account Portfolio
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
===============================================================================
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 $6.36 $0.07
===============================================================================
Historical Performance -- Class C Shares
Net Asset Value
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
===============================================================================
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 $1.37 $0.00
===============================================================================
Historical Performance -- Class Y Shares
Net Asset Value
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
===============================================================================
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 $1.37 $0.00
===============================================================================
4
<PAGE>
Smith Barney Funds, Inc.
Income Return Account Portfolio
- --------------------------------------------------------------------------------
Historical Performance--Class Z Shares
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
- -----------------------------------------------------------------------------
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 $0.63 $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 C Class Y Class Z
-------------------------------------
Year Ended 12/31/95 8.43% 8.06% 8.43% 8.43%
Five Years Ended 12/31/95 6.31 N/A N/A N/A
Ten Years Ended 12/31/95 7.14 N/A N/A N/A
Inception* through 12/31/95 7.47 4.50 4.59 7.75
With Sales Charge(2)
-------------------------------------
Class A Class C Class Y Class Z
-------------------------------------
Year Ended 12/31/95 6.27% 7.06% 8.43% 8.43%
Five Years Ended 12/31/95 5.88 N/A N/A N/A
Ten Years Ended 12/31/95 6.92 N/A N/A N/A
Inception* through 12/31/95 7.27 4.50 4.59 7.75
5
<PAGE>
Smith Barney Funds, Inc.
Income Return Account Portfolio
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charge(1)
---------------
Class A (12/31/85 through 12/31/95) 99.27%
Class C (Inception* through 12/31/95) 14.31
Class Y (Inception* through 12/31/95) 13.95
Class Z (Inception* through 12/31/95) 8.95
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect a 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+
December 1985 -- December 1995
Income Return Salomon Brothers
Account Portfolio 1-Year Treasury Index
12/85 9754 10000
12/86 10423 10804
12/87 10918 11424
12/88 11625 12122
12/89 12865 13343
12/90 14126 14534
12/91 15607 15811
12/92 16605 16571
12/93 17269 17206
12/94 17630 17658
12/95 19118 19085
+ Hypothetical illustration of $10,000 invested in Class A shares on December
31, 1985, 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 December 31,
1995. The Salomon Brothers 1-Year Treasury Index is composed of the most
recently issued twelve month United States Treasury Bill tracks the T-Bill's
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
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns
=============================================================================
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 $0.80 $0.04
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
- --------------------------------------------------------------------------------
Average Annual Total Return--Class A Shares
- --------------------------------------------------------------------------------
Without
Sales Charge
==========================================================================
Year Ended 12/31/95 13.16%
Inception* through 12/31/95 6.26
==========================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return--Class A Shares
- --------------------------------------------------------------------------------
Without
Sales Charge
==========================================================================
Inception* through 12/31/95 28.56%
==========================================================================
* The inception date for Class A shares is November 11, 1991.
+ 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--December 1995
Short-term Salomon Brothers 3-Year
U.S. Treasury Treasury Index
11/11/91 10000 10000
12/91 10285 10230
12/92 10894 10902
12/93 11549 11653
12/94 11301 11471
12/95 12856 13004
+ 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 December 31, 1995. 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 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 December 31, 1995
- --------------------------------------------------------------------------------
INCOME RETURN ACCOUNT PORTFOLIO
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS--76.0%
$ 3,000,000 U.S. Treasury Note, 5.500% due 4/30/96 $ 3,002,580
2,000,000 U.S. Treasury Note, 4.250% due 5/15/96 1,993,100
4,000,000 U.S. Treasury Note, 6.250% due 8/31/96 4,024,040
5,000,000 U.S. Treasury Note, 6.750% due 2/28/97 5,087,600
2,000,000 U.S. Treasury Note, 7.125% due 9/30/99 2,121,540
3,000,000 Federal Farm Credit Bank, 4.000% due 2/3/97 2,961,720
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost--$18,929,070) 19,190,580
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS--24.0%
5,876,000 Goldman Sachs Inc., 5.649% due 1/2/96,
Proceeds at maturity--$5,879,688; (Fully
collateralized by U.S. Treasury Notes, 5.375%
due 11/30/97; Market value--$5,996,262) 5,876,000
189,000 Morgan Stanley Inc., 5.850% due 1/2/96,
Proceeds at maturity--$189,123; (Fully
collateralized by U.S. Treasury Notes, 5.125%
due 4/30/98; Market value--$192,834) 189,000
- --------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost--$6,065,000) 6,065,000
================================================================================
TOTAL INVESTMENTS--100%
(Cost--$24,994,070) $25,255,580
================================================================================
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Schedules of Investments (continued) December 31, 1995
- --------------------------------------------------------------------------------
SHORT-TERM U.S. TREASURY SECURITIES PORTFOLIO
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS--100%
$ 5,500,000 U.S. Treasury Note, 6.500% due 11/30/96 $ 5,564,350
10,500,000 U.S. Treasury Note, 4.750% due 2/15/97 10,448,550
1,000,000 U.S. Treasury Note, 5.500% due 7/31/97 1,005,340
5,000,000 U.S. Treasury Note, 6.500% due 8/15/97 5,101,600
9,000,000 U.S. Treasury Note, 6.000% due 11/30/97 9,132,030
2,750,000 U.S. Treasury Note, 6.000% due 12/31/97 2,792,735
4,000,000 U.S. Treasury Note, 4.750% due 10/31/98 3,949,800
10,500,000 U.S. Treasury Note, 6.500% due 4/30/99 10,891,650
20,000,000 U.S. Treasury Note, 6.750% due 5/31/99 20,899,600
11,000,000 U.S. Treasury Note, 6.875% due 7/31/99 11,557,480
5,000,000 U.S. Treasury Note, 5.875% due 2/15/04 5,107,950
24,300,000 U.S. Treasury Strip, zero coupon due 2/15/00 19,573,407
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS--100%
(Cost--$102,100,725)+ $106,024,492
================================================================================
+ 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 December 31, 1995
- --------------------------------------------------------------------------------
Income Short-Term
Return U.S. Treasury
Account Securities
Portfolio Portfolio
================================================================================
ASSETS:
Investments, at value (Cost--$18,929,070
and $102,100,725) $19,190,580 $106,024,492
Repurchase agreements (Cost--$ 6,065,000) 6,065,000 -
Cash 726 110,445
Receivable for Fund shares sold 129 6,900
Interest receivable 295,927 1,190,649
Other assets 157,345 -
Receivable from manager -- 46,662
- --------------------------------------------------------------------------------
Total Assets 25,709,707 107,379,148
================================================================================
LIABILITIES:
Payable for Fund shares purchased 89,066 77,249
Dividend payable 19,824 43,351
Management fees payable 9,113 -
Distribution fees payable 1,093 31,960
Accrued expenses and other liabilities 26,096 127,494
- --------------------------------------------------------------------------------
Total Liabilities 145,192 280,054
- --------------------------------------------------------------------------------
Total Net Assets $25,564,515 $107,099,094
================================================================================
NET ASSETS:
Par value of capital shares $ 26,619 $ 255,690
Capital paid in excess of par value 26,971,962 110,973,663
Undistributed net investment income 17,808 -
Accumulated net realized loss on investments (1,713,384) (8,054,026)
Net unrealized appreciation of investments 261,510 3,923,767
- --------------------------------------------------------------------------------
Total Net Assets $25,564,515 $107,099,094
================================================================================
Shares Outstanding:
Class A 1,700,013 25,568,994
Class C 262,459 -
Class Y 99,116 -
Class Z 600,282 -
Net Asset Value:
Class A (and redemption price) $9.60 $4.19
Class C* $9.60 -
Class Y (and redemption price) $9.60 -
Class Z (and redemption price) $9.61 -
Class A Maximum Public Offering Price Per Share
(net asset value plus 2.04% of net asset
value per share) $9.80 $4.19
================================================================================
* 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.
12
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Statements of Operations For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
Income Short-Term
Return U.S. Treasury
Account Securities
Portfolio Portfolio
================================================================================
INVESTMENT INCOME:
Interest $1,719,313 $ 5,624,350
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 125,055 403,161
Distribution fees (Note 2) 9,541 313,569
Registration fees 28,374 65,003
Shareholder and system servicing fees 14,655 46,778
Custody 1,500 18,002
Shareholder communications 10,000 13,998
Audit and legal 11,300 8,602
Directors' fees 3,500 3,103
Other 2,000 5,202
- --------------------------------------------------------------------------------
Total Expenses 205,925 877,418
- --------------------------------------------------------------------------------
Net Investment Income 1,513,388 4,746,932
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3):
Realized Gain (Loss) From Long-Term
Security Transactions:
Proceeds from sales 17,340,625 65,454,151
Cost of securities sold 17,300,122 66,578,289
- --------------------------------------------------------------------------------
Net Realized Gain (Loss) From
Long-Term Security Transactions 40,503 (1,124,138)
- --------------------------------------------------------------------------------
Realized Gain From Short-Term
Security Transactions:
Proceeds from Sales 12,436,560 -
Cost of securities sold 12,374,226 -
- --------------------------------------------------------------------------------
Net Realized Gains From
Short-Term Security Transactions 62,334 -
- --------------------------------------------------------------------------------
Net Realized Gain (Loss) 102,837 (1,124,138)
Increase in Net Unrealized Appreciation
(Note 6) 724,801 7,502,923
- --------------------------------------------------------------------------------
Net Gain on Investments 827,638 6,378,785
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $2,341,026 $11,125,717
================================================================================
See Notes to Financial Statements.
13
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Years Ended December 31,
Income Return
Account Portfolio
---------------------------
1995 1994
================================================================================
OPERATIONS:
Net investment income $ 1,513,388 $ 2,203,747
Net realized gain (loss) 102,837 (547,137)
Increase in net unrealized appreciation
(depreciation) 724,801 (689,785)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 2,341,026 966,825
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,510,819) (2,191,210)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (1,510,819) (2,191,210)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 2,507,895 13,380,684
Net asset value of shares issued for
reinvestment of dividends 1,263,875 1,738,307
Cost of shares reacquired (11,328,757) (41,882,513)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (7,556,987) (26,763,522)
- --------------------------------------------------------------------------------
Decrease in Net Assets (6,726,780) (27,987,907)
NET ASSETS:
Beginning of year 32,291,295 60,279,202
- --------------------------------------------------------------------------------
End of year* $25,564,515 $32,291,295
================================================================================
* Includes undistributed net
investment income of: $17,808 $15,239
================================================================================
See Notes to Financial Statements.
14
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Years Ended December 31,
Short-Term
U.S. Treasury
Securities Portfolio
----------------------------
1995 1994
================================================================================
OPERATIONS:
Net investment income $ 4,746,932 $ 7,334,575
Net realized loss (1,124,138) (3,948,419)
Increase in net unrealized appreciation
(depreciation) 7,502,923 (6,533,895)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
From Operations 11,125,717 (3,147,739)
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (4,746,932) (7,334,575)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (4,746,932) (7,334,575)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 10,999,038 89,709,541
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 6) 53,909,184 -
Net asset value of shares issued for
reinvestment of dividends 3,983,544 6,166,194
Cost of shares reacquired (56,878,050) (202,445,248)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions 12,013,716 (106,569,513)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 18,392,501 (117,051,827)
NET ASSETS:
Beginning of year 88,706,593 205,758,420
- --------------------------------------------------------------------------------
End of year $107,099,094 $ 88,706,593
================================================================================
See Notes to Financial Statements.
15
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 annual reports.
The significant accounting policies consistently followed by the Portfolios
are: (a) securities 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; short-term investments and securities maturing within
60 days are valued at cost plus accreted discount, or minus amortized premiums,
which approximates market value; (d) interest income is recorded on the accrual
basis; (e) gains or losses on the sale of securities are calculated by using the
specific identification method; (f) 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; (g) dividends and distributions
to shareholders are recorded on the ex-dividend date; (h) 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; (i) 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 price change; and (j) 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
16
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)(continued)
- --------------------------------------------------------------------------------
markets and any other parameters used in determining these estimates could cause
actual results to differ from these amounts.
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 year ended December 31, 1995, SB
received sales charges of approximately $33,000 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
year ended December 31, 1995, CDSCs paid to SB for Class C shares were
approximately $1,000.
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 service fee with respect to Class A shares calculated at
the annual rate of 0.25% of its average daily net assets and a distribution fee
calculated at the annual rate of 0.10% of average daily net assets. For the year
ended December 31, 1995, total Distribution Plan fees were as follows:
Class A Class C
=======================================================================
Income Return Account $ -- $9,541
Short-Term U.S. Treasury 313,569 -
=======================================================================
All officers and three Directors of the Fund are employees of SB.
17
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
3. Investments
During the year ended December 31, 1995, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
Income
Return Short-Term
Account U.S. Treasury
=======================================================================
Purchases $21,839,540 $25,328,281
Sales 19,340,625 65,454,151
=======================================================================
At December 31, 1995, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes by Portfolio were
approximately as follows:
Income
Return Short-Term
Account U.S. Treasury
=======================================================================
Gross unrealized appreciation $264,972 $4,000,021
Gross unrealized depreciation (3,462) (76,254)
Net unrealized appreciation $261,510 $3,923,767
======================================================================
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. Capital Shares
At December 31, 1995, the Fund had two billion shares of capital stock
authorized with a par value of $0.01 per share. The Income Return Account has
the ability to issue multiple classes of shares. Each share of a class
represents an identical interest in the Income Return Account and has the same
rights, except that each class bears certain expenses specifically related to
the distribution of its shares. Effective November 7, 1994, the Fund adopted a
new class structure, renaming existing Class B shares as Class C shares and
renaming former Class C shares as Class Y shares for the Income Return Account.
18
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At December 31, 1995 total paid-in-capital amounted to the following for
each class and respective Portfolio:
<TABLE>
<CAPTION>
Portfolio Class A Class C Class Y Class Z
============================================================================================
<S> <C> <C> <C> <C>
Income Return Account $ 17,706,033 $2,572,255 $1,088,247 $5,632,046
Short-Term U.S. Treasury 111,229,353 - - -
============================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994
------------------------ --------------------------
Income Return Account Shares Amount Shares Amount
============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 225,444 $ 2,157,394 276,529 $ 2,616,488
Shares issued on reinvestment 78,208 744,322 150,791 1,427,935
Shares redeemed (629,762) (5,998,609) (3,708,422) (35,070,581)
- --------------------------------------------------------------------------------------------
Net Decrease (326,110) $ (3,096,893) (3,281,102) $ (31,026,158)
============================================================================================
Class C+
Shares sold 31,564 $ 300,875 256,226 $ 2,437,665
Shares issued on reinvestment 10,399 98,935 11,683 110,488
Shares redeemed (106,686) (1,012,222) (357,469) (3,389,893)
- --------------------------------------------------------------------------------------------
Net Decrease (64,723) $ (612,412) (89,560) $ (841,740)
============================================================================================
Class Y++
Shares sold - $ - 121,282 $ 1,152,444
Shares issued on reinvestment 6,752 64,067 11,913 112,510
Shares redeemed (254,016) (2,404,236) (351,172) (3,300,139)
- --------------------------------------------------------------------------------------------
Net Decrease (247,264) $ (2,340,169) (217,977) $ (2,035,185)
============================================================================================
Class Z*
Shares sold 5,206 $ 49,626 761,580 $ 7,174,087
Shares issued on reinvestment 37,427 356,551 9,325 87,374
Shares redeemed (200,256) (1,913,690) (13,001) (121,900)
- --------------------------------------------------------------------------------------------
Net Increase (Decrease) (157,623) $ (1,507,513) 757,904 $ 7,139,561
============================================================================================
</TABLE>
+ On November 7, 1994, the former Class B shares were renamed Class C shares.
++ On November 7, 1994, the former Class C shares were renamed Class Y shares.
* Sales of Class Z shares commenced on November 7, 1994.
19
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994
------------------------ --------------------------
Short-Term U.S. Treasury Shares Amount Shares Amount
============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 2,680,304 $ 10,999,038 21,923,554 $ 89,709,541
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 6) 13,207,339 53,909,184 - -
Shares issued on reinvestment 973,147 3,983,544 1,530,315 6,166,194
Shares redeemed (13,976,062) (56,878,050) (50,274,705) (202,445,248)
============================================================================================
Net Increase (Decrease) 2,884,728 $ 12,013,716 (26,820,836) $(106,569,513)
============================================================================================
</TABLE>
6. Transfer of Net Assets
On August 11, 1995, Short-Term U.S. Treasury acquired the net 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:
Total Net
Shares Assets of Total Net
Issued by Acquired Assets of
Acquired Fund the Portfolio Fund the Portfolio
=======================================================================
Limited Maturity Treasury 13,207,339 $53,909,184 $64,271,771
=======================================================================
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. The transaction was structured for tax purposes to qualify as a tax-
free reorganization under the Internal Revenue Code of 1986, as amended.
20
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
7. 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
unused 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:
1996 1997 2001 2002 2003
================================================================================
Income Return Account $930,000 $218,000 $ - $ 547,000 $ -
Short-Term U.S. Treasury - - 1,477,000 5,472,000 1,124,000
================================================================================
21
<PAGE>
Smith Barney Funds, Inc.
Income Return Account Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares 1995 1994 1993 1992 1991
============================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $9.34 $9.59 $9.68 $9.65 $9.38
- --------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.51 0.46 0.45 0.52 0.67
Net realized and unrealized gain (loss) 0.26 (0.26) (0.07) 0.03 0.33
- --------------------------------------------------------------------------------------------
Total Income From Operations 0.77 0.20 0.38 0.55 1.00
- --------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.51) (0.45) (0.47) (0.52) (0.73)
- --------------------------------------------------------------------------------------------
Total Distributions (0.51) (0.45) (0.47) (0.52) (0.73)
- --------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.60 $9.34 $9.59 $9.68 $9.65
- --------------------------------------------------------------------------------------------
Total Return 8.43% 2.14% 4.00% 5.85% 11.06%
- --------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $16,324 $18,918 $50,874 $48,538 $33,682
- --------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.69% 0.56% 0.53% 0.50% 0.49%
Net investment income 5.38 4.60 4.67 5.33 6.98
- --------------------------------------------------------------------------------------------
Portfolio Turnover Rate 107.30% 126.64% 152.04% 84.15% 30.44%
============================================================================================
</TABLE>
22
<PAGE>
Smith Barney Funds, Inc.
Income Return Account Portfolio
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares(1) 1995 1994 1993 1992(2)
=================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $9.34 $9.58 $9.68 $9.69
- ---------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.48 0.42 0.45 0.03
Net realized and unrealized gain (loss) 0.26 (0.24) (0.12) -
- ---------------------------------------------------------------------------------
Total Income From Operations 0.74 0.18 0.33 0.03
- ---------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.48) (0.42) (0.43) (0.04)
- ---------------------------------------------------------------------------------
Total Distributions (0.48) (0.42) (0.43) (0.04)
- ---------------------------------------------------------------------------------
Net Asset Value, End of Year $9.60 $9.34 $9.58 $9.68
- ---------------------------------------------------------------------------------
Total Return 8.06% 1.86% 3.53% 0.31%++
- ---------------------------------------------------------------------------------
Net Assets, End of Year (000s) $2,520 $3,055 $3,993 $10
- ---------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.02% 0.94% 0.90% 0.86%+
Net investment income 4.89 4.40 4.25 5.71+
- ---------------------------------------------------------------------------------
Portfolio Turnover Rate 107.30% 126.64% 152.04% 84.15%
=================================================================================
</TABLE>
(1) On November 7, 1994, the former Class B shares were renamed Class C shares.
(2) 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.
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 year:
<TABLE>
<CAPTION>
Class Y Shares(1) 1995 1994 1993(2)
========================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $9.34 $9.59 $9.72
- ------------------------------------------------------------------------
Income From Operations:
Net investment income 0.51 0.44 0.42
Net realized and unrealized gain (loss) 0.26 (0.25) (0.13)
- ------------------------------------------------------------------------
Total Income From Operations 0.77 0.19 0.29
- ------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.51) (0.44) (0.42)
- ------------------------------------------------------------------------
Total Distributions (0.51) (0.44) (0.42)
- ------------------------------------------------------------------------
Net Asset Value, End of Year $9.60 $9.34 $9.59
- ------------------------------------------------------------------------
Total Return 8.43% 2.01% 3.01%++
- ------------------------------------------------------------------------
Net Assets, End of Year (000s) $952 $3,235 $5,412
- ------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.73% 0.69% 0.75%+
Net investment income 5.43 4.65 4.78+
- ------------------------------------------------------------------------
Portfolio Turnover Rate 107.30% 126.64% 152.04%
========================================================================
</TABLE>
(1) On November 7, 1994, the former Class C shares were renamed Class Y shares.
(2) 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.
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 year:
<TABLE>
<CAPTION>
Class Z Shares 1995 1994(1)
===============================================================
<S> <C> <C>
Net Asset Value, Beginning of Year $9.35 $9.42
- ---------------------------------------------------------------
Income From Operations:
Net investment income 0.50 0.07
Net realized and unrealized gain (loss) 0.27 (0.02)
- ---------------------------------------------------------------
Total Income From Operations 0.77 0.05
- --------------------------------------------------------------
Less Distributions From:
Net investment income (0.51) (0.12)
- --------------------------------------------------------------
Total Distributions (0.51) (0.12)
- --------------------------------------------------------------
Net Asset Value, End of Year $9.61 $9.35
- --------------------------------------------------------------
Total Return 8.43% 0.38%++
- --------------------------------------------------------------
Net Assets, End of Year (000s) $5,769 $7,083
- --------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.70% 0.46%+
Net investment income 5.38 5.29+
- --------------------------------------------------------------
Portfolio Turnover Rate 107.30% 126.64%
==============================================================
</TABLE>
(1) 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.
25
<PAGE>
Smith Barney Funds, Inc.
Short-Term U.S. Treasury Securities Portfolio
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares 1995 1994 1993 1992 1991(1)
================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $3.91 $4.16 $4.12 $4.09 $4.01
- ------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.22 0.18 0.18 0.19 0.03
Net realized and unrealized gain (loss) 0.28 (0.25) 0.06 0.04 0.09
- ------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.50 (0.07) 0.24 0.23 0.12
- ------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.22) (0.18) (0.18) (0.19) (0.03)
Net realized gains - - (0.02) (0.01) (0.01)
- ------------------------------------------------------------------------------------------------
Total Distributions (0.22) (0.18) (0.20) (0.20) (0.04)
- ------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $4.19 $3.91 $4.16 $4.12 $4.09
- ------------------------------------------------------------------------------------------------
Total Return 13.16% (2.15)% 6.01% 5.92% 2.85%++
- ------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $107,099 $88,707 $205,758 $130,280 $93,946
- ------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.98% 0.91% 0.88% 0.91% 0.80%+
Net investment income 5.29 4.54 4.40 4.76 4.89+
- ------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 28.62% 24.51% 41.12% 44.99% 4.61%
================================================================================================
</TABLE>
(1) 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.
26
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Smith Barney Funds, Inc.:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of the Income Return Account and the
Short-Term U.S. Treasury Securities Portfolios of Smith Barney Funds, Inc. as of
December 31, 1995, and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the years in the two-
year period then ended and the financial highlights for each of the years in the
five-year period then ended with respect to the Income Return Account Portfolio
and for each of the years in the four-year period then ended and the period from
November 11, 1991 (commencement of operations) to December 31, 1991 with respect
to the Short-Term U.S. Treasury Securities Portfolio. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
27
<PAGE>
Smith Barney Funds, Inc.
- --------------------------------------------------------------------------------
Independent Auditors' Report (continued)
- --------------------------------------------------------------------------------
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Income Return Account and the Short-Term U.S. Treasury Securities Portfolios of
Smith Barney Funds, Inc. as of December 31, 1995, and the results of their
operations for the year then ended, the changes in their net assets for each of
the years in the two-year period then ended and the financial highlights for
each of the years in the five-year period then ended with respect to Income
Return Account Portfolio and for each of the years in the four-year period then
ended and the period from November 11, 1991 to December 31, 1991 with respect to
the Short-Term U.S. Treasury Securities Portfolio, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 13, 1996
28
<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 Travelers Group [Logo]
Investment Manager
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
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
FD0854 2/96
<PAGE>
A N N U A L R E P O R T
1995
1995
1995
1995
1995
Smith Barney
Funds, Inc.
U.S. Government
Securities Portfolio
---------------------------------------
December 31, 1995
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
US Government Securities Portfolio
Dear Shareholder:
We are pleased to provide you with the annual report for the year ended December
31, 1995 for Smith Barney Funds, Inc. - U.S. Government Securities Portfolio. 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 annual report.
Performance Summary
For the twelve months ended December 31, 1995, Smith Barney Funds, Inc. - U.S.
Government Securities Portfolio posted an average annual total return of 16.52%
for Class A shares. This performance compares favorably to the Lipper Analytical
Services, Inc. total return average for GNMA funds of 16.25%. (Lipper Analytical
Services, Inc. is a major fund performance tracking organization.)
1995: The Year in Review
When 1995 began, the Federal Reserve had already raised interest rates six times
in 1994. The year started with signs that the U.S. economy, as measured by gross
domestic product (GDP), would continue its recovery. Economic indicators were
strong and the U.S. economy was growing at an annual rate of roughly 5.0%. This
rapid growth, combined with strong employment, was seen by the Federal Reserve
as a sign of a possible increase in the rate of inflation. In an effort to head
off any such increase, the Federal Reserve raised the federal funds rate from
5.50% to 6.00% in early 1995, effectively slowing economic growth. (The federal
funds rate represents the rate banks charge each other for overnight loans and
affects all other interest rates.)
As early as March, automobile manufacturers, for example, began reporting
sluggish demand and responded with production cuts. This contributed to slower
economic growth and the Federal Reserve Board's concerns were allayed. The
Federal Reserve eased monetary policy on July 6, 1995 by lowering the federal
funds rate from 6.00% to 5.75%. Following its July meeting, the Federal Reserve
held firm and did not lower short-term interest rates until its final meeting of
the year. Citing subdued inflation, the Federal Reserve lowered the federal
funds rate another 25 basis points to 5.50% in December.
Investment Strategy
During the course of 1995, the U.S. Government Securities Portfolio went from
being very defensive to slightly bullish. We began to increase the Portfolio's
holdings in GNMA securities which, in our view, represented a
1
<PAGE>
good value. In 1995, mortgage-backed securities performed well, but not as well
as U.S. Treasuries. We think mortgage-backed securities continue to represent
fair value because the spread between mortgage-backed securities and Treasuries
is significantly higher today and because of our expectations that prepayments
and mortgage refinancing should be much lower than what occurred in 1993. We
believe the Portfolio's better relative performance than the index can be
attributed to lowered prepayment expectations regarding GNMA securities, a
condition we expect to continue. We therefore plan on selling U.S. Treasuries
and investing in current-coupon or near-premium GNMA securities in the near
term.
In our view, any continuation of a bond market rally in 1996 is dependent on
signs of economic weakness. We therefore expect to remain cautious in managing
the U.S. Government Securities Portfolio and will keep its duration in a four-
year range until we perceive any signs of economic weakness.
Market Outlook
There are both positive and negative factors to consider as we enter 1996. On
the negative side, the stalled budget negotiations in Washington, D.C., a
potential debt default by the U.S. government and the situation in Bosnia are,
in our view, developing situations that investors should watch closely.
While there are always negative factors that may adversely affect the market,
our outlook for the next six months is positive because of strong economic
fundamentals such as moderate economic growth with low inflation, the rise
of fiscal conservatism and the likelihood of an eventual budget compromise in
Washington, D.C. In addition, the strengthening U.S. dollar, declining interest
rates and changing demographics such as the aging of America that should act to
spur more savings and investing are also positive factors worth noting.
In closing, we would like to thank you for your investment in Smith Barney
Funds, Inc. - U.S. Government Securities Portfolio.
Sincerely,
/s/ Heath B. McLendon /s/ Patrick Sheehan
Heath B. McLendon Patrick Sheehan
Chairman and Portfolio Manager
Chief Executive Officer
January 19, 1996
2
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
- -------------------------------------------------------------------------
Historical Performance -- Class A Shares
- -------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
=========================================================================
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 $11.36 $ 0.57
=========================================================================
- -------------------------------------------------------------------------
Historical Performance -- Class B Shares
- -------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
=========================================================================
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 $ 1.07 $ .00
=========================================================================
- -------------------------------------------------------------------------
Historical Performance -- Class C Shares
- -------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
=========================================================================
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 $ 2.88 $ 0.15
=========================================================================
3
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
- -------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- -------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
=========================================================================
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 $ 2.82 $ 0.15
=========================================================================
- -------------------------------------------------------------------------
Historical Performance -- Class Z Shares
- -------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
=========================================================================
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 $ 1.19 $ 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
=========================================================================
Year Ended 12/31/95 16.52% 16.03% 15.93% 16.88% 16.89%
Five Years Ended 12/31/95 8.70 N/A N/A N/A N/A
Ten Years Ended 12/31/95 9.03 N/A N/A N/A N/A
Inception* through 12/31/95 10.09 15.85 6.47 6.78 16.67
=========================================================================
With Sales Charge(2)
--------------------
Class A Class B Class C Class Y Class Z
=========================================================================
Year Ended 12/31/95 11.28% 11.53% 14.93% 16.88% 16.89%
Five Years Ended 12/31/95 7.71 N/A N/A N/A N/A
Ten Years Ended 12/31/95 8.53 N/A N/A N/A N/A
Inception* through 12/31/95 9.64 12.43 6.47 6.78 16.67
=========================================================================
4
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
- -------------------------------------------------------------------------
Cumulative Total Return
- -------------------------------------------------------------------------
Without
Sales Charge(1)
=========================================================================
Class A (12/31/85 through 12/31/95) 137.49%
Class B (Inception* through 12/31/95) 18.40
Class C (Inception* through 12/31/95) 21.29
Class Y (Inception* through 12/31/95) 21.48
Class Z (Inception* through 12/31/95) 19.40
=========================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect a 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 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 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.
5
<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 Mutual Fund Index+
- -------------------------------------------------------------------------
December 1985 -- December 1995
[GRAPH APPEARS HERE]
12/85 9,601.00 10,000.00
12/86 10,591.00 11,252.00
12/87 10,831.00 11,738.00
12/88 11,732.00 12,771.00
12/89 13,454.00 14,774.00
12/90 14,740.00 16,337.00
12/91 17,082.00 18,958.00
12/92 18,193.00 20,362.00
12/93 19,297.00 21,701.00
12/94 18,969.00 21,374.00
12/95 22,104.00 25,018.00
+ 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 Mutual Fund 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.
6
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1995
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 91.2%
$14,500,000 U.S. Treasury Notes, 6.250% due 8/15/23 $ 14,924,995
12,870,000 FHLMC Gold Certificates, 8.500% due 1/1/25 13,449,383
19,010,000 FHLMC Gold Certificates, 7.500% due 6/1/25 19,515,325
20,000,000 FHLMC TBA Gold Certificates, 7.500% due 6/1/25** 20,500,000
5,256,000 GNMA Certificates, 10.000% due 7/15/20* 5,766,705
25,284,000 GNMA Certificates, 8.500% due 5/15/22* 26,564,168
50,822,000 GNMA Certificates, 7.000% due 7/15/23* 51,473,005
60,830,000 GNMA Certificates, 6.500% due 5/15/24* 60,430,066
63,697,000 GNMA Certificates, 7.500% due 7/15/24* 65,567,939
55,604,000 GNMA Certificates, 8.000% due 11/15/25* 57,967,399
35,864,000 GNMA Certificates, 9.000% due 2/15/25* 38,026,980
2,637,000 GNMA II Certificates, 10.000% due 1/20/18* 2,866,586
20,747,000 GNMA II Certificates, 8.500% due 8/20/24* 21,641,319
24,421,000 GNMA II Certificates, 7.000% due 9/20/25* 24,550,615
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost -- $411,083,990) 423,244,485
================================================================================
REPURCHASE AGREEMENT -- 8.8%
40,802,000 Chemical Securities Inc., 5.800% due 1/2/96,
Proceeds at maturity -- $40,828,288;
(Fully collateralized by U.S. Treasury Notes,
6.125% due 5/31/97; Market value -- $41,619,114)
(Cost -- $40,802,000) 40,802,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $451,885,990)+ $ 464,046,485
================================================================================
* 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 5).
+ Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
7
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1995
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $451,885,990) $ 464,046,485
Cash 924
Receivable for Fund shares sold 179,240
Interest receivable 2,832,520
Other assets 4,492
- --------------------------------------------------------------------------------
Total Assets 467,063,661
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 20,468,750
Dividends payable 973,268
Management fees payable 168,165
Payable for Fund shares purchased 117,571
Distribution fees payable 113,522
Accrued expenses and other liabilities 98,120
- --------------------------------------------------------------------------------
Total Liabilities 21,939,396
- --------------------------------------------------------------------------------
Total Net Assets $445,124,265
================================================================================
NET ASSETS:
Par value of capital shares $ 327,454
Capital paid in excess of par value 442,415,552
Overdistributed net investment income (100,007)
Accumulated net realized loss on investments (9,679,229)
Net unrealized appreciation of investments 12,160,495
- --------------------------------------------------------------------------------
Total Net Assets $445,124,265
================================================================================
Shares Outstanding:
Class A 28,289,208
Class B 816,870
Class C 1,587,202
Class Y 513,698
Class Z 1,538,469
Net Asset Value:
Class A (and redemption price) $13.59
Class B* $13.61
Class C** $13.58
Class Y (and redemption price) $13.61
Class Z (and redemption price) $13.60
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $14.23
================================================================================
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if shares
are redeemed less than 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.
8
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $32,195,158
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 1,869,768
Distribution fees (Note 2) 1,112,369
Shareholder and system servicing fees 171,000
Registration fees 80,110
Shareholder communications 70,003
Custody 45,087
Audit and legal 18,604
Trustees' fees 9,001
Other 19,404
- --------------------------------------------------------------------------------
Total Expenses 3,395,346
- --------------------------------------------------------------------------------
Net Investment Income 28,799,812
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 232,315,964
Cost of securities sold 222,946,947
- --------------------------------------------------------------------------------
Net Realized Gain 9,369,017
Increase in Net Unrealized Appreciation (Note 7) 26,284,851
- --------------------------------------------------------------------------------
Net Gain on Investments 35,653,868
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $64,453,680
===============================================================================
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 28,799,812 $ 31,215,317
Net realized gain (loss) 9,369,017 (1,106,366)
Increase in net unrealized appreciation
(depreciation) 26,284,851 (38,104,827)
- -------------------------------------------------------------------------------
Increase (Decrease) In Net Assets From
Operations 64,453,680 (7,995,876)
- -------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (28,927,423) (31,643,231)
Net realized gains -- (1,490,047)
- -------------------------------------------------------------------------------
Decrease In Net Assets From Distributions
to Shareholders (28,927,423) (33,133,278)
- -------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sales 29,154,430 56,175,610
Net asset value of shares issued in connection
with the transfer of Smith Barney Funds,
Inc.-- Monthly Payment Government
Portfolio's net assets (Note 7) 42,151,893 --
Net asset value of shares issued to shareholders
for reinvestment of dividends 17,079,838 18,997,260
Cost of reacquired shares (92,097,436) (123,068,611)
- -------------------------------------------------------------------------------
Decrease In Net Assets From Fund
Share Transactions (3,711,275) (47,895,741)
- -------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 31,814,982 (89,024,895)
NET ASSETS:
Beginning of year 413,309,283 502,334,178
- -------------------------------------------------------------------------------
End of year* $445,124,265 $413,309,283
===============================================================================
* Includes undistributed (overdistributed)
net investment income of: $(100,007) $27,604
===============================================================================
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 annual reports.
The significant accounting policies consistently followed by the Fund are: (a)
securities transactions are accounted for on 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; short-term investments and securities maturing within 60 days are
valued at cost plus accreted discount, or minus amortized premium, which
approximates market value; (d) interest income is recorded on the accrual basis;
(e) gains or losses on the sale of securities are calculated by using the
specific identification method; (f) 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; (g) dividends and distributions
to shareholders are recorded on the ex-dividend date; (h) 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; (i) 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
11
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
this change; and (j) 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 from these amounts.
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 year ended December 31, 1995, SB received sales charges of
approximately $284,000 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
year ended December 31, 1995, CDSCs paid to SB were approximately:
Class B Class C
================================================================================
CDSC $11,000 $5,000
================================================================================
12
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (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 year ended December 31, 1995, total
Distribution Plan fees were as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
=====================================================================
<S> <C> <C> <C>
Distribution Plan Fees $914,410 $45,752 $152,207
=====================================================================
</TABLE>
All officers and three Directors of the Fund are employees of SB.
3. Investments
During the year ended December 31, 1995, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
=====================================================================
Purchases $226,539,161
- ---------------------------------------------------------------------
Sales 232,315,964
=====================================================================
At December 31, 1995, the aggregate unrealized appreciation and depreciation
of investments for Federal income tax purposes were approximately as follows:
=====================================================================
Gross unrealized appreciation $12,827,014
Gross unrealized depreciation (666,519)
- ---------------------------------------------------------------------
Net unrealized appreciation $12,160,495
=====================================================================
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.
13
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
5. 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 December 31, 1995, the Portfolio held one TBA security with a cost of
$20,406,250.
6. Capital Shares
At December 31, 1995, 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.
Effective November 7, 1994, the Fund adopted a new class structure, renaming
existing Class B shares as Class C shares and former C shares as Class Y shares.
At December 31, 1995, total paid-in capital amounted to the following for
each class:
Class Amount
=====================================================================
A $384,381,482
B 10,608,519
C 21,698,176
Y 7,578,980
Z 18,475,849
=====================================================================
14
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994*
---------------------- -------------------------
Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 993,281 $ 13,089,337 1,869,276 $ 24,593,957
Net asset value of shares issued
in connection with the transfer
of Smith Barney Funds, Inc.--
Monthly Payment
Government Portfolio's
net assets (Note 7) 2,887,733 38,637,744 -- --
Shares issued on reinvestment 1,073,322 14,209,870 1,351,832 17,357,603
Shares redeemed (5,309,396) (70,232,692) (8,851,963) (114,384,462)
- -------------------------------------------------------------------------------------------------
Net Decrease (355,060) $ (4,295,741) (5,630,855) $ (72,432,902)
=================================================================================================
Class B
Shares sold 759,232 $ 10,098,823 149,288 $ 1,870,235
Net asset value of shares issued
in connection with the transfer
of Smith Barney Funds, Inc.--
Monthly Payment
Government Portfolio's
net assets (Note 7) 40,956 548,705 -- --
Shares issued on reinvestment 23,845 318,309 1,488 18,633
Shares redeemed (129,358) (1,718,302) (28,581) (356,657)
- -------------------------------------------------------------------------------------------------
Net Increase 694,675 $ 9,247,535 122,195 $ 1,532,211
=================================================================================================
Class C+
Shares sold 236,768 $ 3,129,915 722,632 $ 9,602,624
Net asset value of shares issued
in connection with the transfer
of Smith Barney Funds, Inc.--
Monthly Payment
Government Portfolio's
net assets (Note 7) 221,615 2,965,444 -- --
Shares issued on reinvestment 69,690 921,823 85,790 1,099,736
Shares redeemed (641,755) (8,524,847) (567,463) (7,323,683)
- -------------------------------------------------------------------------------------------------
Net Increase (Decrease) (113,682) $ (1,507,665) 240,959 $ 3,378,677
=================================================================================================
Class Y++
Shares sold 3,330 $ 44,021 103,206 $ 1,413,134
Shares issued on reinvestment 12,500 165,457 13,895 178,365
Shares redeemed (613,583) (8,026,122) (38,511) (508,509)
- -------------------------------------------------------------------------------------------------
Net Increase (Decrease) (597,753) $ (7,816,644) 78,590 $ 1,082,990
=================================================================================================
</TABLE>
15
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994*
---------------------- -------------------------
Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Class Z
Shares sold 212,929 $ 2,792,334 1,498,512 $ 18,695,660
Shares issued on reinvestment 110,569 1,464,379 27,412 342,923
Shares redeemed (271,382) (3,595,473) (39,571) (495,300)
Net Increase 52,116 $ 661,240 1,486,353 $ 18,543,283
=================================================================================================
</TABLE>
* For Class B and Z shares, transactions are for the period from November 7,
1994 (inception date) to December 31, 1994.
+ On November 7, 1994, the former Class B shares were renamed Class C shares.
++ On November 7, 1994, the former Class C shares were renamed Class Y shares.
7. Transfer of Net Assets
On October 13, 1995, the Portfolio acquired the net 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:
<TABLE>
<CAPTION>
Total Net
Shares Assets of Total Net
Issued by Monthly Assets of
Acquired Portfolio the Portfolio Payment the Portfolio
=============================================================================
<S> <C> <C> <C>
Monthly Payment 3,150,304 $ 42,151,893 $409,850,631
=============================================================================
</TABLE>
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. The
transaction was structured for tax purposes to qualify as a tax-free
reorganization under the Internal Revenue Code of 1986, as amended.
8. Capital Loss Carryforward
At December 31, 1995, the Portfolio had for Federal income tax purposes
approximately $4,584,000 of unused 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.
16
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
The amount and date of expiration for each carryforward loss is indicated below:
<TABLE>
<CAPTION>
12/31/96 12/31/97 12/31/01 12/31/02
===============================================================================
<S> <C> <C> <C> <C>
Carryforward Amounts $ 392,000 $ 898,000 $ 430,000 $2,864,000
===============================================================================
</TABLE>
9. Mortgage Dollar Rolls
The Portfolio may enter into mortgage dollar rolls in which the Portfolio
sells mortgage securities for delivery in the current month and simultaneously
contracts to repurchase similar, but not identical, securities at the same price
on a fixed date. The Portfolio receives compensation as consideration for
entering into the commitment to repurchase. The counterparty receives all
principal and interest payments, including prepayments, made with regard to this
security while it is the holder. Mortgage dollar rolls may be renewed with a new
purchase and fixed repurchase price and a cash settlement made at each renewal
without physical delivery of the securities subject to the contract.
At December 31, 1995, there were no open mortgage dollar roll contracts.
17
<PAGE>
Smith Barney Funds, Inc.
U.S. Government Securities Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares 1995 1994 1993 1992 1991
============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 12.50 $ 13.66 $ 13.87 $ 14.10 $ 13.22
- ------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.92 0.91 0.98 1.06 1.26
Net realized and unrealized gain (loss) 1.09 (1.11) (0.10) (0.13) 0.80
- ------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.01 (0.20) 0.88 0.93 2.06
- ------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.92) (0.91) (0.98) (1.08) (1.13)
Net realized gains -- (0.05)* (0.11)* (0.08)* (0.05)*
- ------------------------------------------------------------------------------------------------------------
Total Distributions (0.92) (0.96) (1.09) (1.16) (1.18)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 13.59 $ 12.50 $ 13.66 $ 13.87 $ 14.10
- ------------------------------------------------------------------------------------------------------------
Total Return 16.52% (1.48)% 6.40% 6.85% 16.29%
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 384,534 $ 358,045 $ 468,278 $ 459,380 $394,412
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.79% 0.56% 0.49% 0.50% 0.44%
Net investment income 6.82 6.83 7.00 7.65 8.31
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 57.39% 40.22% 57.34% 26.18% 9.29%
============================================================================================================
<CAPTION>
Class B Shares 1995 1994(1)
============================================================================================================
Net Asset Value, Beginning of Year $ 12.51 $ 12.47
- ------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.80 0.08
Net realized and unrealized gain 1.16 0.17
- ------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.96 0.25
- ------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.86) (0.21)
- ------------------------------------------------------------------------------------------------------------
Total Distributions (0.86) (0.21)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 13.61 $ 12.51
- ------------------------------------------------------------------------------------------------------------
Total Return 16.03% 2.04%++
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 11,116 $ 1,529
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.28% 1.02%+
Net investment income 6.16 6.94+
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 57.39% 40.22%
============================================================================================================
</TABLE>
(1) 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.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
18
<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 year:
<TABLE>
<CAPTION>
Class C Shares(1) 1995 1994 1993 1992(2)
============================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 12.50 $ 13.66 $ 13.86 $ 14.01
- ------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.86 0.82 0.89 0.15
Net realized and unrealized gain (loss) 1.09 (1.11) (0.10) --
- ------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.95 (0.29) 0.79 0.15
- ------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.87) (0.83) (0.88) (0.30)
Net realized gains -- (0.04)* (0.11)* --
- ------------------------------------------------------------------------------------------------------------
Total Distributions (0.87) (0.87) (0.99) (0.30)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 13.58 $ 12.50 $ 13.66 $ 13.86
- ------------------------------------------------------------------------------------------------------------
Total Return 15.93% (2.11)% 5.74% 1.07%++
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 21,559 $ 21,253 $ 19,938 $ 1,954
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.25% 1.21% 1.21% 1.14%+
Net investment income 6.36 6.27 6.23 6.56+
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 57.39% 40.22% 57.34% 26.18%
============================================================================================================
<CAPTION>
Class Y Shares(3) Class Z Shares
------------------------------------- -----------------------
1995 1994 1993(4) 1995 1994(5)
============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 12.51 $ 13.67 $ 13.97 $ 12.50 $ 12.47
- ------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 1.00 0.89 0.86 0.94 0.14
Net realized and unrealized gain (loss) 1.06 (1.10) (0.10) 1.11 0.13
- ------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.06 (0.21) 0.76 2.05 0.27
- ------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.96) (0.91) (0.95) (0.95) (0.24)
Net realized gains -- (0.04)* (0.11)* -- --
- ------------------------------------------------------------------------------------------------------------
Total Distributions (0.96) (0.95) (1.06) (0.95) (0.24)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 13.61 $ 12.51 $ 13.67 $ 13.60 $ 12.50
- ------------------------------------------------------------------------------------------------------------
Total Return 16.88% (1.53)% 5.55%++ 16.89% (2.15)%++
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 6,992 $ 13,903 $ 14,118 $ 20,093 $ 18,580
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.49% 0.61% 0.69%+ 0.50% 0.34%+
Net investment income 7.22 6.82 7.29+ 7.12 7.55+
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 57.39% 40.22% 57.34% 57.39% 40.22%
============================================================================================================
</TABLE>
(1) On November 7, 1994, the former Class B shares were renamed Class C shares.
(2) For the period from December 2, 1992 (inception date) to December 31, 1992.
(3) On November 7, 1994, the former Class C shares were renamed Class Y shares.
(4) For the period from January 12, 1993 (inception date) to December 31, 1993.
(5) 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.
++ 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
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Smith Barney Funds, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the U.S. Government Securities
Portfolio of Smith Barney Funds, Inc. as of December 31, 1995, and the related
statement of operations for the year then ended, statements of changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian. As to securities
purchased but not received, we performed other appropriate auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
U.S. Government Securities Portfolio of Smith Barney Funds, Inc. as of December
31, 1995, and the results of its operations for the year then ended, the changes
in its net assets for each of the years in the two-year period then ended and
the financial highlights for each of the years in the five-year period then
ended, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 13, 1996
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
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A member of Travelers Group [LOGO]
INVESTMENT MANAGER
Smith Barney Mutual Funds
Management Inc.
DISTRIBUTOR
Smith Barney Inc.
CUSTODIAN
PNC Bank
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 accompanies 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
FD01068 2/96
