<PAGE>
[GRAPHIC]
Smith Barney Funds, Inc.
Large Cap
Value Fund
[GRAPHIC]
-------------------------
SEMI-ANNUAL REPORT
-------------------------
June 30, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Everyday.(SM)
<PAGE>
Smith Barney Funds, Inc.
Large Cap Value Fund
================================================================================
The Large Cap Value Fund seeks current income and long-term growth of income and
capital primarily through investments in common stock. It invests primarily in
common stocks of companies having market capitalizations of at least $5 billion.
Smith Barney Funds, Inc.
Large Cap Value Fund
Average Annual Total Returns
June 30, 1998
<TABLE>
<CAPTION>
Without Sales Charges(1)
--------------------------------------------------
Class A Class B Class L(2)
================================================================================
<S> <C> <C> <C>
Six Months+ 13.24% 12.81% 12.82%
- --------------------------------------------------------------------------------
One-Year 21.74 20.75 20.78
- --------------------------------------------------------------------------------
Five-Year 17.72 N/A 16.82
- --------------------------------------------------------------------------------
Ten-Year 14.67 N/A N/A
- --------------------------------------------------------------------------------
Since Inception++ 13.22 23.35 17.00
================================================================================
<CAPTION>
With Sales Charges(3)
--------------------------------------------------
Class A Class B Class L(2)
================================================================================
<S> <C> <C> <C>
Six Months+ 7.58% 7.81% 10.70%
- --------------------------------------------------------------------------------
One-Year 15.63 15.75 18.54
- --------------------------------------------------------------------------------
Five-Year 16.52 N/A 16.58
- --------------------------------------------------------------------------------
Ten-Year 14.08 N/A N/A
- --------------------------------------------------------------------------------
Since Inception++ 12.99 23.03 16.79
================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to Class
B and L shares.
(2) On June 12, 1998, Class C shares were renamed Class L shares.
(3) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 5.00% and 1.00%,
respectively; and Class B shares reflect the deduction of a 5.00% CDSC,
which applies if shares are redeemed within one year from purchase.
Thereafter, the CDSC declines by 1.00% per year until no CDSC is incurred.
Class L shares reflect the deduction of a 1.00% CDSC which applies if
shares are redeemed within the first year of purchase.
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.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
++ Inception dates for Class A, B and L shares are May 18, 1967, November 7,
1994 and December 2, 1992, respectively.
================================================================================
FUND HIGHLIGHTS
================================================================================
We maintain a strong allegiance to the concept of sticking with companies where
we have the greatest confidence in earnings predictability and sustainability,
and continue to find opportunities in the consumer staples and consumer
cyclicals sectors, particularly among health care, auto-related and retail
companies.
================================================================================
NASDAQ SYMBOL
================================================================================
Class A SBCIX
Class B SBCCX
Class L SBGCX
================================================================================
WHAT'S INSIDE
================================================================================
Shareholder Letter ......................................................... 1
Historical Performance ..................................................... 4
Schedule of Investments .................................................... 10
Statement of Assets and Liabilities ........................................ 13
Statement of Operations .................................................... 14
Statements of Changes in Net Assets ........................................ 15
Notes to Financial Statements .............................................. 16
Financial Highlights ....................................................... 20
Additional Shareholder Information ......................................... 25
<PAGE>
================================================================================
Shareholder Letter
================================================================================
[PHOTO] [PHOTO]
HEATH B. ELLEN CARDOZO
MCLENDON SONSINO
Chairman Vice President
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Funds,
Inc. -- Large Cap Value Fund ("Fund"), for the period ended June 30, 1998. In
this report, we summarize the period's prevailing economic conditions and
briefly outline the Fund's investment strategy. A detailed summary of
performance and current holdings can be found in the appropriate sections that
follow. We hope you find this report to be useful and informative.
A Style Pure Fund
The Large Cap Value Fund is a Style Pure Fund. Style Pure Series mutual funds
are Smith Barney Mutual Funds that are the basic building blocks of asset
allocation. Other than for the purposes of maintaining minimal cash or
responding to extraordinary market conditions, each Style Pure Series Fund is
totally invested 100% of the time within its designated asset classes and its
designated investment style.
Portfolio Performance and Investment Strategy
For the six months ended June 30, 1998, the Fund generated total returns of
13.24%, 12.81% and 12.82% for its Class A, B and L shares without sales charges,
respectively. In comparison, the Fund outperformed the Russell 1000 Value
Index*, which posted a total return of 12.16% for the same period. In addition,
the Fund significantly outperformed its Lipper Analytical Services Inc. peer
group average, which posted a return of 9.13% for the six months ended June 30,
1998. (Lipper is a major fund-tracking organization.)
Market Update and Outlook
During the first half of 1998, we have seen a continuation of the stock market's
remarkable seven-year gallop. Most of the stock market's increase came during
the first quarter of 1998, as the Standard & Poor's 500 Index ("S&P 500 Index")
posted one of the largest quarterly gains in the past 50 years. (The S&P 500
Index is a capitalization-weighted measure of 500 widely held common stocks.)
The S&P 500 Index peaked in April, at the time that many investors were
obsessing about fears of rising interest rates associated with concerns that
global economic growth would be too strong. Interestingly, May's market retreat
was associated with just the opposite concern: future corporate earnings. As the
Asian contagion re-emerged, many companies began to issue warnings regarding
their second quarter 1998 earnings. We believe the backdrop for financial assets
remains positive, however, and that the Southeast Asian turmoil should force the
Federal Reserve Board ("Fed") to stand pat on interest rates, create downward
pressure on inflation and allow the market to moderately extend its remarkable
seven-year performance.
* The Russell 1000 Value Index contains those stocks in the major Russell
indexes with a less-than-average growth orientation. Companies that are
categorized in this index generally have lower price-to-book and
price-earnings ratios, higher dividend yields and lower forecasted growth
values. A price-earnings ratio is a widely used gauge of a stock's
valuation that indicates what investors are paying for an interest in a
company based on its prior earnings. A price-to-book ratio shows the price
of a stock compared to the company's book value.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 1
<PAGE>
Although we generally expect the stock market to maintain an upward bias, we
note that declining Asian demand and a strong U.S. dollar deprive many U.S.
multinationals of a once robust area of unit and revenue growth. Therefore, we
expect many investors to continue to sift through their portfolios and to seek
to reduce holdings of companies perceived to be negatively impacted by
slackening Asian demand and global overcapacity. We maintain a strong allegiance
to the concept of sticking with companies where we have the greatest confidence
in earnings predictability and sustainability, and continue to find
opportunities in the consumer staples and consumer cyclicals sectors,
particularly among health care, auto-related and retail companies. We have also
identified ideas in the financial sector, with an emphasis on companies
benefiting from structural change in the insurance industry, while disfavoring
global commodity businesses largely dependent on strong global demand to sustain
pricing and volume.
Investment Strategy and Portfolio Update
As previously noted, the Fund seeks to provide shareholders with current income
and long-term growth of income and capital. We strive to minimize risk in the
Fund in a number of ways. As of June 30, 1998, the Fund owned 58 securities and
no single security made up more than 3.9% in the Fund.
Ford, up 83% this year, has logged a stellar performance year-to-date and
clearly stands out among the stocks contributing most favorably to the Fund's
performance. Several positives have propelled the stock's price including higher
earnings guidance following its annual investor meeting, greater than expected
cost reductions and stronger international performance. Additionally, record
light truck sales in recent months, which carry higher margins than cars, bodes
positively for further upside earnings surprises and Ford's large $12 billion in
excess cash flow could be used to increase share repurchases. Ford also recently
provided a breakout of financial results for Visteon, Ford's auto parts
subsidiary, in what could be a precursor to an eventual initial public offering
("IPO") or spin-off of this unit to shareholders.
Among our largest holdings, Chase Manhattan has also appreciated nicely, up
about 38% year-to-date. Chase reported exceptional first quarter earnings
results as loan syndication volumes doubled, merger and acquisition ("M&A") fees
tripled, and high-yield securities underwriting quadrupled. Moreover, Chase has
initiated a shareholder value added framework for determining capital allocation
and improving its profitability. The ultimate impact of the Asian crisis on
Chase's credit quality remains a concern. However, losses have been less than
investors anticipated and non-performing assets are not expected to rise higher
than the first quarter pace throughout the year. We think that further
dissipation of acquisition fears and rising investor confidence that Chase will
post impressive financial results in the coming months should continue to
bolster the stock price. We continue to believe Chase is uniquely positioned to
provide the corporate finance needs of multinational corporations on a global
scale and is well positioned to take advantage of opportunities associated with
European capital markets development.
Negative earnings pre-announcements were in abundance recently, a disturbing
trend from which the Fund's portfolio was not immune. Stanley Works slid roughly
12.6% on such an announcement, citing weak demand in the U.K. and France,
capacity constraints on new products and negative currency comparisons. We
believe the company will show improvement during the second half of the year as
benefits from restructuring cost savings are realized and new products are
introduced.
The earnings of Imperial Chemical Industries are also expected to suffer from
global demand weakness. The stock has underperformed the market this year as
analysts have steadily adjusted earnings estimates downwards. Many analysts
expect lower volume growth in Asia Pacific and the extension of pricing
pressures in a number of operations. The company is in the process of divesting
the bulk of its commodity chemical assets and transforming into a specialty
chemicals and paint concern. We believe Imperial
- --------------------------------------------------------------------------------
2 1998 Semi-Annual Report to Shareholders
<PAGE>
Chemical's shares remain an attractive long-term value.
In closing, thank you for your investment in the Smith Barney Funds, Inc. --
Large Cap Value Fund. We look forward to continuing to help you pursue your
financial goals in the years to come.
Sincerely,
/s/ Heath B. McLendon /s/ Ellen Cardozo Sonsino
Heath B. McLendon Ellen Cardozo Sonsino
Chairman Vice President
Vice President
July 13, 1998
Shareholder Notice
On a more somber note, we report with much sadness the passing of Emeritus
Director C. Richard Youngdahl on August 6, 1998. Dick made many valuable
contributions to the Board and the Fund during his tenure and he will be missed.
================================================================================
Top Ten Holdings* As of June 30, 1998
================================================================================
<TABLE>
<S> <C>
1. American Home Products Corp. 3.9%
- --------------------------------------------------------------------------------
2. Bristol-Myers Squibb Co. 3.8
- --------------------------------------------------------------------------------
3. Xerox Corp. 3.3
- --------------------------------------------------------------------------------
4. Unilever NV 3.2
- --------------------------------------------------------------------------------
5. Sprint Corp. 3.1
- --------------------------------------------------------------------------------
6. Limited Inc. 2.9
- --------------------------------------------------------------------------------
7. General Electric Co. 2.6
- --------------------------------------------------------------------------------
8. Chase Manhattan Corp. 2.5
- --------------------------------------------------------------------------------
9. Mobil Corp. 2.3
- --------------------------------------------------------------------------------
10. Abbott Labs, Inc. 2.3
- --------------------------------------------------------------------------------
</TABLE>
* As a percentage of total common stock.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 3
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Historical Performance -- Class A Shares
====================================================================================================================================
Net Asset Value
-----------------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
6/30/98 $17.09 $19.18 $0.17 $0.00 13.24%+
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/97 14.79 17.09 0.29 1.50 27.86
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/96 14.59 14.79 0.36 1.79 16.06
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/95 12.18 14.59 0.39 1.18 33.05
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/94 13.31 12.18 0.42 0.14 (4.31)
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/93 12.48 13.31 0.46 0.73 16.38
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/92 12.51 12.48 0.51 0.40 7.23
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/91 10.54 12.51 0.73 0.05 26.57
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/90 12.69 10.54 0.70 0.25 (9.46)
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/89 11.00 12.69 0.70 0.31 25.11
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/88 10.05 11.00 0.63 0.17 17.67
====================================================================================================================================
Total $5.36 $6.52
====================================================================================================================================
<CAPTION>
====================================================================================================================================
Historical Performance -- Class B Shares
====================================================================================================================================
Net Asset Value
-----------------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
6/30/98 $17.03 $19.11 $0.10 $0.00 12.81%+
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/97 14.74 17.03 0.15 1.50 26.83
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/96 14.54 14.74 0.24 1.79 15.22
- ------------------------------------------------------------------------------------------------------------------------------------
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 $0.87 $4.61
====================================================================================================================================
<CAPTION>
====================================================================================================================================
Historical Performance -- Class L Shares
====================================================================================================================================
Net Asset Value
-----------------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
6/30/98 $17.05 $19.13 $0.10 $0.00 12.82%+
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/97 14.76 17.05 0.16 1.50 26.85
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/96 14.57 14.76 0.24 1.79 15.15
- ------------------------------------------------------------------------------------------------------------------------------------
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 $1.55 $5.74
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
4 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Historical Performance -- Class Y Shares
====================================================================================================================================
Net Asset Value
-----------------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
6/30/98 $17.09 $19.18 $0.20 $0.00 13.42%+
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/97 14.80 17.09 0.35 1.50 28.21
- ------------------------------------------------------------------------------------------------------------------------------------
Inception*-- 12/31/96 15.06 14.80 0.41 1.79 12.86+
====================================================================================================================================
Total $0.96 $3.29
====================================================================================================================================
<CAPTION>
====================================================================================================================================
Historical Performance -- Class Z Shares
====================================================================================================================================
Net Asset Value
-----------------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
6/30/98 $17.12 $19.21 $0.20 $0.00 13.41%+
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/97 14.82 17.12 0.35 1.50 28.27
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/96 14.61 14.82 0.41 1.79 16.47
- ------------------------------------------------------------------------------------------------------------------------------------
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 $1.50 $4.61
====================================================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends quarterly and capital gains, if
any, annually.
<TABLE>
<CAPTION>
====================================================================================================================================
Average Annual Total Return
====================================================================================================================================
Without Sales Charge(1)
------------------------------------------------------------------------------------------
Class A Class B Class L Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 6/30/98+ 13.24% 12.81% 12.82% 13.42% 13.41%
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended 6/30/98 21.74 20.75 20.78 22.13 22.04
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 6/30/98 17.72 N/A 16.82 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 6/30/98 14.67 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 6/30/98 11.96 23.35 17.00 22.98 24.81
====================================================================================================================================
<CAPTION>
With Sales Charge(2)
------------------------------------------------------------------------------------------
Class A Class B Class L Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 6/30/98+ 7.58% 7.81% 10.70% 13.42% 13.41%
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended 6/30/98 15.63 15.75 18.54 22.13 22.04
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 6/30/98 16.52 N/A 16.58 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 6/30/98 14.08 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 6/30/98 11.78 23.03 16.79 22.98 24.81
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 5
<PAGE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
================================================================================
<S> <C>
Class A (6/30/88 through 6/30/98) 293.00%
- --------------------------------------------------------------------------------
Class A (Inception* through 6/30/98) 3,275.96
- --------------------------------------------------------------------------------
Class B (Inception* through 6/30/98) 112.94
- --------------------------------------------------------------------------------
Class L (Inception* through 6/30/98) 140.11
- --------------------------------------------------------------------------------
Class Y (Inception* through 6/30/98) 64.11
- --------------------------------------------------------------------------------
Class Z (Inception* through 6/30/98) 124.38
================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
contingent deferred sales charges ("CDSC") with respect to Class B and L
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 5.00% and 1.00%,
respectively; and Class B shares reflect the deduction of a 5.00% CDSC,
which applies if shares are redeemed within one year from purchase.
Thereafter the CDSC declines by 1.00% per year until no CDSC is incurred.
Class L shares reflect the deduction of a 1.00% CDSC, which applies if
shares are redeemed within the first year of purchase.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception dates for Class A, B, L, Y and Z shares are May 18, 1967,
November 7, 1994, December 2, 1992, February 6, 1996 and November 7, 1994,
respectively.
- --------------------------------------------------------------------------------
6 1998 Semi-Annual Report to Shareholders
<PAGE>
[This page intentionally left blank]
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 7
<PAGE>
Smith Barney Funds, Inc.
Large Cap Value Fund
Growth of $10,000 Invested in Class A Shares
of the Smith Barney Large Cap Value Fund
vs. the Standard & Poor's 500 Index*
May 18, 1967 -- June 30, 1998
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Large Cap
Value Fund
Date Portfolio S&P 500
- --------------------------------------------------------------------------------
<S> <C> <C>
5/18/67 $ 9,427 $10,000
12/31/67 $ 9,670 $11,301
12/31/68 $11,945 $12,252
12/31/69 $10,636 $11,218
12/31/70 $10,887 $11,661
12/31/71 $12,073 $13,329
12/31/72 $12,652 $15,861
12/31/73 $10,134 $12,531
12/31/74 $ 8,357 $ 9,949
12/31/75 $11,282 $13,654
12/31/76 $15,461 $16,921
12/31/77 $15,709 $15,709
12/31/78 $15,997 $16,743
12/31/79 $19,370 $19,857
12/31/80 $25,639 $26,311
12/31/81 $28,703 $25,016
</TABLE>
1968--Assassination of Martin Luther King, Jr.
1969--United States puts the first man on the moon
1970--War in Cambodia escalates
1971--Freeze on wages and prices
NASDAQ introduced
- --------------------------------------------------------------------------------
February 1972--Mutual Management Corp. assumes management of
Large Cap Value Fund
- --------------------------------------------------------------------------------
1972--Watergate break-in
Nixon visits China
1973--OPEC oil embargo
1974--Nixon resigns as President
1975--U.S. involvement in Vietnam ends
1976--Bicentennial celebration
1977--U.S. energy crisis
1978--Genocide in Cambodia
Camp David accords
1979--Three Mile Island disaster
Iran hostage crisis begins
1980--Reagan elected President in landslide
1981--Assassination attempts on Reagan
and Pope. First space shuttle launch
* Hypothetical illustration of $10,000 invested in Class A shares on May 18,
1967, assuming deduction of the maximum 5.00% sales charge at the time of
investment and reinvestment of dividends and capital gains, if any, at net
asset value through June 30, 1998. The Standard & Poor's 500 Index ("S&P
500") is an index composed of widely held common stocks listed on the New
York Stock Exchange, American Stock Exchange and over-the-counter market.
Figures for the index include reinvestment of dividends. The index is
unmanaged and is not subject to the same management and trading expenses as
a mutual fund. The performance of the Portfolio's other classes may be
greater or less than the Class A shares' performance indicated on this
chart,
- --------------------------------------------------------------------------------
8 1998 Semi-Annual Report to Shareholders
<PAGE>
Smith Barney Large Cap Value Fund...
For more than 30 years, a solid Fund with a sturdy track record
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Large Cap
Value Fund
Date Portfolio S&P 500
- --------------------------------------------------------------------------------
<S> <C> <C>
12/31/82 $36,575 $30,407
12/31/83 $42,934 $37,267
12/31/84 $47,195 $39,604
12/31/85 $60,077 $52,170
12/31/86 $72,719 $61,905
12/31/87 $70,663 $65,156
12/31/88 $83,150 $75,945
12/31/89 $104,029 $99,967
12/31/90 $94,188 $96,858
12/31/91 $119,208 $126,303
12/31/92 $127,818 $135,914
12/31/93 $148,760 $149,587
12/31/94 $142,341 $151,547
12/31/95 $189,386 $208,422
12/31/96 $219,811 $256,255
6/30/97 $261,434 $309,044
12/31/97 $281,046 $341,741
6/30/98 $320,903 $402,297
</TABLE>
1982--Worst U.S. recession in 40 years
1983--Beirut bombing
1984--Iran/Iraq conflict
1985--U.S. becomes debtor nation
Gramm-Rudman Act
1986--Tax reform
Bombing of Libya
1987--Market correction
1988--RJR Nabisco buyout
1989--Collapse of high-yield bond market
Berlin Wall falls
1990--Iraq invasion of Kuwait
1991--U.S. recession
1992--Riots in Los Angeles
1993--World Trade Center terrorist bombing
Passage of NAFTA
1994--Orange County bankruptcy
1995--Dow rises above 4000, then 5000
1996--Dow rises above 6500
1997--Dow rises above 7000
1998--Asia crisis escalates
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.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 9
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedule of Investments (unaudited) June 30, 1998
====================================================================================================================================
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
COMMON STOCK -- 99.7%
Aerospace & Defense -- 2.5%
220,000 Lockheed Martin Corp.+ $ 23,292,500
80,000 United Technologies Corp. 7,400,000
- ------------------------------------------------------------------------------------------------------------------------------------
30,692,500
- ------------------------------------------------------------------------------------------------------------------------------------
Automated Design Systems -- 0.6%
100,000 PPG Industries Inc. 6,956,250
- ------------------------------------------------------------------------------------------------------------------------------------
Automotive -- 3.5%
300,000 Chrysler Corp. 16,912,500
450,000 Ford Motor Co. 26,550,000
- ------------------------------------------------------------------------------------------------------------------------------------
43,462,500
- ------------------------------------------------------------------------------------------------------------------------------------
Banking -- 9.0%
212,188 Banc One Corp. 11,842,743
416,000 Chase Manhattan Corp. 31,408,000
150,000 First Chicago NBD Corp. 13,293,750
150,000 Fleet Financial Group, Inc. 12,525,000
225,000 NationsBank Corp. 17,212,500
600,000 Washington Mutual, Inc.++ 26,062,500
- ------------------------------------------------------------------------------------------------------------------------------------
112,344,493
- ------------------------------------------------------------------------------------------------------------------------------------
Beverages - Alcoholic -- 1.3%
400,000 Seagram Company Ltd.+ 16,375,000
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Goods -- 5.9%
400,000 Emerson Electric Co. 24,150,000
350,000 General Electric Co. 31,850,000
350,000 National Service Industries, Inc. 17,806,250
- ------------------------------------------------------------------------------------------------------------------------------------
73,806,250
- ------------------------------------------------------------------------------------------------------------------------------------
Chemicals -- 1.8%
350,000 Imperial Chemical Industries ADR 22,575,000
- ------------------------------------------------------------------------------------------------------------------------------------
Conglomerate -- 1.5%
400,000 Pitney Bowes, Inc. 19,250,000
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer Cyclical -- 2.1%
100,000 McGraw Hill, Inc. 8,156,250
450,000 Stanley Works 18,703,125
- ------------------------------------------------------------------------------------------------------------------------------------
26,859,375
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer Products -- 2.2%
400,000 Whirlpool Corp. 27,500,000
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer Staples -- 14.4%
950,000 American Home Products Corp. 49,162,500
375,000 Baxter International Inc.+ 20,179,688
415,000 Bristol-Myers Squibb Co.+ 47,699,062
430,000 Heinz HJ & Co. 24,133,750
500,000 Unilever NV+ 39,468,750
- ------------------------------------------------------------------------------------------------------------------------------------
180,643,750
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedule of Investments (unaudited)(continued) June 30, 1998
====================================================================================================================================
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
Energy -- 9.3%
350,000 Ashland Inc. $ 18,068,750
250,000 BEL Energy 10,375,000
325,000 Dresser Industries, Inc. 14,320,312
400,000 Duke Energy Corp.+ 23,700,000
600,000 El Paso Natural Gas Co.+ 22,950,000
500,000 Enron Corp. 27,031,250
- ------------------------------------------------------------------------------------------------------------------------------------
116,445,312
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Services -- 6.1%
150,000 American General Corp.+ 10,678,125
200,000 Chubb Corp. 16,075,000
400,000 Dow Jones & Co., Inc.+ 22,300,000
450,000 Marsh & McLennan Cos., Inc.+ 27,196,875
- ------------------------------------------------------------------------------------------------------------------------------------
76,250,000
- ------------------------------------------------------------------------------------------------------------------------------------
Food Processing -- 2.2%
300,000 Quaker Oats Co. 16,481,250
200,000 Sara Lee Corp. 11,187,500
- ------------------------------------------------------------------------------------------------------------------------------------
27,668,750
- ------------------------------------------------------------------------------------------------------------------------------------
Hospital Supplies & Services -- 2.3%
700,000 Abbott Labs, Inc.+ 28,612,500
- ------------------------------------------------------------------------------------------------------------------------------------
Insurance -- 6.0%
105,000 Aon Corp.+ 7,376,250
310,000 CIGNA Corp. 21,390,000
225,000 Hartford Financial Services, Inc. 25,734,375
500,000 St. Paul Cos. 21,031,250
- ------------------------------------------------------------------------------------------------------------------------------------
75,531,875
- ------------------------------------------------------------------------------------------------------------------------------------
Integrated -- 7.2%
300,000 Chevron Corp.+ 24,918,750
225,000 E.I. du Pont de Nemours & Co. 16,790,625
275,000 Exxon Corp. 19,610,938
380,000 Mobil Oil Corp. 29,117,500
- ------------------------------------------------------------------------------------------------------------------------------------
90,437,813
- ------------------------------------------------------------------------------------------------------------------------------------
Natural Gas -- 1.4%
500,000 Williams Cos., Inc. 16,875,000
- ------------------------------------------------------------------------------------------------------------------------------------
Paper Products -- 1.0%
300,000 International Paper Co.+ 12,900,000
- ------------------------------------------------------------------------------------------------------------------------------------
Raw and Intermediate Materials -- 3.3%
400,000 Masco Corp.+ 24,200,000
300,000 Reynolds Metals Co. 16,781,250
- ------------------------------------------------------------------------------------------------------------------------------------
40,981,250
- ------------------------------------------------------------------------------------------------------------------------------------
Retail -- 4.0%
30 Abercrombie & Fitch Co., Class A Shares* 1,320
1,100,000 Limited Inc.+ 36,437,500
230,000 Sears, Roebuck & Co. 14,044,375
- ------------------------------------------------------------------------------------------------------------------------------------
50,483,195
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 11
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedule of Investments (unaudited)(continued) June 30, 1998
====================================================================================================================================
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
Technology -- 3.3%
400,000 Xerox Corp. $ 40,650,000
- ------------------------------------------------------------------------------------------------------------------------------------
Telephone -- 8.8%
450,000 American Telephone & Telegraph Corp.++ 25,706,250
300,000 Bellsouth Corp. 20,137,500
450,000 GTE Corp. 25,031,250
550,000 Sprint Corp. 38,775,000
- ------------------------------------------------------------------------------------------------------------------------------------
109,650,000
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost-- $869,277,823) 1,246,950,813
====================================================================================================================================
FACE
AMOUNT SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
REPURCHASE AGREEMENTS -- 0.3%
$ 3,526,000 Goldman, Sachs & Co., 5.646% due 7/1/98;
Proceeds at maturity-- $3,526,553; (Fully collateralized
by U.S. Treasury Notes, 5.375% due 6/30/00;
Market value-- $3,598,197) (Cost-- $3,526,000) 3,526,000
====================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $872,803,823**) $1,250,476,813
====================================================================================================================================
</TABLE>
+ A portion of the security is on loan (See Note 5).
++ Security is on loan (See Note 5).
* Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
=========================================================================================
Statement of Assets and Liabilities (unaudited) June 30, 1998
=========================================================================================
<S> <C>
ASSETS:
Investments, at value (Cost-- $872,803,823) $ 1,250,476,813
Cash 971
Collateral for securities on loan (Note 5) 158,476,020
Receivable for Fund shares sold 2,206,129
Dividends and interest receivable 2,048,490
- -----------------------------------------------------------------------------------------
Total Assets 1,413,208,423
- -----------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note 5) 158,476,020
Management fee payable 613,183
Distribution fees payable 89,394
Accrued expenses 265,829
- -----------------------------------------------------------------------------------------
Total Liabilities 159,444,426
- -----------------------------------------------------------------------------------------
Net Assets $ 1,253,763,997
=========================================================================================
NET ASSETS:
Par value of capital shares $ 653,811
Capital paid in excess of par value 806,934,413
Overdistributed net investment income (3,124,493)
Accumulated net realized gain on security transactions 71,627,276
Net unrealized appreciation of investments 377,672,990
- -----------------------------------------------------------------------------------------
Net Assets $ 1,253,763,997
=========================================================================================
Shares Outstanding:
Class A 43,799,687
----------------------------------------------------------------------------------
Class B 2,469,337
----------------------------------------------------------------------------------
Class L 2,799,921
----------------------------------------------------------------------------------
Class Y 7,610,628
----------------------------------------------------------------------------------
Class Z 8,701,534
----------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $19.18
----------------------------------------------------------------------------------
Class B * $19.11
----------------------------------------------------------------------------------
Class L ** $19.13
----------------------------------------------------------------------------------
Class Y (and redemption price) $19.18
----------------------------------------------------------------------------------
Class Z (and redemption price) $19.21
----------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 5.26% of net asset value per share) $20.19
----------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $19.32
=========================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 13
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Statement of Operations (unaudited) For the Six Months Ended June 30, 1998
================================================================================
<S> <C>
INVESTMENT INCOME:
Dividends $ 12,420,504
Interest 874,758
Less: Foreign withholding tax (77,312)
- -------------------------------------------------------------------------------
Total Investment Income 13,217,950
- -------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 3,322,659
Distribution fees (Note 2) 1,418,933
Shareholder servicing fees 311,541
Shareholder communications 47,556
Registration fees 36,200
Custody 18,353
Audit and legal 14,567
Directors' fees 11,881
Other 5,604
- -------------------------------------------------------------------------------
Total Expenses 5,187,294
- -------------------------------------------------------------------------------
Net Investment Income 8,030,656
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 244,692,651
Cost of securities sold 173,065,713
- -------------------------------------------------------------------------------
Net Realized Gain 71,626,938
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 312,077,532
End of period 377,672,990
- -------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 65,595,458
- -------------------------------------------------------------------------------
Net Gain on Investments 137,222,396
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 145,253,052
===============================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Statements of Changes in Net Assets
================================================================================
For the Six Months Ended June 30, 1998 (unaudited)
and the Year Ended December 31, 1997
<TABLE>
<CAPTION>
1998 1997
=======================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 8,030,656 $ 16,595,710
Net realized gain 71,626,938 88,456,915
Increase in net unrealized appreciation 65,595,458 126,983,410
- ---------------------------------------------------------------------------------------
Increase in Net Assets From Operations 145,253,052 232,036,035
- ---------------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (11,147,673) (16,833,261)
Net realized gain (84,524) (88,392,744)
- ---------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (11,232,197) (105,226,005)
- ---------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sales 77,579,177 164,777,053
Net asset value of shares issued for
reinvestment of dividends 8,848,982 88,143,626
Cost of shares reacquired (51,730,979) (132,196,413)
- ---------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 34,697,180 120,724,266
- ---------------------------------------------------------------------------------------
Increase in Net Assets 168,718,035 247,534,296
NET ASSETS:
Beginning of period 1,085,045,962 837,511,666
- ---------------------------------------------------------------------------------------
End of period* $ 1,253,763,997 $ 1,085,045,962
=======================================================================================
* Includes overdistributed net investment income of: $(3,124,493) $(7,476)
=======================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 15
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)
================================================================================
1. Significant Accounting Policies
The Large Cap Value Fund ("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 two other separate investment portfolios: U.S. Government
Securities Fund and Short-Term High Grade Bond Fund (formerly known as the
Short-Term U.S. Treasury Securities Fund). The financial statements and
financial highlights for the other portfolios are presented in separate
semi-annual reports.
The significant accounting policies consistently followed by the Portfolio are:
(a) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing prices on such markets;
securities for which no sales price was reported and U.S. government and agency
obligations are valued at the mean between the bid and ask prices; (c)
securities that have a maturity of more than 60 days are valued at prices based
on market quotations for securities of similar type, yield and maturity; (d)
securities maturing within 60 days or less are valued at cost plus accreted
discount, or minus amortized premium, which approximates value; (e) dividend
income is recorded on the ex-dividend date and interest income is recorded on
the accrual basis; foreign dividends are recorded on the ex-dividend date or as
soon as practical after the Portfolio determines the existence of a dividend
declaration after exercising reasonable due diligence; (f) gains or losses on
the sale of securities are calculated by using the specific identification
method; (g) dividends and distributions to shareholders are recorded on the
ex-dividend date; (h) direct expenses are charged to each class; management fees
and general portfolio expenses are allocated on the basis of relative net assets
by class; (i) the accounting records are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars based on the rate of exchange of such currencies against U.S. dollars on
the date of valuation. Purchases and sales of securities, and income and
expenses are translated at the rate of exchange quoted on the respective date
that such transactions are recorded. Differences between income and expense
amounts recorded and collected or paid are adjusted when reported by the
custodian bank; (j) the Portfolio intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
(k) the character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. At December 31, 1997, reclassifications were made to the
capital accounts of the Fund to reflect permanent book/tax differences and
income and gains available for distributions under income tax regulations. Net
investment income, net realized gains and net assets were not affected by this
change; and (l) estimates and assumptions are required to be made regarding
assets, liabilities and changes in net assets resulting from operations when
financial statements are prepared. Changes in the economic environment,
financial markets and any other parameters used in determining these estimates
could cause actual results to differ.
2. Management Agreement and Other Transactions
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings
Inc. ("SSBH"), acts as investment manager of the Fund. The Portfolio pays MMC a
management fee calculated at an annual rate of 0.60% on the Portfolio's average
daily net assets up to
- --------------------------------------------------------------------------------
16 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
$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 SSBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
six months ended June 30, 1998, SB received brokerage commissions of $176,051.
On June 12, 1998, the Portfolio's existing Class C shares were renamed as Class
L shares. Effective June 15, 1998, Class L shares are being sold at net asset
value plus a maximum initial sales charge of 1.00%. Class L shares also have a
1.00% contingent deferred sales charge ("CDSC"), which applies if redemption
occurs within the first year of purchase.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B shares,
which applies if redemption occurs less than one year from purchase and declines
thereafter by 1.00% per year until no CDSC is incurred.
For the six months ended June 30, 1998, SB received sales charges of $60,000 on
sales of the Fund's Class A shares, respectively. In addition, CDSCs paid to SB
were approximately $3,000 for Class B shares.
Pursuant to a Distribution Plan, the Portfolio pays a service fee with respect
to its Class A, B and C shares calculated at the annual rate of 0.25% of the
average daily net assets of each respective class. In addition, the Portfolio
also pays a distribution fee with respect to Class B and L shares calculated at
the annual rate of 0.75% of the average daily net assets of each class. For the
six months ended June 30, 1998, total Distribution Plan fees were as follows:
<TABLE>
<CAPTION>
Class A Class B Class L
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $1,006,675 $178,025 $234,233
================================================================================
</TABLE>
All officers and two Directors of the Fund are employees of SB.
3. Investments
During the six months ended June 30, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
================================================================================
<S> <C>
Purchases $314,610,191
- --------------------------------------------------------------------------------
Sales 244,692,651
================================================================================
</TABLE>
At June 30, 1998, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $380,651,560
Gross unrealized depreciation (2,978,570)
- --------------------------------------------------------------------------------
Net unrealized appreciation $377,672,990
================================================================================
</TABLE>
4. Repurchase Agreements
The Portfolio purchases (and its custodian take possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Portfolio requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
5. Lending of Portfolio Securities
The Portfolio has an agreement with its custodian whereby the custodian may lend
securities owned by the Portfolio to brokers, dealers and other financial
organizations. Fees earned by the Portfolio on securities lending are recorded
in interest income. Loans of securities by the Portfolio are collateralized by
cash, U.S. government securities or high quality money market instruments that
are maintained at all times in an amount at least equal to the current market
value of the loaned securities, plus a margin which may vary depending on the
type of securities loaned. The custodian establishes and maintains the
collateral in a segregated account. The Portfolio maintains exposure for the
risk of any losses in the investment of amounts received as collateral.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 17
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
At June 30, 1998, the Portfolio loaned stocks having a value of approximately
$154,628,618 and holds the following collateral for loaned securities.
<TABLE>
<CAPTION>
Security Descriptions Value
================================================================================
<S> <C>
Time Deposits:
Deutsche Bank, 7.000% due 7/1/98 $ 16,951,083
Banque Paribas, 6.500% due 7/1/98 20,849,833
Svenska Handelbank Euro, 6.500% due 7/1/98 16,951,083
Toronto Dominion Euro, 6.500% due 7/1/98 16,951,083
UBS Bank of Switzerland Euro, 6.000% due 7/1/98 2,698,000
Repurchase Agreements:
Goldman, Sachs & Co., 6.250% due 7/1/98 10,634,234
Morgan Stanley, 6.250% due 7/1/98 11,018,204
Commercial Paper:
Riverwoods Funding Corp., 5.550% due 7/10/98 62,422,500
- --------------------------------------------------------------------------------
Total $158,476,020
================================================================================
</TABLE>
6. Capital Shares
At June 30, 1998, 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 June 12, 1998, the Fund adopted the renaming of existing Class C
shares as Class L shares.
At June 30, 1998, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Total Paid-in Capital $479,757,862 $41,182,527 $40,674,964 $130,030,474 $115,942,397
====================================================================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
--------------------------- ----------------------------
Shares Amount Shares Amount
====================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 1,390,320 $ 25,645,961 1,441,479 $ 24,457,765
Shares issued on reinvestment 348,416 6,637,173 3,970,126 67,884,054
Shares redeemed (2,341,156) (43,260,741) (4,677,363) (78,829,273)
- ----------------------------------------------------------------------------------------------------
Net Increase (Decrease) (602,420) $(10,977,607) 734,242 $ 13,512,546
====================================================================================================
Class B
Shares sold 929,763 $ 17,328,922 731,383 $ 12,514,579
Shares issued on reinvestment 10,377 197,086 135,875 2,316,326
Shares redeemed (145,970) (2,711,410) (201,810) (3,394,313)
- ----------------------------------------------------------------------------------------------------
Net Increase 794,170 $ 14,814,598 665,448 $ 11,436,592
====================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
18 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
------------------------------ -----------------------------
Shares Amount Shares Amount
========================================================================================================
<S> <C> <C> <C> <C>
Class L*
Shares sold 474,784 $ 8,812,056 324,275 $ 5,556,018
Shares issued on reinvestment 13,471 256,140 208,453 3,556,014
Shares redeemed (158,318) (2,938,074) (322,821) (5,333,286)
- --------------------------------------------------------------------------------------------------------
Net Increase 329,937 $ 6,130,122 209,907 $ 3,778,746
========================================================================================================
Class Y
Shares sold 1,074,629 $ 19,485,420 6,479,279 $ 114,285,256
Shares redeemed -- -- (1,982,275) (35,361,534)
- --------------------------------------------------------------------------------------------------------
Net Increase 1,074,629 $ 19,485,420 4,497,004 $ 78,923,722
========================================================================================================
Class Z
Shares sold 344,729 $ 6,306,818 484,651 $ 7,963,435
Shares issued on reinvestment 92,167 1,758,583 839,710 14,387,232
Shares redeemed (148,378) (2,820,754) (545,481) (9,278,007)
- --------------------------------------------------------------------------------------------------------
Net Increase 288,518 $ 5,244,647 778,880 $ 13,072,660
========================================================================================================
</TABLE>
* On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 19
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares 1998(1) 1997 1996 1995 1994(2) 1993
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $17.09 $14.79 $14.59 $12.18 $13.31 $12.48
- -----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.12 0.29 0.36 0.39 0.43 0.46
Net realized and unrealized gain (loss) 2.14 3.80 1.99 3.59 (1.00) 1.56
- -----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.26 4.09 2.35 3.98 (0.57) 2.02
- -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.17) (0.29) (0.36) (0.39) (0.42) (0.46)
Net realized gains(3) -- (1.50) (1.79) (1.18) (0.14) (0.73)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.17) (1.79) (2.15) (1.57) (0.56) (1.19)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $19.18 $17.09 $14.79 $14.59 $12.18 $13.31
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return 13.24%++ 27.86% 16.06% 33.05% (4.31)% 16.38%
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $839,918 $758,708 $645,935 $617,431 $544,572 $627,870
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.92%+ 0.92% 0.95% 1.02% 0.96% 0.91%
Net investment income 1.33+ 1.71 2.28 2.78 3.31 3.42
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21% 40% 49% 51% 27% 46%
- -----------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4) $0.06 $0.06 $0.06 $0.06 -- --
===================================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) On October 10, 1994 the former Class C shares were exchanged into Class A
shares; therefore for the period from January 1, 1994 to October 9, 1994
the Class C share activity is included with the Class A share activity.
(3) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
20 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class B Shares 1998(1) 1997 1996 1995 1994(2)
=====================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $17.03 $14.74 $14.54 $12.15 $12.54
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.05 0.16 0.25 0.24 0.03
Net realized and unrealized gain (loss) 2.13 3.78 1.98 3.62 (0.19)
- ---------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.18 3.94 2.23 3.86 (0.16)
- ---------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.10) (0.15) (0.24) (0.29) (0.09)
Net realized gains(3) -- (1.50) (1.79) (1.18) (0.14)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (0.10) (1.65) (2.03) (1.47) (0.23)
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $19.11 $17.03 $14.74 $14.54 $12.15
- ---------------------------------------------------------------------------------------------------------------------
Total Return 12.81%++ 26.83% 15.22% 32.07% (1.28)%++
- ---------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $47,179 $28,525 $14,883 $6,065 $354
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.70%+ 1.71% 1.71% 1.73% 1.59%+*
Net investment income 0.56+ 0.92 1.55 1.83 2.11+
- ---------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21% 40% 49% 51% 27%
- ---------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4) $0.06 $0.06 $0.06 $0.06 --
=====================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) For the period from November 7, 1994 (inception date) to December 31, 1994.
(3) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
* Figure has been restated from December 31, 1994 annual report.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 21
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class L Shares(1) 1998(2) 1997 1996 1995 1994(3) 1993
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $17.05 $14.76 $14.57 $12.18 $13.30 $12.48
- -----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.05 0.16 0.24 0.27 0.31 0.38
Net realized and unrealized gain (loss) 2.13 3.79 1.98 3.59 (0.95) 1.53
- -----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.18 3.95 2.22 3.86 (0.64) 1.91
- -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.10) (0.16) (0.24) (0.29) (0.34) (0.36)
Net realized gains(4) -- (1.50) (1.79) (1.18) (0.14) (0.73)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.10) (1.66) (2.03) (1.47) (0.48) (1.09)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $19.13 $17.05 $14.76 $14.57 $12.18 $13.30
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return 12.82%++ 26.85% 15.15% 32.01% (4.91)% 15.46%
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $53,560 $42,115 $33,365 $29,758 $27,507 $15,408
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.69%+ 1.69% 1.73% 1.79% 1.75% 1.65%
Net investment income 0.56+ 0.93 1.50 2.00 2.49 2.59
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21% 40% 49% 51% 27% 46%
- -----------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(5) $0.06 $0.06 $0.06 $0.06 -- --
===================================================================================================================================
</TABLE>
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(2) For the six months ended June 30, 1998 (unaudited).
(3) On November 7, 1994, the former Class B shares were renamed Class C shares.
(4) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
(5) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
22 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class Y Shares 1998(1) 1997 1996(2)(3)
====================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $17.09 $14.80 $15.06
- ------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.15 0.38 0.36
Net realized and unrealized gain 2.14 3.76 1.58
- ------------------------------------------------------------------------------------
Total Income From Operations 2.29 4.14 1.94
- ------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.20) (0.35) (0.41)
Net realized gains(4) -- (1.50) (1.79)
- ------------------------------------------------------------------------------------
Total Distributions (0.20) (1.85) (2.20)
- ------------------------------------------------------------------------------------
Net Asset Value, End of Period $19.18 $17.09 $14.80
- ------------------------------------------------------------------------------------
Total Return 13.42%++ 28.21% 12.86%++
- ------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $145,961 $111,690 $30,169
- ------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.59%+ 0.60% 0.66%+
Net investment income 1.66+ 2.06 3.02+
- ------------------------------------------------------------------------------------
Portfolio Turnover Rate 21% 40% 49%
- ------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(5) $0.06 $0.06 $0.06
====================================================================================
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) For the period from February 6, 1996 (inception date) to December 31, 1996.
(4) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
(5) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 23
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class Z Shares 1998(1) 1997 1996 1995 1994(2)
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $17.12 $14.82 $14.61 $12.19 $12.54
- --------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.15 0.35 0.42 0.43 0.07
Net realized and unrealized gain (loss) 2.14 3.80 1.99 3.59 (0.16)
- --------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.29 4.15 2.41 4.02 (0.09)
- --------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.20) (0.35) (0.41) (0.42) (0.12)
Net realized gains(3) -- (1.50) (1.79) (1.18) (0.14)
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.20) (1.85) (2.20) (1.60) (0.26)
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $19.21 $17.12 $14.82 $14.61 $12.19
- --------------------------------------------------------------------------------------------------------------------------
Total Return 13.41%++ 28.27% 16.47% 33.41% (0.73)%++
- --------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $167,146 $144,008 $113,160 $98,661 $80,010
- --------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.60%+ 0.60% 0.62% 0.69% 0.42%+
Net investment income 1.65+ 2.03 2.62 3.11 3.88+
- --------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21% 40% 49% 51% 27%
- --------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4) $0.06 $0.06 $0.06 $0.06 --
==========================================================================================================================
</TABLE>
(1) For the six months ended June 30,1998 (unaudited).
(2) For the period from November 7, 1994 (inception date) to December 31, 1994.
(3) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
24 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Additional Shareholder Information (unaudited)
================================================================================
On March 9, 1998, a special meeting of shareholders of the Fund was held for the
purpose of voting on the following matters:
1. To elect Directors of the Fund; and
2. To approve or disapprove the reclassification, modification and/or
elimination of certain fundamental investment policies.
The results of the vote on Proposal 1 were as follows:
<TABLE>
<CAPTION>
Shares Voted Percentage Shares Voted Percentage
Name of Directors For Shares Voted Against Shares Voted
====================================================================================================================================
<S> <C> <C> <C> <C>
Donald R. Foley 62,337,781.584 97.711% 1,460,539.861 2.289%
Paul Hardin 62,483,574.901 97.939 1,314,746.544 2.061
Heath B. McLendon 62,478,743.675 97.932 1,319,577.770 2.068
Roderick C. Rasmussen 62,392,606.672 97.797 1,405,714.773 2.203
Bruce D. Sargent 62,441,692.899 97.874 1,356,628.546 2.126
John P. Toolan 62,414,616.642 97.831 1,383,704.803 2.169
====================================================================================================================================
</TABLE>
Proposal 2 requested that shareholders approve certain changes to the
fundamental policies of the Portfolio in order to modernize them in view of
certain regulatory, business or industry developments that have occurred since
original adoption of these policies by the Portfolio. The following chart
demonstrates that all proposals were approved by shareholders.
Please note that "M" indicates a modification of the policy; "E" indicates the
elimination of the policy; and "R" indicates the reclassification of the policy
from fundamental (which would require shareholder approval to change) to
non-fundamental (which can be changed by a vote of the Board of Directors).
<TABLE>
<S> <C>
====================================================================================================================================
M Diversification Approved
- ------------------------------------------------------------------------------------------------------------------------------------
M Senior Securities Approved
- ------------------------------------------------------------------------------------------------------------------------------------
M Industry Concentration Approved
- ------------------------------------------------------------------------------------------------------------------------------------
M Borrowing Approved
- ------------------------------------------------------------------------------------------------------------------------------------
E Ability to Pledge Assets Approved
- ------------------------------------------------------------------------------------------------------------------------------------
M Lending Approved
- ------------------------------------------------------------------------------------------------------------------------------------
M Underwriting of Securities Approved
- ------------------------------------------------------------------------------------------------------------------------------------
R Margin and Short Sales Approved
- ------------------------------------------------------------------------------------------------------------------------------------
M Real Estate Approved
- ------------------------------------------------------------------------------------------------------------------------------------
R Restricted and Illiquid Securities Approved
- ------------------------------------------------------------------------------------------------------------------------------------
R Unseasoned Issues Approved
- ------------------------------------------------------------------------------------------------------------------------------------
E 5% of 0wnership of Certain Securities Approved
- ------------------------------------------------------------------------------------------------------------------------------------
R Purchases of Securities of Other Investment Companies Approved
- ------------------------------------------------------------------------------------------------------------------------------------
R Exercising Control or Management Approved
- ------------------------------------------------------------------------------------------------------------------------------------
R Investments in Oil, Gas and Mineral Exploration Approved
- ------------------------------------------------------------------------------------------------------------------------------------
R Puts, Calls and Combinations Thereof Approved
====================================================================================================================================
</TABLE>
The information below reports the lowest percentage of shares voting for the
proposals, the highest percentage of shares voting against and abstaining by
shareholders of the Portfolio on all proposals.
<TABLE>
<CAPTION>
Percentage Percentage Percentage
Shares Voted of Shares Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstained Abstained
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
32,325,590.748 91.658% 8,13,462.455 2.306% 2,128,663.416 6.036%
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 25
<PAGE>
Smith Barney
Funds, Inc.
Directors Investment Adviser
Donald R. Foley Mutual Management Corp.
Paul Hardin
Heath B. McLendon, Chairman Distributor
Roderick C. Rasmussen Smith Barney Inc.
John P. Toolan
Custodian
Joseph H. Fleiss, Emeritus PNC Bank, N.A.
Officers Shareholder Servicing Agent
Heath B. McLendon First Data Investor Services Group, Inc.
President and Chief Executive Officer P.O. Box 9134
Boston, MA 02205-9134
Lewis E. Daidone
Senior Vice President and Treasurer
Ellen Cardozo Sonsino This report is submitted for the
Vice President general information of the
shareholders of Smith Barney Funds,
Thomas M. Reynolds Inc. -- Large Cap Value Fund. It is
Controller not for distribution to prospective
investors unless accompanied by a
Christina T. Sydor current Prospectus for the Fund, which
Secretary contains information concerning the
Fund's investment policies and
expenses as well as other pertinent
information.
SMITH BARNEY
------------
A Member of TravelersGroup[LOGO]
Smith Barney Funds, Inc.
Smith Barney Mutual Funds
388 Greenwich Street
New York, New York 10013
www.smithbarney.com
FD0628 8/98
<PAGE>
================================================================================
[GRAPHIC]
Smith Barney Funds, Inc.
U.S. Government
Securities Fund
------------------
SEMI-ANNUAL REPORT
------------------
June 30, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(SM)
<PAGE>
Smith Barney
Funds, Inc.
[PHOTO] [PHOTO]
HEATH B. JAMES E.
MCLENDON CONROY
Chairman Vice President
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Funds,
Inc. -- U.S. Government Securities Fund ("Portfolio"), formerly known as U.S.
Government Securities Portfolio, for the period ended June 30, 1998. 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 report.
Performance Update
For the six months ended June 30, 1998, the Portfolio posted a total return of
2.92% for Class A shares. The Portfolio's return lagged the average total return
for general U.S. government funds of 3.62% according to Lipper Analytical
Services, Inc., an independent fund-tracking organization. In addition, during
the past six months, the Portfolio distributed income dividends totaling $0.43
per Class A share. For performance information on the Portfolio's other share
classes, please turn to page five.
Investment Strategy
The Portfolio seeks high current income, liquidity and security of principal by
investing in obligations of the U.S. Government, its agencies or its
instrumentalities and related repurchase and reverse repurchase agreements. We
seek income from the standpoint of paying dividends to shareholders, but our
overriding concern is preserving asset values in all market environment
conditions. For example, if interest rates are expected to move lower, we are
not going to defy the market and buy high-income coupon securities that maximize
income but typically do not perform well when interest rates are going down.
Rather, we would buy securities that perform better in an anticipated lower
interest rate environment.
To this end, we have shifted the Portfolio's emphasis toward mortgage-backed
securities ("MBS") and away from U.S. Treasury securities. As of June 30, 1998,
MBSs represented approximately 73% of the Portfolio's holdings (with U.S.
Treasury securities making up roughly 20% and the remaining 7% in cash
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 1
<PAGE>
equivalents) compared to nearly 36% as of December 31, 1997. In our view, there
currently is little relative value to be found in U.S. Treasury securities due
to the flatness of the yield curve. (The yield curve shows the difference in
yields between short-term and long-term fixed-income securities.)
Instead, we have adopted an interest rate strategy incorporating our expectation
of further interest rate declines. We believe that the Portfolio's MBS holdings
should help to maximize its income potential. In the coming months, we will
continue to closely monitor prepayment trends and will make further adjustments
if warranted.
Market Update and Outlook
During the reporting period, two distinct themes dominated bond markets: ongoing
economic turmoil in Asia and steady U.S. economic growth with low inflation.
Both of these developments have provided quite favorable conditions for bonds.
As can be seen from the chart below, interest rates have continued to decline
during the past six months:
<TABLE>
<CAPTION>
Yields from U.S. Treasuries
12/31/97 6/30/98
================================================================================
<S> <C> <C>
90-Day U.S. Treasury Bill 5.34% 5.09%
2-Year U.S. Treasury Note 5.64 5.47
5-Year U.S. Treasury Note 5.70 5.46
10-Year U.S. Treasury Bond 5.74 5.45
30-Year U.S. Treasury Bond 5.92 5.62
================================================================================
</TABLE>
It has been more than a year after the first signs of trouble in Asia began to
surface and, so far, no clear resolution has emerged. The U.S. dollar has
strengthened considerably in response to weakening economies in the region, and
as the crisis drags on, fears of another round of currency devaluations has
heightened. Moreover, major Asian banks could soon find themselves enveloped in
a crisis of their own as they face mounting numbers of non-performing loans.
One result of the Asian crisis has been a flight of capital to U.S. financial
markets as many investors sought out a "safe haven" from the tumult surrounding
many global markets. We believe that foreign investors, whose holdings of U.S.
Treasury securities has nearly doubled in the last three years, have been
attracted to Treasurys because of a strong U.S. dollar as well as the
competitive yields that they currently offer.
In addition, a robust U.S. economy has dramatically increased tax receipts,
enabling government officials to project a federal budget surplus for the first
time in years and reducing the need for federal borrowing. Issuance of U.S.
Treasury
- --------------------------------------------------------------------------------
2 1998 Semi-Annual Report to Shareholders
<PAGE>
securities in 1998 is expected to be substantially less than in 1997 and
auctions of 3-year U.S. Treasury notes have been eliminated all together. This
decreased supply combined with a burgeoning demand has helped sustain a U.S.
Treasury market rally, driving the yield on the benchmark 30-year U.S. Treasury
bond to new historic lows.
For its part, the Federal Reserve Board ("Fed") has chosen to remain on the
sidelines. At its meetings in March 1998 and May 1998, the Federal Open Market
Committee ("FOMC"), the Fed's policy-making panel, elected to leave short-term
interest rates unchanged. However, the FOMC did indicate a bias toward
tightening monetary policy on fears that persistent strength in the U.S. economy
would soon lead to a pick-up in inflationary pressures. The FOMC also ended its
July 1998 meeting without action but has not yet released details of its
decision.
Fed Chairman Alan Greenspan has cited a number of crosscurrents in the U.S.
economy that has led the FOMC to adopt a wait-and-see attitude. By many
traditional measures, U.S. economic growth has been quite robust. The U.S.
economy grew at an annualized rate of 5.4% in the first quarter of 1998 compared
to the 3.7% annual rate for 1997 and unemployment dropped to a mere 4.3% in
April 1998, the lowest level in decades. This vigorous growth has led to
increased concern that demand might soon outpace capacity and lead to price
increases.
However, we share the view of some FOMC members who have suggested that
continued weakness in most Asian economies should help to dampen inflationary
pressures in the U.S. economy. Clearly, the Asian crisis has had an adverse
effect on a number of U.S. industries. Moreover, in recent months, conditions in
Asian financial markets have deteriorated even further since the crisis began.
Of special concern has been the floundering Japanese economy because of its
status as the economic linchpin for Asia and a key U.S. trading partner. Many
economists have projected U.S. economic growth to be substantially lower in the
second quarter of 1998, due in large part to softening Asian demand.
Looking ahead, we view the U.S. bond market as very attractive. With currently
low interest rates and mortgage prepayments at their highest since 1993, some
would argue that interest rates should not decline further. In our view, there
is evidence that suggests interest rates could drop even more. Real interest
rates (the interest rate after subtracting the effects of inflation) are
approaching 4% compared to a historical norm of 2.75%.
Moreover, there are a number of reasons to expect a slowdown in U.S. economic
growth and therefore diminishing the threat of higher inflation. We believe that
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 3
<PAGE>
the U.S. has yet to feel the full impact of the Asian crisis and the
accompanying narrowing of corporate profit margins. In addition, we do not
believe that business investment and home building can sustain their recent
energetic pace. For all of the above reasons, we remain very positive on the
prospects for U.S. government agency securities.
In closing, thank you for investing in the Smith Barney Funds, Inc. -- U.S.
Government Securities Fund. We look forward to continuing to help you pursue
your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman Vice President
July 14, 1998
Shareholder Notice
On a more somber note, we report with much sadness the passing of Emeritus
Director C. Richard Youngdahl on August 6, 1998. Dick made many valuable
contributions to the Board and the Fund during his tenure and he will be missed.
- --------------------------------------------------------------------------------
4 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================
Historical Performance -- Class A Shares
==========================================================================================
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==========================================================================================
<S> <C> <C> <C> <C> <C>
6/30/98 $13.61 $13.57 $0.43 $0.00 2.92%+
- ------------------------------------------------------------------------------------------
12/31/97 13.24 13.61 0.86 0.00 9.67
- ------------------------------------------------------------------------------------------
12/31/96 13.59 13.24 0.86 0.00 3.97
- ------------------------------------------------------------------------------------------
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
==========================================================================================
Total $10.76 $0.29
==========================================================================================
<CAPTION>
==========================================================================================
Historical Performance -- Class B Shares
==========================================================================================
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==========================================================================================
<S> <C> <C> <C> <C> <C>
6/30/98 $13.63 $13.58 $0.40 $0.00 2.60%+
- ------------------------------------------------------------------------------------------
12/31/97 13.26 13.63 0.80 0.00 9.12
- ------------------------------------------------------------------------------------------
12/31/96 13.61 13.26 0.79 0.00 3.44
- ------------------------------------------------------------------------------------------
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 $3.06 $0.00
==========================================================================================
<CAPTION>
==========================================================================================
Historical Performance -- Class L # Shares
==========================================================================================
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==========================================================================================
<S> <C> <C> <C> <C> <C>
6/30/98 $13.60 $13.55 $0.40 $0.00 2.61%+
- ------------------------------------------------------------------------------------------
12/31/97 13.23 13.60 0.80 0.00 9.18
- ------------------------------------------------------------------------------------------
12/31/96 13.58 13.23 0.80 0.00 3.49
- ------------------------------------------------------------------------------------------
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 $4.88 $0.15
==========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 5
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================
Historical Performance -- Class Y Shares
==========================================================================================
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==========================================================================================
<S> <C> <C> <C> <C> <C>
6/30/98 $13.64 $13.58 $0.46 $0.00 2.99%+
- ------------------------------------------------------------------------------------------
12/31/97 13.27 13.64 0.90 0.00 10.00
- ------------------------------------------------------------------------------------------
12/31/96 13.61 13.27 0.89 0.00 4.30
- ------------------------------------------------------------------------------------------
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 $5.07 $0.15
==========================================================================================
<CAPTION>
==========================================================================================
Historical Performance -- Class Z Shares
==========================================================================================
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==========================================================================================
<S> <C> <C> <C> <C> <C>
6/30/98 $13.63 $13.58 $0.45 $0.00 3.02%+
- ------------------------------------------------------------------------------------------
12/31/97 13.26 13.63 0.90 0.00 9.98
- ------------------------------------------------------------------------------------------
12/31/96 13.60 13.26 0.89 0.00 4.31
- ------------------------------------------------------------------------------------------
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 $3.43 $0.00
==========================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
- --------------------------------------------------------------------------------
6 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
Average Annual Total Return
==============================================================================================
Without Sales Charge(1)
-------------------------------------------------------
Class A Class B Class L Class Y Class Z
==============================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 6/30/98+ 2.92% 2.60% 2.61% 2.99% 3.02%
- ----------------------------------------------------------------------------------------------
Year Ended 6/30/98 9.23 8.63 8.67 9.50 9.51
- ----------------------------------------------------------------------------------------------
Five Years Ended 6/30/98 6.42 N/A 5.86 6.62 6.65
- ----------------------------------------------------------------------------------------------
Ten Years Ended 6/30/98 8.74 N/A N/A N/A 8.85
- ----------------------------------------------------------------------------------------------
Inception* through 6/30/98 9.45 9.04 6.30 6.84 9.53
==============================================================================================
<CAPTION>
With Sales Charge(2)
------------------------------------------------------
Class A Class B Class L Class Y Class Z
==============================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 6/30/98+ (1.71)% (1.88)% 0.58% 2.99% 3.02%
- ----------------------------------------------------------------------------------------------
Year Ended 6/30/98 4.34 4.13 6.61 9.50 9.51
- ----------------------------------------------------------------------------------------------
Five Years Ended 6/30/98 5.44 N/A 5.65 6.62 6.65
- ----------------------------------------------------------------------------------------------
Ten Years Ended 6/30/98 8.23 N/A N/A N/A 8.85
- ----------------------------------------------------------------------------------------------
Inception* through 6/30/98 9.08 8.60 6.11 6.84 9.53
==============================================================================================
</TABLE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
================================================================================
<S> <C>
Class A (6/30/88 through 6/30/98) 131.08%
- --------------------------------------------------------------------------------
Class B (Inception* through 6/30/98) 37.12
- --------------------------------------------------------------------------------
Class L # (Inception* through 6/30/98) 40.63
- --------------------------------------------------------------------------------
Class Y (Inception* through 6/30/98) 43.55
- --------------------------------------------------------------------------------
Class Z (Inception* through 6/30/98) 249.22
================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to Class
B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 4.50% and 1.00%
respectively; Class B shares reflect the deduction of a 4.50% CDSC, which
applies if shares are redeemed within one year from initial purchase. This
CDSC declines by 0.50% the first year after purchase and thereafter by
1.00% per year until no CDSC is incurred. Class L shares also 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, L, Y and Z shares are October 9, 1984,
November 7, 1994, December 2, 1992, January 12, 1993 and November 7, 1994,
respectively.
# On June 12 1998, Class C shares were renamed Class L shares.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 7
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of the
U.S. Government Securities Fund vs.
Lehman Brothers MBS Index+
- --------------------------------------------------------------------------------
June 1988 -- June 1998
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
U.S. Government Lehman Brothers
Securities Fund MBS Index
--------------- ---------
<S> <C> <C>
6/88 $ 9,547 $10,000
12/88 $ 9,786 $10,255
12/89 $11,265 $11,828
12/90 $12,386 $13,097
12/91 $14,404 $15,156
12/92 $15,390 $16,210
12/93 $16,375 $17,319
12/94 $16,132 $17,041
12/95 $18,798 $19,905
12/96 $19,544 $20,970
12/97 $21,434 $22,960
6/98 $22,060 $23,724
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares on June 30,
1988, assuming deduction of the maximum 4.50% 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 June 30,
1998. The Lehman Brothers MBS Index is composed of about 600 15-year to
30-year fixed-rate mortgage-backed pools of Government National Mortgage
Association, Federal National Mortgage Association and Federal Home Loan
Mortgage Corp. 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.
- --------------------------------------------------------------------------------
8 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
============================================================================================
Schedule of Investments (unaudited) June 30, 1998
============================================================================================
FACE
AMOUNT SECURITY VALUE
============================================================================================
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 20.0%
$ 65,000,000 U.S. Treasury Strips, zero coupon due 5/15/03 $ 49,947,300
32,500,000 U.S. Treasury Strips, zero coupon due 11/15/09 17,226,950
- --------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost -- $66,804,165) 67,174,250
============================================================================================
U.S. GOVERNMENT AGENCIES -- 72.9%
31,292,077 Federal Home Loan Mortgage Corporation, 5.50% due 6/1/13+ 30,411,831
23,000,226 Federal Home Loan Mortgage Corporation, 7.00% due 6/1/28+ 23,359,490
47,275,461 Federal National Mortgage Association, 6.00% due 5/1/05+ 47,171,929
23,000,000 Federal National Mortgage Association, 5.50% due 6/1/05@+ 22,518,380
6,645,123 Government National Mortgage Association Certificates,
9.00% due 11/15/19+ 7,116,462
935,913 Government National Mortgage Association Certificates,
10.00% due 7/15/20+ 1,023,066
11,976,799 Government National Mortgage Association Certificates,
8.00% due 3/15/25+ 12,418,384
91,838,379 Government National Mortgage Association Certificates Platinum,
9.00% due 12/15/17+* 99,357,188
733,957 Government National Mortgage Association II Certificates,
10.00% due 1/20/18+ 794,964
- --------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES
(Cost -- $242,007,811) 244,171,694
============================================================================================
REPURCHASE AGREEMENTS -- 7.1%
1,058,000 Goldman, Sachs & Co., 5.650% due 7/1/98; Proceeds
at maturity -- $1,058,166; (Fully collateralized by
U.S. Treasury Note, 5.375% due 6/30/00;
Market value -- $1,079,663) 1,058,000
22,600,000 Morgan Stanley, 5.536% due 7/23/98; Proceeds at
maturity -- $22,697,311; (Fully collateralized by Federal Home
Loan Mortgage Corp. Certificates, 6.167% due 2/1/25;
Market value -- $23,061,293) 22,600,000
- --------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $23,658,000) 23,658,000
============================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $332,469,976**) $335,003,944
============================================================================================
</TABLE>
@ Security is traded on a "to-be-announced" basis (See Note 6).
+ Maturity date shown represents the last in the range of maturity dates of
mortgage certificates owned.
* Security segregated by Custodian for open purchase commitment.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 9
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================
Statement of Assets and Liabilities (unaudited) June 30, 1998
===============================================================================================
<S> <C>
ASSETS:
Investments, at value (Cost -- $332,469,976) $335,003,944
Interest receivable 1,454,956
Receivable for Fund shares sold 174,179
- -----------------------------------------------------------------------------------------------
Total Assets 336,633,079
- -----------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 22,578,012
Management fees payable 166,619
Payable to bank 37,585
Distribution fees payable 31,170
Accrued expenses 47,300
- -----------------------------------------------------------------------------------------------
Total Liabilities 22,860,686
- -----------------------------------------------------------------------------------------------
Total Net Assets $313,772,393
===============================================================================================
NET ASSETS:
Par value of capital shares $ 231,246
Capital paid in excess of par value 308,833,481
Overdistributed net investment income (1,484,978)
Accumulated net realized gain on security transactions and futures contracts 3,658,676
Net unrealized appreciation of investments 2,533,968
- -----------------------------------------------------------------------------------------------
Total Net Assets $313,772,393
===============================================================================================
Shares Outstanding:
Class A 18,992,049
--------------------------------------------------------------------------------------------
Class B 960,780
--------------------------------------------------------------------------------------------
Class L 1,067,135
--------------------------------------------------------------------------------------------
Class Y 270,156
--------------------------------------------------------------------------------------------
Class Z 1,834,476
--------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $13.57
--------------------------------------------------------------------------------------------
Class B * $13.58
--------------------------------------------------------------------------------------------
Class L ** $13.55
--------------------------------------------------------------------------------------------
Class Y (and redemption price) $13.58
--------------------------------------------------------------------------------------------
Class Z (and redemption price) $13.58
--------------------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.71% of net asset value per share) $14.21
--------------------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $13.69
===============================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within the first year of purchase (See Note 2).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Statement of Operations (unaudited)
================================================================================
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1998
<S> <C>
INVESTMENT INCOME:
Interest $10,163,106
Less: Interest expense (Note 5) (164,004)
- -------------------------------------------------------------------------------
Total Investment Income 9,999,102
- -------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 734,418
Distribution fees (Note 2) 426,157
Shareholder and system servicing fees 65,690
Registration fees 34,713
Shareholder communications 20,125
Audit and legal 8,330
Custody 7,935
Directors' fees 2,480
Other 4,960
- -------------------------------------------------------------------------------
Total Expenses 1,304,808
- -------------------------------------------------------------------------------
Net Investment Income 8,694,294
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 3 AND 7):
Realized Gain From:
Security transactions (excluding short-term securities) 3,494,402
Futures contracts 164,274
- -------------------------------------------------------------------------------
Net Realized Gain 3,658,676
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 5,789,934
End of period 2,533,968
- -------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (3,255,966)
- -------------------------------------------------------------------------------
Net Gain on Investments and Futures Contracts 402,710
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations $9,097,004
===============================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 11
<PAGE>
================================================================================
Statements of Changes in Net Assets
================================================================================
For the Six Months Ended June 30, 1998 (unaudited) and the Year Ended December
31, 1997
<TABLE>
<CAPTION>
1998 1997
======================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 8,694,294 $ 21,650,743
Net realized gain 3,658,676 3,738,506
Increase (decrease) in net unrealized appreciation (3,255,966) 5,629,941
- --------------------------------------------------------------------------------------
Increase in Net Assets From Operations 9,097,004 31,019,190
- --------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (10,173,795) (21,829,158)
Net realized gains -- (111,560)
- --------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (10,173,795) (21,940,718)
- --------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 13,722,101 17,054,286
Net asset value of shares issued for
reinvestment of dividends 6,069,658 12,732,904
Cost of shares reacquired (31,408,965) (77,835,161)
- --------------------------------------------------------------------------------------
Decrease in Net Assets
From Fund Share Transactions (11,617,206) (48,047,971)
- --------------------------------------------------------------------------------------
Decrease in Net Assets (12,693,997) (38,969,499)
NET ASSETS:
Beginning of period 326,466,390 365,435,889
- --------------------------------------------------------------------------------------
End of period* $ 313,772,393 $ 326,466,390
======================================================================================
* Includes overdistributed net investment income of: $(1,484,978) $(5,477)
======================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)
================================================================================
1. Significant Accounting Policies
The U.S. Government Securities Fund ("Portfolio"), formerly known as U.S.
Government Securities 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 two other
separate investment portfolios: Large Cap Value Fund and Short-Term High Grade
Bond Fund (formerly known as the Short-Term U.S. Treasury Securities Fund). The
financial statements and financial highlights for the other portfolios are
presented in separate semi-annual reports.
The significant accounting policies consistently followed by the Portfolio are:
(a) security transactions are accounted for on trade date; (b) U.S. government
agencies and obligations are valued at the mean between the bid and ask prices;
(c) securities maturing within 60 days are valued at cost plus accreted
discount, or minus amortized premium, which approximates value; (d) interest
income is recorded on an 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 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) 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 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, 1997, reclassifications were made to the Portfolio's capital
accounts to reflect permanent book/tax differences and income and gains
available for distribution under income tax regulations. Accordingly, a portion
of overdistributed net investment income amounting to $174,566 was reclassified
to paid-in capital. 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.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 13
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
2. Management Agreement and Transactions with Affiliated Persons
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings
Inc. ("SSBH"), acts as investment manager for the Fund. The Portfolio pays MMC
an investment advisory fee calculated at an annual rate of 0.50% of the first
$200 million of the average daily net assets, and 0.40% of the average daily net
assets of the Portfolio in excess of $200 million. This fee is calculated daily
and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SSBH, acts as distributor of
Fund shares.
On June 12, 1998, the Fund's existing Class C shares were renamed as Class L
shares. Effective June 15, 1998, Class L shares are being sold at net asset
value plus a maximum initial sales charge of 1.00%. Class L shares also have a
1.00% contingent deferred sales charge ("CDSC"), which applies if redemption
occurs within the first year of purchase.
There is also a CDSC of 4.50% on Class B shares, which applies if redemption
occurs within one year from purchase. This CDSC declines by 0.50% the first year
and thereafter by 1.00% per year until no CDSC is incurred.
For the six months ended June 30, 1998, SB received sales charges of
approximately $74,000 and $3,000 on sales of the Fund's Class A and Class L
shares, respectively. In addition, CDSCs paid to SB were approximately $21,000
for Class B shares.
Pursuant to a Distribution Plan, the Portfolio pays a service fee with respect
to its Class A, B and L shares calculated at an annual rate of 0.25% of the
average daily net assets for each respective class. In addition, the Portfolio
also pays a distribution fee with respect to Class B and L shares calculated at
the annual rate of 0.50% and 0.45% of the average daily net assets for each
class, respectively. For the six months ended June 30, 1998, total Distribution
Plan fees were as follows:
<TABLE>
<CAPTION>
Class A Class B Class L
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $329,680 $46,561 $49,916
================================================================================
</TABLE>
All officers and two Directors of the Fund are employees of SB.
================================================================================
14 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
3. Investments
During the six months ended June 30, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
================================================================================
<S> <C>
Purchases $418,887,666
- --------------------------------------------------------------------------------
Sales 459,708,652
================================================================================
</TABLE>
At June 30, 1998, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $2,541,361
Gross unrealized depreciation (7,393)
- --------------------------------------------------------------------------------
Net unrealized appreciation $2,533,968
================================================================================
</TABLE>
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.
5. Reverse Repurchase Agreement
The Portfolio may enter into reverse repurchase agreement transactions for
leveraging purposes. A reverse repurchase agreement involves a sale by the
Portfolio of securities that it holds with an agreement by the Portfolio to
repurchase the same securities at an agreed upon price and date. A reverse
repurchase agreement involves the risk that the market value of the securities
sold by the Portfolio may decline below the repurchase price of the securities.
The Portfolio will establish a segregated account with its custodian, in which
the Portfolio will maintain cash, U.S. government securities or other liquid
high grade debt obligations equal in value to its obligations with respect to
the reverse repurchase agreement.
During the six months ended June 30, 1998, the maximum and average amounts of
reverse repurchase agreements outstanding were as follows:
<TABLE>
================================================================================
<S> <C>
Maximum amount outstanding $35,350,000
- --------------------------------------------------------------------------------
Average amount outstanding $29,119,375
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 15
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
Interest rates earned on reverse repurchase agreements ranged from 1.10% to
5.45% during the six months. For the six months ended June 30, 1998, interest
expense from reverse repurchase agreements totalled $164,004.
At June 30, 1998, the Portfolio had no open reverse repurchase agreements.
6. Securities Traded on a 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.
At June 30, 1998, the Portfolio held one TBA security with a cost of
$22,503,200.
7. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized
as assets. Securities equal to the initial margin amount are segregated by the
custodian in the name of the broker. Additional securities are also segregated
up to the current market value of the futures contracts. During the period the
futures contract is open, changes in the value of the contract are recognized as
unrealized gains or losses by "marking to market" on a daily basis to reflect
the market value of the contract at the end of each day's trading. Variation
margin payments are made or received and recognized as assets due from or
liabilities due to broker, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Portfolio records a realized gain or
loss equal to the difference between the proceeds from (or cost of) the closing
transactions and the Portfolio's basis in the contract.
The Portfolio enters into such contracts to hedge a portion of its portfolio.
The Portfolio bears the market risk that arises from changes in the value of the
financial instruments and securities indices (futures contracts).
At June 30, 1998, the Portfolio had no open futures contracts.
================================================================================
16 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
8. Capital Shares
At June 30, 1998, 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. Each class bears certain
expenses specifically related to the distribution of its shares. Effective June
12, 1998, the Fund adopted the renaming of existing Class C shares as Class L
shares.
At June 30, 1998, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class L Class Y Class Z
============================================================================================
<S> <C> <C> <C> <C> <C>
Total Paid-in Capital $255,035,735 $12,487,466 $14,769,695 $4,276,177 $22,495,654
============================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
-------------------------- --------------------------
Shares Amount Shares Amount
============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 513,228 $ 7,011,788 622,981 $ 8,299,404
Shares issued on reinvestment 346,391 4,709,169 774,295 10,292,016
Shares redeemed (1,829,506) (24,952,406) (4,983,291) (66,329,135)
- --------------------------------------------------------------------------------------------
Net Decrease (969,887) $(13,231,449) (3,586,015) $(47,737,715)
============================================================================================
Class B
Shares sold 191,580 $ 2,619,624 244,954 $ 3,269,526
Shares issued on reinvestment 18,194 247,584 35,495 472,688
Shares redeemed (146,813) (2,006,025) (228,140) (3,043,767)
- --------------------------------------------------------------------------------------------
Net Increase 62,961 $ 861,183 52,309 $ 698,447
============================================================================================
Class L*
Shares sold 91,346 $ 1,245,257 76,583 $ 1,020,293
Shares issued on reinvestment 17,782 241,449 39,216 520,622
Shares redeemed (105,450) (1,437,646) (355,831) (4,722,947)
- --------------------------------------------------------------------------------------------
Net Increase (Decrease) 3,678 $ 49,060 (240,032) $ (3,182,032)
============================================================================================
Class Y
Shares sold -- $ -- 3,928 $ 53,575
Shares issued on reinvestment 2,360 32,122 5,590 74,202
Shares redeemed (112,163) (1,539,338) (50,797) (681,381)
- --------------------------------------------------------------------------------------------
Net Decrease (109,803) $ (1,507,216) (41,279) $ (553,604)
============================================================================================
Class Z
Shares sold 207,207 $ 2,845,432 329,314 $ 4,411,488
Shares issued on reinvestment 61,699 839,334 103,114 1,373,376
Shares redeemed (108,569) (1,473,550) (229,967) (3,057,931)
- --------------------------------------------------------------------------------------------
Net Increase 160,337 $ 2,211,216 202,461 $ 2,726,933
============================================================================================
</TABLE>
* On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 17
<PAGE>
<TABLE>
<CAPTION>
======================================================================================================
Financial Highlights
======================================================================================================
For a share of each class of capital stock outstanding throughout each period:
Class A Shares 1998(1) 1997 1996 1995 1994 1993
======================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 13.61 $ 13.24 $ 13.59 $ 12.50 $ 13.66 $ 13.87
- ------------------------------------------------------------------------------------------------------
Income (Loss) From
Operations:
Net investment income 0.37 0.85 0.84 0.92 0.91 0.98
Net realized and
unrealized gain (loss) 0.02 0.38 (0.33) 1.09 (1.11) (0.10)
- ------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.39 1.23 0.51 2.01 (0.20) 0.88
- ------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.43) (0.86) (0.86) (0.92) (0.91) (0.98)
Net realized gains -- (0.00)# -- -- (0.05)* (0.11)*
- ------------------------------------------------------------------------------------------------------
Total Distributions (0.43) (0.86) (0.86) (0.92) (0.96) (1.09)
- ------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $ 13.57 $ 13.61 $ 13.24 $ 13.59 $ 12.50 $ 13.66
- ------------------------------------------------------------------------------------------------------
Total Return 2.92%++ 9.67% 3.97% 16.52% (1.48)% 6.40%
- ------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $ 258 $ 272 $ 312 $ 385 $ 358 $ 468
- ------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.47%+ 6.37% 6.34% 6.82% 6.83% 7.00%
Interest expense 0.10+ -- -- -- -- --
Other expenses 0.80+ 0.80 0.79** 0.79 0.76@ 0.49
- ------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 127% 130% 265% 57% 40% 57%
======================================================================================================
<CAPTION>
Class B Shares 1998(1) 1997 1996 1995 1994(2)
======================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 13.63 $ 13.26 $ 13.61 $ 12.51 $ 12.47
- ------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.34 0.79 0.77 0.80 0.08
Net realized and unrealized gain (loss) 0.01 0.38 (0.33) 1.16 0.17
- ------------------------------------------------------------------------------------------------------
Total Income From Operations 0.35 1.17 0.44 1.96 0.25
- ------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.40) (0.80) (0.79) (0.86) (0.21)
Net realized gains -- (0.00)# -- -- --
- ------------------------------------------------------------------------------------------------------
Total Distributions (0.40) (0.80) (0.79) (0.86) (0.21)
- ------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 13.58 $ 13.63 $ 13.26 $ 13.61 $ 12.51
- ------------------------------------------------------------------------------------------------------
Total Return 2.60%++ 9.12% 3.44% 16.03% 2.04%++
- ------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $13,050 $ 12,238 $11,212 $11,116 $ 1,529
- ------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 4.96%+ 5.85% 5.85% 6.16% 6.94%+
Interest expense 0.10+ -- -- -- --
Other expenses 1.31+ 1.31 1.28** 1.28 1.21+@
- ------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 127% 130% 265% 57% 40%
======================================================================================================
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) For the period from November 7, 1994 (inception date) to December 31, 1994.
# Amount represents less than $0.01.
* Represents distributions from paydown gains which are reported as ordinary
income for tax purposes.
** Amount has been restated from the December 31, 1996 annual report.
@ Amount has been restated from the December 31, 1994 annual report.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
18 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================
Financial Highlights (continued)
=====================================================================================================
For a share of each class of capital stock outstanding throughout each period:
Class L Shares(1) 1998(2) 1997 1996 1995 1994(3) 1993
=====================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $13.60 $13.23 $13.58 $12.50 $13.66 $13.86
- -----------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.34 0.77 0.78 0.86 0.82 0.89
Net realized and unrealized
gain (loss) 0.01 0.40 (0.33) 1.09 (1.11) (0.10)
- -----------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.35 1.17 0.45 1.95 (0.29) 0.79
- -----------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.40) (0.80) (0.80) (0.87) (0.83) (0.88)
Net realized gains -- (0.00)# -- (0.04)* (0.11)*
- -----------------------------------------------------------------------------------------------------
Total Distributions (0.40) (0.80) (0.80) (0.87) (0.87) (0.99)
- -----------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $13.55 $13.60 $13.23 $13.58 $12.50 $13.66
- -----------------------------------------------------------------------------------------------------
Total Return 2.61%++ 9.18% 3.49% 15.93% (2.11)% 5.74%
- -----------------------------------------------------------------------------------------------------
Net Assets, End of
Period (000s) $14,463 $14,464 $17,249 $21,559 $21,253 $19,938
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.00%+ 5.91% 5.87% 6.36% 6.27% 6.23%
Interest expense 0.10+ -- -- -- -- --
Other expenses 1.27+ 1.27 1.26** 1.25 1.21 1.21
- -----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 127% 130% 265% 57% 40% 57%
=====================================================================================================
</TABLE>
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(2) For the six months ended June 30, 1998 (unaudited).
(3) On November 7, 1994, the former Class B shares were renamed Class C shares.
# Amount represents less than $0.01.
* Represents distributions from paydown gains which are reported as ordinary
income for tax purposes.
** Amount has been restated from the December 31, 1996 annual report.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 19
<PAGE>
<TABLE>
<CAPTION>
=========================================================================================================
Financial Highlights (continued)
=========================================================================================================
For a share of each class of capital stock outstanding throughout each period:
Class Y Shares 1998(1)(2) 1997 1996 1995 1994(3) 1993(4)
=========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $13.64 $13.27 $13.61 $12.51 $13.67 $13.97
- ---------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.39 0.88 0.88 1.00 0.89 0.86
Net realized and unrealized
gain (loss) 0.01 0.39 (0.33) 1.06 (1.10) (0.10)
- ---------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.40 1.27 0.55 2.06 (0.21) 0.76
- ---------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.46) (0.90) (0.89) (0.96) (0.91) (0.95)
Net realized gains -- (0.00)# -- -- (0.04)* (0.11)*
- ---------------------------------------------------------------------------------------------------------
Total Distributions (0.46) (0.90) (0.89) (0.96) (0.95) (1.06)
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $13.58 $13.64 $13.27 $13.61 $12.51 $13.67
- ---------------------------------------------------------------------------------------------------------
Total Return 2.99%++ 10.00% 4.30% 16.88% (1.53)% 5.55%++
- ---------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (000s) $3,669 $5,182 $5,589 $6,992 $13,903 $14,118
- ---------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.79%+ 6.65% 6.64% 7.22% 6.82% 7.29%+
Interest expense 0.10+ -- -- -- -- --
Other expenses 0.52+ 0.51 0.50** 0.49 0.61 0.69+
- ---------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 127% 130% 265% 57% 40% 57%
=========================================================================================================
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) 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.
# Amount represents less than $0.01.
* Represents distributions from paydown gains which are reported as ordinary
income for tax purposes.
** Amount has been restated from the December 31, 1996 annual report.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
20 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Financial Highlights (continued)
=============================================================================================
For a share of each class of capital stock outstanding throughout each period:
Class Z Shares 1998(1) 1997 1996 1995 1994(2)
=============================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $13.63 $13.26 $13.60 $12.50 $12.47
- ---------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.39 0.89 0.88 0.94 0.14
Net realized and unrealized
gain (loss) 0.01 0.38 (0.33) 1.11 0.13
- ---------------------------------------------------------------------------------------------
Total Income From Operations 0.40 1.27 0.55 2.05 0.27
- ---------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.45) (0.90) (0.89) (0.95) (0.24)
Net realized gains -- (0.00)# -- -- --
- ---------------------------------------------------------------------------------------------
Total Distributions (0.45) (0.90) (0.89) (0.95) (0.24)
- ---------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.58 $13.63 $13.26 $13.60 $12.50
- ---------------------------------------------------------------------------------------------
Total Return 3.02%++ 9.98% 4.31% 16.89% 2.15%++
- ---------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $24,908 $22,815 $19,511 $20,923 $18,580
- ---------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.75%+ 6.64% 6.64% 7.12% 7.55%+
Interest expense 0.10+ -- -- -- --
Other expenses 0.51+ 0.51 0.49 0.50 0.34+
- ---------------------------------------------------------------------------------------------
Portfolio Turnover Rate 127% 130% 265% 57% 40%
=============================================================================================
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) For the period from November 7, 1994 (inception date) to December 31, 1994.
# Amount represents less than $0.01.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 21
<PAGE>
================================================================================
Additional Shareholder Information (unaudited)
================================================================================
On March 9, 1998, a special meeting of shareholders of the Fund was held for the
purpose of voting on the following matters:
1. To elect Directors of the Fund; and
2. To approve or disapprove the reclassification, modification and/or
elimination of certain fundamental investment policies.
The results of the vote on Proposal 1 were as follows:
<TABLE>
<CAPTION>
Shares Voted Percentage Shares Voted Percentage
Name of Directors For Shares Voted Against Shares Voted
=========================================================================================
<S> <C> <C> <C> <C>
Donald R. Foley 62,337,781.584 97.711% 1,460,539.861 2.289%
Paul Hardin 62,483,574.901 97.939 1,314,746.544 2.061
Heath B. McLendon 62,478,743.675 97.932 1,319,577.770 2.068
Roderick C. Rasmussen 62,392,606.672 97.797 1,405,714.773 2.203
Bruce D. Sargent 62,441,692.899 97.874 1,356,628.546 2.126
John P. Toolan 62,414,616.642 97.831 1,383,704.803 2.169
=========================================================================================
</TABLE>
Proposal 2 requested that shareholders approve certain changes to the
fundamental policies of the Portfolio in order to modernize them in view of
certain regulatory, business or industry developments that have occurred since
original adoption of these policies by the Portfolio. The following chart
demonstrates that all proposals were approved by shareholders.
Please note that "M" indicates a modification of the policy; "E" indicates the
elimination of the policy; and "R" indicates the reclassification of the policy
from fundamental (which would require shareholder approval to change) to
non-fundamental (which can be changed by a vote of the Board of Directors).
================================================================================
M Diversification Approved
- --------------------------------------------------------------------------------
M Senior Securities Approved
- --------------------------------------------------------------------------------
M Industry Concentration Approved
- --------------------------------------------------------------------------------
M Borrowing Approved
- --------------------------------------------------------------------------------
E Ability to Pledge Assets Approved
- --------------------------------------------------------------------------------
M Lending Approved
- --------------------------------------------------------------------------------
M Underwriting of Securities Approved
- --------------------------------------------------------------------------------
R Margin and Short-Sales Approved
- --------------------------------------------------------------------------------
M Real Estate Approved
- --------------------------------------------------------------------------------
R Restricted and Illiquid Securities Approved
- --------------------------------------------------------------------------------
R Unseasoned Issues Approved
- --------------------------------------------------------------------------------
E 5% Ownership of Certain Securities Approved
- --------------------------------------------------------------------------------
R Purchases of Securities of Other Investment Companies Approved
- --------------------------------------------------------------------------------
R Exercising Control or Management Approved
- --------------------------------------------------------------------------------
R Investments in Oil, Gas and Mineral Exploration Approved
- --------------------------------------------------------------------------------
R Puts, Calls and Combinations Thereof Approved
================================================================================
- --------------------------------------------------------------------------------
22 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Additional Shareholder Information (unaudited) (continued)
================================================================================
The information below reports the lowest percentage of shares voting for the
proposals, the highest percentage of shares voting against and abstaining by
shareholders of the Portfolio on all proposals.
<TABLE>
<CAPTION>
Percentage Percentage Percentage
Shares Voted of Shares Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstaining Voted
===========================================================================================
<S> <C> <C> <C> <C> <C>
12,903,017.770 92.719% 220,214.558 1.583% 792,986.775 5.698%
===========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 23
<PAGE>
[This page intentionally left blank]
<PAGE>
Smith Barney SMITH BARNEY
Funds, Inc. ------------
A Member of TravelersGroup [LOGO]
Directors Investment Manager
Donald R. Foley Mutual Management Corp.
Paul Hardin
Heath B. McLendon, Chairman Distributor
Roderick C. Rasmussen Smith Barney Inc.
John P. Toolan
Custodian
Joseph H. Fleiss, Emeritus PNC Bank, N.A.
Officers Shareholder
Heath B. McLendon Servicing Agent
President and First Data Investor Services Group, Inc.
Chief Executive Officer P.O. Box 9134
Boston, MA 02205-9134
Lewis E. Daidone
Senior Vice President
and Treasurer This report is submitted for the general
information of the shareholders of Smith
James E. Conroy Barney Funds, Inc. -- U.S. Government
Vice President Securities Fund. It is not authorized
for distribution to prospective
Thomas M. Reynolds investors unless accompanied or preceded
Controller by a current Prospectus for the
Portfolio, which contains information
Christina T. Sydor concerning the Portfolio's investment
Secretary policies and expenses as well as other
pertinent information.
Smith Barney Funds, Inc.
388 Greenwich Street
New York, New York 10013
www.smithbarney.com
FD0631 8/98
<PAGE>
================================================================================
[GRAPHIC]
Smith Barney Funds, Inc.
Short-Term
High Grade
Bond Fund
-------------------------------
SEMI-ANNUAL REPORT
-------------------------------
June 30, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day. (SM)
<PAGE>
Smith Barney
Funds, Inc. [PHOTO] [PHOTO]
HEATH B. JAMES E.
MCLENDON CONROY
Chairman Vice President
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Funds,
Inc. -- Short-Term High Grade Bond Fund ("Fund"), previously known as the Smith
Barney Short-Term U.S. Treasury Securities Fund, for the period ended June 30,
1998. 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.
Special Shareholder Notice
As you know, the Board of Directors of Smith Barney Funds, Inc. recently
approved expanding the types of investments in which your Fund can invest
because of their belief that the Fund lacked the needed flexibility to take
advantage of opportunities to provide potentially higher returns with minimal
increase in risk. In addition, the Board also approved changing the Fund's name
to the Smith Barney Short-Term High Grade Bond Fund, which became effective on
July 2, 1998.
Please note that your Fund's investment objective will continue to be income and
preservation of capital; but, in management's opinion, the Fund should be better
positioned to generate enhanced returns going forward. The Fund will maintain a
"high grade" portfolio including corporate debt securities, bank obligations and
a variety of U.S. government securities (including mortgage-backed securities
and other U.S. government agency securities).
Although the Fund will have more flexibility, it will continue to be managed as
a short-term investment, and as such intends to minimize fluctuations in the Net
Asset Value ("NAV") by maintaining a U.S. dollar-weighted average maturity of no
greater than four years. Previously, the Fund's average maturity was between two
and five years. (Shorter-term fixed income securities tend to be less volatile
than longer-term issues.)
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 1
<PAGE>
Performance Update
For the six months ended June 30, 1998, the Fund posted a total return of 2.78%
for Class A shares. The Fund's performance was in line with the average return
of 2.68% for flexible income funds according to Lipper Analytical Services,
Inc., an independent fund-tracking organization. In addition, during the past
six months, the Fund distributed income dividends totaling $0.10 per Class A
share. For performance information on the Fund's Class Y shares, please turn to
page five.
Market Update and Outlook
During the reporting period, two distinct themes dominated bond markets: ongoing
economic turmoil in Asia and steady U.S. economic growth with low inflation.
Both of these developments have provided quite favorable conditions for bonds.
As can be seen from the chart below, interest rates have continued to decline
during the past six months:
Yields from U.S. Treasuries
<TABLE>
<CAPTION>
6/30/98 12/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
90-Day U.S. Treasury Bill 5.09% 5.34%
2-Year U.S. Treasury Note 5.47 5.64
5-Year U.S. Treasury Note 5.46 5.70
10-Year U.S. Treasury Bond 5.45 5.74
30-Year U.S. Treasury Bond 5.62 5.92
- --------------------------------------------------------------------------------
</TABLE>
It has been more than a year after the first signs of trouble in Asia began to
surface and, so far, no clear resolution has emerged. The U.S. dollar has
strengthened considerably in response to weakening economies in the region, and
as the crisis drags on, fears of another round of currency devaluations has
heightened. Moreover, major Asian banks could soon find themselves enveloped in
a crisis of their own as they face mounting numbers of non-performing loans.
One result of the Asian crisis has been a flight of capital to U.S. financial
markets as many investors sought out a "safe haven" from the tumult surrounding
many global markets. We believe that foreign investors, whose holdings of U.S.
Treasury securities have nearly doubled in the last three years, have been
attracted to Treasurys because of a strong U.S. dollar as well as the
competitive yields that they currently offer.
In addition, a robust U.S. economy has dramatically increased tax receipts,
enabling government officials to project a federal budget surplus for the first
time in years and reducing the need for federal borrowing. Issuance of U.S.
Treasury securities in 1998 is expected to be substantially less than in 1997
and auctions of 3-year U.S. Treasury notes have been eliminated all together.
This decreased
- --------------------------------------------------------------------------------
2 1998 Semi-Annual Report to Shareholders
<PAGE>
supply combined with a burgeoning demand has helped sustain a U.S. Treasury
market rally, driving the yield on the benchmark 30-year U.S. Treasury bond to
new historic lows.
For its part, the Federal Reserve Board ("Fed") has chosen to remain on the
sidelines. At its meetings in March 1998 and May 1998, the Federal Open Market
Committee ("FOMC"), the Fed's policy-making panel, elected to leave short-term
interest rates unchanged. However, the FOMC did indicate a bias toward
tightening monetary policy on fears that persistent strength in the U.S. economy
would soon lead to a pick-up in inflationary pressures. The FOMC also ended its
July 1998 meeting without action but has not yet released details of its
decision.
Fed Chairman Alan Greenspan has cited a number of crosscurrents in the U.S.
economy that has led the FOMC to adopt a wait-and-see attitude. By many
traditional measures, U.S. economic growth has been quite robust. The U.S.
economy grew at an annualized rate of 5.4% in the first quarter of 1998 compared
to the 3.7% annual rate for 1997 and unemployment dropped to a mere 4.3% in
April 1998, the lowest level in decades. This vigorous growth has led to
increased concern that demand might soon outpace capacity and lead to price
increases.
However, we share the view of some FOMC members who have suggested that
continued weakness in most Asian economies should help to dampen inflationary
pressures in the U.S. economy. Clearly, the Asian crisis has had an adverse
effect on a number of U.S. industries. Moreover, in recent months, conditions in
Asian financial markets have deteriorated even further since the crisis began.
Of special concern has been the floundering Japanese economy because of its
status as the economic linchpin for Asia and a key U.S. trading partner. Many
economists have projected U.S. economic growth to be substantially lower in the
second quarter of 1998, due in large part to softening Asian demand.
Looking ahead, we view the U.S. bond market as very attractive. With low
interest rates and mortgage prepayments at their highest since 1993, some would
argue that interest rates should not decline further. In our view, there is
evidence that suggests interest rates could drop even more. Real interest rates
(the interest rate after subtracting the effects of inflation) are approaching
4% compared to a historical norm of 2.75%.
Moreover, there are a number of reasons to expect a slowdown in U.S. economic
growth and therefore diminishing the threat of higher inflation. We believe that
the U.S. has yet to feel the full impact of the Asian crisis and the
accompanying narrowing of corporate profit margins. In addition, we do not
believe that business investment and home building can sustain their recent
energetic pace.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 3
<PAGE>
For all of the above reasons, we remain very positive on the prospects for U.S.
government agency securities.
In closing, thank you for investing in the Smith Barney Funds, Inc. --
Short-Term High Grade Bond Fund. We look forward to continuing to help you
pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman Vice President
July 14, 1998
Shareholder Notice
On a more somber note, we report with much sadness the passing of Emeritus
Director C. Richard Youngdahl on August 6, 1998. Dick made many valuable
contributions to the Board and the Fund during his tenure and he will be missed.
- --------------------------------------------------------------------------------
4 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Historical Performance -- Class A Shares
=============================================================================================
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns
=============================================================================================
<S> <C> <C> <C> <C> <C>
6/30/98 $4.09 $4.10 $0.10 $0.00 2.78%+
- ---------------------------------------------------------------------------------------------
12/31/97 4.05 4.09 0.22 0.00 6.73
- ---------------------------------------------------------------------------------------------
12/31/96 4.19 4.05 0.23 0.00 2.17
- ---------------------------------------------------------------------------------------------
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 $1.35 $0.04
=============================================================================================
<CAPTION>
=============================================================================================
Historical Performance -- Class Y Shares
=============================================================================================
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns
=============================================================================================
<S> <C> <C> <C> <C> <C>
6/30/98 $4.09 $4.10 $0.11 $0.00 3.01%+
- ---------------------------------------------------------------------------------------------
12/31/97 4.05 4.09 0.24 0.00 7.20
- ---------------------------------------------------------------------------------------------
Inception*-12/31/96 4.19 4.05 0.22 0.00 2.08+
=============================================================================================
Total $0.57 $0.00
=============================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
================================================================================
Average Annual Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charges
----------------------------------
Class A Class Y
================================================================================
<S> <C> <C>
Six Months Ended 6/30/98+ 2.78% 3.01%
- --------------------------------------------------------------------------------
Year Ended 6/30/98 7.44 7.90
- --------------------------------------------------------------------------------
Five Years Ended 6/30/98 4.94 N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/98 5.67 5.14
================================================================================
</TABLE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charges
================================================================================
<S> <C>
Class A (Inception* through 6/30/98) 44.25%
- --------------------------------------------------------------------------------
Class Y (Inception* through 6/30/98) 12.73
================================================================================
</TABLE>
* The inception dates for Class A and Y shares are November 11, 1991 and
February 7, 1996, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 5
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of
the Short-Term High Grade Bond Fund vs.
Salomon Smith Barney 3-Year Treasury Index and
Lehman Brothers 1-3 Years Treasury Index+
- --------------------------------------------------------------------------------
November 1991 -- June 1998
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Short-Term Salomon Smith Barney Lehman Brothers 1-3
High Grade Bond Fund 3-Year Treasury Index Years++ Treasury Index
-------------------- --------------------- ----------------------
<S> <C> <C> <C>
11/11/91 $10,000 $10,000 $10,000
12/91 $10,283 $10,230 $10,230
12/92 $10,891 $10,902 $11,902
12/93 $11,547 $11,653 $11,653
12/94 $11,361 $11,471 $11,770
12/95 $12,874 $13,004 $13,265
12/96 $13,149 $13,674 $13,905
12/31/97 $14,034 $14,673 $14,808
6/30/98 $14,424 $15,131 $15,253
</TABLE>
+ Hypothetical illustration of $10,000 invested in shares at inception on
November 11, 1991, assuming reinvestment of dividends and capital gains, if
any, at net asset value through June 30, 1998. The Salomon Smith Barney
3-Year Treasury Index is composed of the most recently issued 3-year United
States Treasury Notes which are used to track the index total return. The
Lehman Brothers 1-3 Years Treasury Index is composed of fixed-rate U.S.
Treasury securities that have one year to three years final maturity and at
least $100 million par amount outstanding. The indexes are unmanaged and
are not subject to the same management and trading expenses of a mutual
fund. The performance of the Portfolio's other class may be greater or less
than the Class A shares' performance indicated on this chart, depending on
whether greater or lesser fees were incurred by shareholders investing in
the other class.
++ It is the opinion of management that the Lehman Brothers 1-3 Years Treasury
Index more accurately reflects the composition of the Short-Term High Grade
Bond Fund than the Salomon Smith Barney 3-Year Treasury Index. In future
reporting, the Lehman Brothers 1-3 Years Treasury Index will be used as a
basis of comparison of total return performance rather than the Salomon
Smith Barney 3-Year Treasury Index.
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.
- --------------------------------------------------------------------------------
6 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedule of Investments (unaudited) June 30, 1998
=============================================================================================
FACE
AMOUNT SECURITY VALUE
=============================================================================================
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS -- 99.9%
$ 11,300,000 U.S. Treasury Note, 6.500% due 4/30/99 $ 11,392,999
11,000,000 U.S. Treasury Note, 6.250% due 5/31/99 11,072,050
19,600,000 U.S. Treasury Note, 6.750% due 5/31/99 19,818,344
1,700,000 U.S. Treasury Note, 5.500% due 2/29/00 1,700,102
21,500,000 U.S. Treasury Note, 6.000% due 8/15/00 21,706,615
500,000 U.S. Treasury Note, 5.375% due 2/15/01 498,330
18,500,000 U.S. Treasury Note, 5.875% due 11/30/01 18,689,070
16,000,000 U.S. Treasury Note, 5.875% due 9/30/02 16,198,560
- ---------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost -- $100,218,093) 101,076,070
=============================================================================================
REPURCHASE AGREEMENT -- 0.1%
86,000 Goldman, Sachs & Co., 5.645% due 7/1/98;
Proceeds at maturity -- $86,013; (Fully collateralized
by U.S. Treasury Note, 5.375% due 6/30/00;
Market value -- $87,761) (Cost -- $86,000) 86,000
=============================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $100,304,093*) $101,162,070
=============================================================================================
</TABLE>
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 7
<PAGE>
================================================================================
Statement of Assets and Liabilities (unaudited) June 30, 1998
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $100,304,093) $ 101,162,070
Cash 490
Interest receivable 1,148,380
- -------------------------------------------------------------------------------
Total Assets 102,310,940
- -------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 234,561
Management fees payable 36,784
Distribution fees payable 5,150
Accrued expenses 12,975
- -------------------------------------------------------------------------------
Total Liabilities 289,470
- -------------------------------------------------------------------------------
Total Net Assets $ 102,021,470
===============================================================================
NET ASSETS:
Par value of capital shares $ 248,872
Capital paid in excess of par value 107,815,874
Accumulated net realized loss on security transactions (6,901,253)
Net unrealized appreciation of investments 857,977
- -------------------------------------------------------------------------------
Total Net Assets $ 102,021,470
===============================================================================
Shares Outstanding:
Class A 15,892,172
----------------------------------------------------------------------------
Class Y 8,994,979
----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $4.10
----------------------------------------------------------------------------
Class Y (and redemption price) $4.10
----------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Statement of Operations (unaudited)
================================================================================
For the Six Months Ended June 30, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $3,073,495
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 227,689
Distribution fees (Note 2) 119,091
Shareholder and system servicing fees 26,262
Registration fees 24,110
Shareholder communications 14,161
Audit and legal 12,380
Custody 2,360
Directors' fees 1,530
Other 3,676
- --------------------------------------------------------------------------------
Total Expenses 431,259
- --------------------------------------------------------------------------------
Net Investment Income 2,642,236
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 5,283,438
Cost of securities sold 5,282,625
- --------------------------------------------------------------------------------
Net Realized Gain 813
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 746,318
End of period 857,977
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 111,659
- --------------------------------------------------------------------------------
Net Gain on Investments 112,472
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $2,754,708
================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 9
<PAGE>
<TABLE>
<CAPTION>
======================================================================================
Statements of Changes in Net Assets
======================================================================================
For the Six Months Ended June 30, 1998 (unaudited)
and the Year Ended December 31, 1997
1998 1997
======================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 2,642,236 $ 6,806,506
Net realized gain 813 2,141,279
Increase (decrease) in net unrealized appreciation 111,659 (674,103)
- --------------------------------------------------------------------------------------
Increase in Net Assets From Operations 2,754,708 8,273,682
- --------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,642,236) (6,806,506)
- --------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (2,642,236) (6,806,506)
- --------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 17,981,677 52,065,590
Net asset value of shares issued for
reinvestment of dividends 1,520,650 3,694,867
Cost of shares reacquired (18,740,169) (71,518,650)
- --------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions 762,158 (15,758,193)
- --------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 874,630 (14,291,017)
NET ASSETS:
Beginning of period 101,146,840 115,437,857
- --------------------------------------------------------------------------------------
End of period $ 102,021,470 $ 101,146,840
======================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)
================================================================================
1. Significant Accounting Policies
The Short-Term High Grade Bond Fund ("Portfolio"), formerly known as Short-Term
U.S. Treasury Securities Fund, a separate investment portfolio of the Smith
Barney Funds, Inc. ("Fund"), a Maryland corporation, is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund consists of the Portfolio and two other
separate investment portfolios: Large Cap Value Fund and U.S. Government
Securities Fund (formerly known as U.S. Government Securities Portfolio). The
financial statements and financial highlights for the other portfolios are
presented in separate semi-annual reports.
The significant accounting policies consistently followed by the Portfolio are:
(a) security transactions are accounted for on trade date; (b) U.S. government
agencies and obligations are valued at the mean between the bid and ask prices;
(c) securities that have a maturity of more than 60 days are valued at prices
based on market quotations for securities of similar type, yield and maturity;
(d) securities maturing within 60 days are valued at cost plus accreted
discount, or minus amortized premium, which approximates value; (e) interest
income is recorded on an accrual basis; (f) gains or losses on the sale of
securities are calculated by using the specific identification method; (g)
direct expenses are charged to each class; management fees and general fund
expenses are allocated on the basis of relative net assets; (h) dividends and
distributions to shareholders are recorded on the ex-dividend date; (i) the
Portfolio intends to comply with the applicable provisions of the Internal
Revenue Code of 1986, as amended, pertaining to regulated investment companies
and to make distributions of taxable income sufficient to relieve it from
substantially all Federal income and excise taxes; and (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.
2. Management Agreements and Transactions with Affiliated Persons
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings
Inc. ("SSBH"), acts as investment manager to the Fund. The Portfolio pays MMC a
management fee calculated at an annual rate of 0.45% of the Portfolio's average
daily net assets. This fee is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SSBH, acts as distributor of
Fund shares. Pursuant to a Distribution Plan, the Portfolio pays a distribution
fee and a service fee with respect to Class A shares calculated at the annual
rate of
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 11
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
0.10% and 0.25% of its average daily net assets, respectively. For the six
months ended June 30, 1998, total Distribution Plan fees incurred was $119,091.
All officers and two Directors of the Fund are employees of SB.
3. Investments
During the six months ended June 30, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
================================================================================
<S> <C>
Purchases $6,935,273
- --------------------------------------------------------------------------------
Sales 5,283,438
================================================================================
</TABLE>
At June 30, 1998, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $857,977
Gross unrealized depreciation --
- --------------------------------------------------------------------------------
Net unrealized appreciation $857,977
================================================================================
</TABLE>
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.
5. Reverse Repurchase Agreement
A reverse repurchase agreement involves a sale by the Portfolio of securities
that it holds with an agreement to repurchase the same securities at an agreed
upon price and date. A reverse repurchase agreement involves the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of the securities. The Portfolio will establish a segregated
account with its custodian, in which the Portfolio will maintain cash, U.S.
government securities or other liquid high grade debt obligations equal in value
to its obligations with respect to the reverse repurchase agreements.
During the six months ended June 30, 1998, the Portfolio had no open reverse
repurchase agreements.
- --------------------------------------------------------------------------------
12 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
6. Capital Shares
At June 30, 1998, the Fund had two billion shares of capital stock authorized
with a par value of $0.01 per share. The Portfolio has the ability to issue
multiple classes of shares. Each share of a class represents an identical
interest in the Portfolio and has the same rights, except that each class bears
certain expenses specifically related to the distribution of its shares.
At June 30, 1998, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class Y
================================================================================
<S> <C> <C>
Total Paid-in Capital $72,014,277 $36,050,469
================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
-------------------------- ----------------------------
Shares Amount Shares Amount
=============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 2,660,635 $ 10,927,669 6,333,523 $ 25,620,854
Shares issued on reinvestment 370,208 1,520,650 914,485 3,694,867
Shares redeemed (4,566,984) (18,740,169) (10,417,386) (42,121,325)
- ---------------------------------------------------------------------------------------------
Net Decrease (1,536,141) $ (6,291,850) (3,169,378) $(12,805,604)
=============================================================================================
Class Y
Shares sold 1,718,684 $ 7,054,008 6,558,594 $ 26,444,736
Shares redeemed -- -- (7,220,129) (29,397,325)
- ---------------------------------------------------------------------------------------------
Net Increase (Decrease) 1,718,684 $ 7,054,008 (661,535) $ (2,952,589)
=============================================================================================
</TABLE>
7. Capital Loss Carryforward
At December 31, 1997, the Portfolio had for Federal income tax purposes
approximately $6,900,000, of capital loss carryforwards available to offset
future realized gains. 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 expiration of the carryforwards are indicated below. Expiration
occurs on December 31 of the year indicated:
<TABLE>
<CAPTION>
2002 2003 2004
================================================================================
<S> <C> <C> <C>
Carryforward Amounts $4,805,000 $1,124,000 $971,000
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 13
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares 1998(1) 1997 1996 1995 1994 1993
==============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $4.09 $4.05 $4.19 $3.91 $4.16 $4.12
- --------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.10 0.22 0.23 0.22 0.18 0.18
Net realized and unrealized
gain (loss) 0.01 0.04 (0.14) 0.28 (0.25) 0.06
- --------------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.11 0.26 0.09 0.50 (0.07) 0.24
- --------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.10) (0.22) (0.23) (0.22) (0.18) (0.18)
Net realized gains -- -- -- -- -- (0.02)
- --------------------------------------------------------------------------------------------------------------
Total Distributions (0.10) (0.22) (0.23) (0.22) (0.18) (0.20)
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $4.10 $4.09 $4.05 $4.19 $3.91 $4.16
- --------------------------------------------------------------------------------------------------------------
Total Return 2.78%++ 6.73% 2.17% 13.16% (2.15)% 6.01%
- --------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $65 $71 $83 $107 $89 $206
- --------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.99%+ 0.95% 0.98% 0.98% 0.91% 0.88%
Net investment income 5.04+ 5.53 5.62 5.29 4.54 4.40
- --------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 5% 145% 130% 29% 25% 41%
==============================================================================================================
<CAPTION>
Class Y Shares 1998(1) 1997 1996(2)
==============================================================================================================
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period $4.09 $4.05 $4.19
- --------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.11 0.24 0.22
Net realized and unrealized
gain (loss) 0.01 0.04 (0.14)
- --------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.12 0.28 0.08
- --------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.11) (0.24) (0.22)
- --------------------------------------------------------------------------------------------------------------
Total Distributions (0.11) (0.24) (0.22)
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $4.10 $4.09 $4.05
- --------------------------------------------------------------------------------------------------------------
Total Return 3.01%++ 7.20% 2.08%++
- --------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $37 $30 $32
- --------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.54%+ 0.50% 0.58%+
Net investment income 5.50+ 6.00 5.99+
- --------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 5% 145% 130%
==============================================================================================================
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) For the period from February 7, 1996 (inception date) through December 31,
1996.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
14 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Additional Shareholder Information (unaudited)
================================================================================
On March 9, 1998, a special meeting of shareholders of the Fund was held for the
purpose of voting on the following matters:
1. To elect Directors of the Fund; and
2. To approve or disapprove the reclassification, modification and/or
elimination of certain fundamental investment policies.
The results of the vote on Proposal 1 were as follows:
<TABLE>
<CAPTION>
Shares Voted Percentage of Shares Voted Percentage of
Name of Directors For Shares Voted Against Shares Voted
====================================================================================================
<S> <C> <C> <C> <C>
Donald R. Foley 62,337,781.584 97.711% 1,460,539.861 2.289%
Paul Hardin 62,483,574.901 97.939 1,314,746.544 2.061
Heath B. McLendon 62,478,743.675 97.932 1,319,577.770 2.068
Roderick C. Rasmussen 62,392,606.672 97.797 1,405,714.773 2.203
Bruce D. Sargent 62,441,692.899 97.874 1,356,628.546 2.126
John P. Toolan 62,414,616.642 97.831 1,383,704.803 2.169
====================================================================================================
</TABLE>
Proposal 2 requested that shareholders approve certain changes to the
fundamental policies of the Portfolio in order to modernize them in view of
certain regulatory, business or industry developments that have occurred since
original adoption of these policies by the Portfolio. The following chart
demonstrates that all proposals were approved by shareholders.
Please note that "M" indicates a modification of the policy; "E" indicates the
elimination of the policy; and "R" indicates the reclassification of the policy
from fundamental (which would require shareholder approval to change) to
non-fundamental (which can be changed by a vote of the Board of Directors).
================================================================================
M Diversification Approved
- --------------------------------------------------------------------------------
M Senior Securities Approved
- --------------------------------------------------------------------------------
M Borrowing Approved
- --------------------------------------------------------------------------------
E Ability to Pledge Assets Approved
- --------------------------------------------------------------------------------
M Lending Approved
- --------------------------------------------------------------------------------
M Underwriting of Securities Approved
- --------------------------------------------------------------------------------
R Margin and Short Sales Approved
- --------------------------------------------------------------------------------
M Real Estate Approved
- --------------------------------------------------------------------------------
R Restricted and Illiquid Securities Approved
- --------------------------------------------------------------------------------
R Purchases of Securities of Other Investment Companies Approved
- --------------------------------------------------------------------------------
R Investments in Oil, Gas and Mineral Exploration Approved
- --------------------------------------------------------------------------------
R Puts, Calls and Combinations Thereof Approved
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 15
<PAGE>
================================================================================
Additional Shareholder Information (unaudited) (continued)
================================================================================
The information below reports the lowest percentage of shares voting for the
proposals, the highest percentage of shares voting against and abstaining by
shareholders of the Portfolio on all proposals.
<TABLE>
<CAPTION>
Percentage Percentage Percentage
Shares Voted of Shares Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstaining Voted
===========================================================================================
<S> <C> <C> <C> <C> <C>
12,289,676.829 84.787% 1,204,924.633 8.313% 1,000,117.261 6.900%
===========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
16 1998 Semi-Annual Report to Shareholders
<PAGE>
Smith Barney SMITH BARNEY
Funds, Inc. ------------
A Member of TravelersGroup[LOGO]
Directors Investment Manager
Donald R. Foley Mutual Management Corp.
Paul Hardin
Heath B. McLendon, Chairman Distributor
Roderick C. Rasmussen Smith Barney Inc.
John P. Toolan
Custodian
Joseph H. Fleiss, Emeritus PNC Bank, N.A.
Officers Shareholder
Heath B. McLendon Servicing Agent
President and First Data Investor Services Group, Inc.
Chief Executive Officer P.O. Box 9134
Boston, MA 02205-9134
Lewis E. Daidone
Senior Vice President
and Treasurer
This report is submitted for the general
James E. Conroy information of the shareholders of Smith
Vice President Barney Funds, Inc. -- Short-Term High
Grade Bond Fund. It is not authorized
Thomas M. Reynolds for distribution to prospective
Controller investors unless accompanied or preceded
by a current Prospectus for the
Christina T. Sydor Portfolio, which contains information
Secretary 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
www.smithbarney.com
FD0632 8/98
