<PAGE>
================================================================================
ANNUAL REPORT
================================================================================
1997
1997
1997
1997
1997
Smith Barney
Funds, Inc.
U.S. Government
Securities Fund
--------------------------------------------------
December 31, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
- --------------------------------------------------------------------------------
<PAGE>
===============================
U.S. Government Securities Fund
===============================
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Funds, Inc. --
U.S. Government Securities Fund ("Portfolio") for the year ended December 31,
1997. 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 year ended December 31, 1997, the Portfolio's Class A shares had a total
return of 9.67%, which was above its Lipper Analytical Services, Inc. ("Lipper")
peer group total return average of 8.84%. (Lipper is a major independent
fund-tracking organization.) Moreover, over the past twelve months, the
Portfolio distributed income dividends totaling $0.86 per Class A share.
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. Our
investment style emphasizes total return. We seek income from the standpoint of
paying dividends to shareholders, but our overriding concern is preserving asset
values in all market conditions. For example, if interest rates are expected to
decline, 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.
In the first four months of the reporting period, we emphasized mortgage-backed
securities in the Portfolio. However, as the year unfolded, U.S. Treasurys
became our primary focus. In addition, in the last six weeks of the calendar
year, approximately 36% of the Portfolio was invested in Treasurys and about 64%
was in mortgage-backed securities.
Market Update and Outlook
In our view, one of the most important events for the market in 1997 was the
widely publicized currency and economic turmoil in Asia, specifically in Korea,
Japan and Indonesia. As these currencies were devalued, the U.S. dollar was
clearly a beneficiary. Other notable events during the year include:
o As a result of the unexpected strength in the U.S. economy, the
Federal Reserve Board ("Fed") raised the federal-funds rate by 25
basis points,
1
<PAGE>
or 0.25%, at its March 1997 meeting. (The federal-funds rate is the
interest rate banks charge each other for overnight loans and is a
closely watched indicator of the direction of interest rates.)
o The not-so-successful introduction of inflation-indexed bonds by the
U.S. Treasury.
o The drastic reduction in the U.S. budget deficit. According to the
latest report by the Congressional Budget Office, the deficit will go
down to $5 billion in fiscal 1998 and may actually run annual
surpluses in 1999 if present policies continue.
o As a result of lower rates, mortgage refinancing has increased.
o The drive toward the European Monetary Union continues to be on target
for 1999.
As you can see from the chart below, interest rates declined during the year.
Yields from U.S. Treasurys:
<TABLE>
<CAPTION>
12/31/97 12/31/96
-------- --------
<S> <C> <C>
2-Year U.S. Treasury Note 5.642% 5.868%
3-Year U.S. Treasury Note 5.669 6.010
5-Year U.S. Treasury Note 5.705 6.206
10-Year U.S. Treasury Bond 5.741 6.418
30-Year U.S. Treasury Bond 5.924 6.641
</TABLE>
Looking ahead to 1998, we anticipate the following events to have an impact on
the bond market:
o The turmoil in Asia may end up being worse than what is being
reported. Therefore, the troubles in Asia will depress U.S. economic
activity even more than current consensus expectations.
o The Fed will probably ease monetary policy and lower rates. In fact,
several Fed Governors have recently shifted to a more "dovish" view
regarding interest rates.
o U.S economic growth should be modestly weaker.
o Interest rates will be lower and the yield on the 30-Year U.S.
Treasury bond should trend toward 5 1/2%.
2
<PAGE>
Moderate economic growth, combined with historically low inflation and the
threat of financial and economic turmoil in Southeast Asia, should provide more
than enough ammunition for rates to go lower. While non-believers would suggest
rates are too low, there is no compelling evidence to warrant a reversal of the
present trend. High real rates, a lesser supply of U.S. Treasurys and a strong
U.S. dollar are just some of the reasons why we remain bullish on bonds.
On a more somber note, we are saddened by the loss of an outstanding physician
and Director of the Portfolio, Dr. Francis P. Martin. His knowledge and wisdom
will be missed.
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
February 20, 1998
3
<PAGE>
<TABLE>
<CAPTION>
====================================================================================
Historical Performance -- Class A Shares
====================================================================================
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
====================================================================================
<S> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------
12/31/87 13.89 12.68 1.31 0.24 2.67
====================================================================================
Total $11.64 $0.53
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
====================================================================================
Historical Performance -- Class B Shares
====================================================================================
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
====================================================================================
<S> <C> <C> <C> <C> <C>
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 $2.66 $0.00
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
====================================================================================
Historical Performance -- Class C Shares
====================================================================================
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
====================================================================================
<S> <C> <C> <C> <C> <C>
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 $4.48 $0.15
====================================================================================
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
====================================================================================
Historical Performance -- Class Y Shares
====================================================================================
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
====================================================================================
<S> <C> <C> <C> <C> <C>
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 $4.61 $0.15
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
====================================================================================
Historical Performance -- Class Z Shares
====================================================================================
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
====================================================================================
<S> <C> <C> <C> <C> <C>
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 $2.98 $0.00
====================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
5
<PAGE>
================================================================================
Average Annual Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
------------------------------------------------
Class A Class B Class C Class Y Class Z
================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 12/31/97 9.67% 9.12% 9.18% 10.00% 9.98%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/97 6.85 N/A 6.28 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 12/31/97 9.06 N/A N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* through 12/31/97 9.58 9.64 6.40 6.91 10.50
================================================================================
<CAPTION>
With Sales Charge(2)
------------------------------------------------
Class A Class B Class C Class Y Class Z
================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 12/31/97 4.77% 4.62% 8.18% 10.00% 9.98%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/97 5.88 N/A 6.28 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 12/31/97 8.56 N/A N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* through 12/31/97 9.20 9.12 6.40 6.91 10.50
================================================================================
</TABLE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
================================================================================
<S> <C>
Class A (12/31/87 through 12/31/97) 138.12%
- --------------------------------------------------------------------------------
Class B (Inception* through 12/31/97) 33.64
- --------------------------------------------------------------------------------
Class C (Inception* through 12/31/97) 37.05
- --------------------------------------------------------------------------------
Class Y (Inception* through 12/31/97) 39.38
- --------------------------------------------------------------------------------
Class Z (Inception* through 12/31/97) 36.98
================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 4.50%; Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed within one
year from initial purchase. This CDSC declines by 0.50% the first year
after purchase and thereafter by 1.00% per year until no CDSC is incurred.
Class C shares reflect the deduction of a 1.00% CDSC, which applies if
shares are redeemed within the first year of purchase.
* Inception dates for Class A, B, C, Y and Z shares are October 9, 1984,
November 7, 1994, December 2, 1992, January 12, 1993 and November 7, 1994,
respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
6
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of the
U.S. Government Securities Fund vs.
Lehman Brothers GNMA Index and Lehman Brothers MBS Index+
- --------------------------------------------------------------------------------
December 1987 -- December 1997
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
U.S. Government Lehman Brothers Lehman Brothers
Securities Fund GNMA Index MBS Index
--------------- ---------- ---------
<S> <C> <C> <C>
12/87 9,599 10,000 10,000
12/88 10,397 10,879 10,871
12/89 11,924 12,586 12,539
12/90 13,063 13,918 13,884
12/91 15,140 16,150 16,067
12/92 16,124 17,347 17,185
12/93 17,102 18,487 18,360
12/94 16,812 18,209 18,065
12/95 19,590 21,313 21,102
12/96 20,367 22,494 22,230
12/97 22,338 24,648 24,340
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares on December
31, 1987, 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 December
31, 1997. The Lehman Brothers GNMA Index is composed of 15-year and 30-year
fixed-rate securities backed by mortgage pools of the Government National
Mortgage Association. The 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 indexes are unmanaged and are 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.
++ It is the opinion of management that the Lehman Brothers MBS Index more
accurately reflects the composition of the U.S. Government Securities Fund
than the Lehman Brothers GNMA Index. In future reporting, the Lehman
Brothers MBS Index will be used as a basis of comparison of total return
performance rather than the Lehman Brothers GNMA Index.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
7
<PAGE>
<TABLE>
<CAPTION>
================================================================================================
Schedule of Investments December 31, 1997
================================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================================
<S> <C>
U.S. TREASURY OBLIGATIONS -- 35.9%
$57,000,000 U.S. Treasury Note, 5.750% due 11/15/00 $ 57,092,930
13,000,000 U.S. Treasury Note, 5.875% due 2/15/04 13,121,810
48,000,000 U.S. Treasury Strips, zero coupon due 11/15/04 32,515,680
51,000,000 U.S. Treasury Strips, zero coupon due 11/15/21 12,170,880
- ------------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost -- $114,278,071) 114,901,300
================================================================================================
U.S. GOVERNMENT AGENCIES -- 64.0%
90,000,000 Federal National Mortgage Association Principal Strips,
zero coupon due 7/5/14 32,473,389
23,750,000 Federal National Mortgage Association Principal Strips,
zero coupon due 10/9/19 6,193,763
17,000,000 Government National Mortgage Association,
7.000% due 8/14/00@ 17,148,750
1,136,694 Government National Mortgage Association Certificates,
10.000% due 7/15/20+ 1,238,996
15,463,461 Government National Mortgage Association Certificates,
8.000% due 7/15/26+ 16,043,341
8,173,541 Government National Mortgage Association Certificates,
9.000% due 7/15/26+ 8,745,690
5,445,000 Government National Mortgage Association Certificates,
7.000% due 12/15/27+ 5,492,644
26,754,874 Government National Mortgage Association Certificates Platinum,
9.000% due 11/15/17 29,037,333
80,711,459 Government National Mortgage Association Certificates Platinum,
9.000% due 12/15/17 87,596,954
902,254 Government National Mortgage Association II Certificates,
10.000% due 1/20/18+ 974,435
- ------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES
(Cost-- $199,778,590) 204,945,295
================================================================================================
REPURCHASE AGREEMENT -- 0.1%
516,000 Goldman, Sachs & Co., 6.350% due 1/2/98; Proceeds
at maturity -- $516,182; (Fully collateralized by
U.S. Treasury Note, 5.625% due 12/31/99;
Market value -- $526,547) (Cost -- $516,000) 516,000
================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $314,572,661*) $320,362,595
================================================================================================
</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.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
8
<PAGE>
================================================================================
Statement of Assets and Liabilities December 31, 1997
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $314,572,661) $320,362,595
Cash 801
Receivable for securities sold 158,491,265
Receivable for Fund shares sold 214,913
Interest receivable 2,044,013
- --------------------------------------------------------------------------------
Total Assets 481,113,587
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 154,299,090
Management fees payable 170,942
Payable for Fund shares purchased 101,052
Distribution fees payable 37,285
Accrued expenses 38,828
- --------------------------------------------------------------------------------
Total Liabilities 154,647,197
- --------------------------------------------------------------------------------
Total Net Assets $326,466,390
================================================================================
NET ASSETS:
Par value of capital shares $ 239,773
Capital paid in excess of par value 320,442,160
Overdistributed net investment income (5,477)
Net unrealized appreciation of investments 5,789,934
- --------------------------------------------------------------------------------
Total Net Assets $326,466,390
- --------------------------------------------------------------------------------
Shares Outstanding:
Class A 19,961,936
-----------------------------------------------------------------------------
Class B 897,819
-----------------------------------------------------------------------------
Class C 1,063,457
-----------------------------------------------------------------------------
Class Y 379,959
-----------------------------------------------------------------------------
Class Z 1,674,139
-----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $13.61
-----------------------------------------------------------------------------
Class B* $13.63
-----------------------------------------------------------------------------
Class C** $13.60
-----------------------------------------------------------------------------
Class Y (and redemption price) $13.64
-----------------------------------------------------------------------------
Class Z (and redemption price) $13.63
-----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $14.25
================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if shares
are redeemed within the first year of purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase (See Note 2).
See Notes to Financial Statements.
9
<PAGE>
================================================================================
Statement of Operations December 31, 1997
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $24,984,542
Less: Interest expense (Note 5) (542,073)
- --------------------------------------------------------------------------------
Total Investment Income 24,442,469
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 1,571,535
Distribution fees (Note 2) 914,915
Shareholder and system servicing fees 141,273
Registration fees 70,000
Shareholder communications 46,200
Audit and legal 16,801
Custody 16,002
Directors' fees 5,000
Other 10,000
- --------------------------------------------------------------------------------
Total Expenses 2,791,726
- --------------------------------------------------------------------------------
Net Investment Income 21,650,743
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FUTURES CONTRACTS
(NOTES 3 AND 7):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 9,509,242
Futures contracts (5,770,736)
- --------------------------------------------------------------------------------
Net Realized Gain 3,738,506
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 159,993
End of year 5,789,934
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 5,629,941
- --------------------------------------------------------------------------------
Net Gain on Investments and Futures Contracts 9,368,447
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $31,019,190
================================================================================
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================
Statements of Changes in Net Assets For the Years Ended December 31,
===========================================================================================
1997 1996
===========================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 21,650,743 $ 25,143,062
Net realized gain 3,738,506 957,180
Increase (decrease) in net unrealized appreciation 5,629,941 (12,000,502)
- -------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 31,019,190 14,099,740
- -------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (21,829,158) (25,585,330)
Net realized gains (111,560) --
- -------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (21,940,718) (25,585,330)
- -------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 17,054,286 12,294,423
Net asset value of shares issued for
reinvestment of dividends 12,732,904 14,678,816
Cost of shares reacquired (77,835,161) (95,176,025)
- -------------------------------------------------------------------------------------------
Decrease in Net Assets
From Fund Share Transactions (48,047,971) (68,202,786)
- -------------------------------------------------------------------------------------------
Decrease in Net Assets (38,969,499) (79,688,376)
NET ASSETS:
Beginning of year 365,435,889 445,124,265
- -------------------------------------------------------------------------------------------
End of year* $ 326,466,390 $ 365,435,889
===========================================================================================
* Includes overdistributed net investment income of: $(5,477) $(1,628)
===========================================================================================
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
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 U.S.
Treasury Securities Fund. The financial statements and financial highlights for
the other portfolios are presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) security transactions are accounted for on trade date; (b) 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.
12
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
2. MANAGEMENT AGREEMENT AND TRANSACTIONS
WITH AFFILIATED PERSONS
Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual
Funds Management Inc., 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. For the year ended December 31, 1997, SB received sales charges
of approximately $105,000 on sales of the Portfolio's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B
shares, which applies if redemption occurs within one year from initial
purchase. This CDSC declines by 0.50% the first year after purchase and
thereafter by 1.00% per year until no CDSC is incurred. Class C shares have a
1.00% CDSC, which applies if redemption occurs within the first year of
purchase. For the year ended December 31, 1997, CDSCs paid to SB were
approximately:
<TABLE>
<CAPTION>
Class B Class C
================================================================================
<S> <C> <C>
CDSCs $29,000 $1,000
================================================================================
</TABLE>
Pursuant to a Distribution Plan, the Portfolio pays a service fee with
respect to its Class A, B and C 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 C shares
calculated at the annual rate of 0.50% and 0.45% of the average daily net assets
for each class, respectively. For the year ended December 31, 1997, total
Distribution Plan fees were as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $720,768 $88,018 $106,129
================================================================================
</TABLE>
All officers and two Directors of the Fund are employees of SB.
13
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
3. INVESTMENTS
During the year ended December 31, 1997, 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 $484,837,865
- --------------------------------------------------------------------------------
Sales 464,946,272
================================================================================
</TABLE>
At December 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $6,331,247
Gross unrealized depreciation (541,313)
- --------------------------------------------------------------------------------
Net unrealized appreciation $5,789,934
================================================================================
</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 year ended December 31, 1997, the maximum and average amounts of
reverse repurchase agreements outstanding were as follows:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Maximum amount outstanding $36,208,125
- --------------------------------------------------------------------------------
Average amount outstanding $17,607,992
================================================================================
</TABLE>
14
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
Interest rates earned on reverse repurchase agreements ranged from 1.10% to
5.45% during the year. For the year ended December 31, 1997, interest expense
from reverse repurchase agreements totalled $542,073 and the Portfolio had no
open reverse repurchase agreements at December 31, 1997.
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 December 31, 1997, the Portfolio held one TBA security with a cost of
$17,042,963.
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 December 31, 1997, the Portfolio had no open futures contracts.
15
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
8. CAPITAL SHARES
At December 31, 1997, 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.
At December 31, 1997, 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 $268,267,184 $11,626,283 $14,720,635 $5,783,393 $20,284,438
=====================================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
------------------------------ -------------------------------
Shares Amount Shares Amount
====================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 622,981 $ 8,299,404 434,053 $ 5,765,143
Shares issued on reinvestment 774,295 10,292,016 913,861 12,031,692
Shares redeemed (4,983,291) (66,329,135) (6,089,171) (80,467,760)
- --------------------------------------------------------------------------------------------------------------------
Net Decrease (3,586,015) $(47,737,715) (4,741,257) $(62,670,925)
====================================================================================================================
Class B
Shares sold 244,954 $ 3,269,526 285,992 $ 3,778,340
Shares issued on reinvestment 35,495 472,688 36,148 476,041
Shares redeemed (228,140) (3,043,767) (293,500) (3,913,310)
- --------------------------------------------------------------------------------------------------------------------
Net Increase 52,309 $ 698,447 28,640 $ 341,071
====================================================================================================================
Class C
Shares sold 76,583 $ 1,020,293 55,061 $ 725,736
Shares issued on reinvestment 39,216 520,622 50,186 660,064
Shares redeemed (355,831) (4,722,947) (388,960) (5,148,015)
- --------------------------------------------------------------------------------------------------------------------
Net Decrease (240,032) $ (3,182,032) (283,713) $ (3,762,215)
====================================================================================================================
Class Y
Shares sold 3,928 $ 53,575 -- --
Shares issued on reinvestment 5,590 74,202 7,206 $ 95,184
Shares redeemed (50,797) (681,381) (99,666) (1,326,266)
- --------------------------------------------------------------------------------------------------------------------
Net Decrease (41,279) $ (553,604) (92,460) $ (1,231,082)
====================================================================================================================
Class Z
Shares sold 329,314 $ 4,411,488 152,496 $ 2,025,204
Shares issued on reinvestment 103,114 1,373,376 107,482 1,415,835
Shares redeemed (229,967) (3,057,931) (326,769) (4,320,674)
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) 202,461 $ 2,726,933 (66,791) $ (879,635)
====================================================================================================================
</TABLE>
16
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares 1997 1996 1995 1994 1993
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.24 $13.59 $12.50 $13.66 $13.87
- ----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.85 0.84 0.92 0.91 0.98
Net realized and unrealized gain (loss) 0.38 (0.33) 1.09 (1.11) (0.10)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.23 0.51 2.01 (0.20) 0.88
- ----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.86) (0.86) (0.92) (0.91) (0.98)
Net realized gains (0.00)# -- -- (0.05)* (0.11)*
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.86) (0.86) (0.92) (0.96) (1.09)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.61 $13.24 $13.59 $12.50 $13.66
Total Return 9.67% 3.97% 16.52% (1.48)% 6.40%
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $271,767 $311,875 $384,534 $358,045 $468,278
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.80% 0.79%** 0.79% 0.76%@ 0.49%
Net investment income 6.37 6.34 6.82 6.83 7.00
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 130% 265% 57% 40% 57%
==================================================================================================================================
<CAPTION>
Class B Shares 1997 1996 1995 1994(1)
==================================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.26 $13.61 $12.51 $12.47
- ----------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.79 0.77 0.80 0.08
Net realized and unrealized gain (loss) 0.38 (0.33) 1.16 0.17
- ----------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.17 0.44 1.96 0.25
- ----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.80) (0.79) (0.86) (0.21)
Net realized gains (0.00)# -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.80) (0.79) (0.86) (0.21)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.63 $13.26 $13.61 $12.51
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return 9.12% 3.44% 16.03% 2.04%++
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $12,238 $11,212 $11,116 $1,529
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.31% 1.28%** 1.28% 1.21%+@
Net investment income 5.85 5.85 6.16 6.94+
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 130% 265% 57% 40%
==================================================================================================================================
</TABLE>
(1) 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.
17
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares 1997 1996 1995 1994(1) 1993
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.23 $13.58 $12.50 $13.66 $13.86
- --------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.77 0.78 0.86 0.82 0.89
Net realized and unrealized gain (loss) 0.40 (0.33) 1.09 (1.11) (0.10)
- --------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.17 0.45 1.95 (0.29) 0.79
- --------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.80) (0.80) (0.87) (0.83) (0.88)
Net realized gains (0.00)# -- -- (0.04)* (0.11)*
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.80) (0.80) (0.87) (0.87) (0.99)
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.60 $13.23 $13.58 $12.50 $13.66
- --------------------------------------------------------------------------------------------------------------------------------
Total Return 9.18% 3.49% 15.93% (2.11)% 5.74%
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $14,464 $17,249 $21,559 $21,253 $19,938
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.27% 1.26%** 1.25% 1.21% 1.21%
Net investment income 5.91 5.87 6.36 6.27 6.23
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 130% 265% 57% 40% 57%
================================================================================================================================
<CAPTION>
Class Y Shares 1997 1996 1995 1994(2) 1993(3)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.27 $13.61 $12.51 $13.67 $13.97
- --------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.88 0.88 1.00 0.89 0.86
Net realized and unrealized gain (loss) 0.39 (0.33) 1.06 (1.10) (0.10)
- --------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.27 0.55 2.06 (0.21) 0.76
- --------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.90) (0.89) (0.96) (0.91) (0.95)
Net realized gains (0.00)# -- -- (0.04)* (0.11)*
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.90) (0.89) (0.96) (0.95) (1.06)
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.64 $13.27 $13.61 $12.51 $13.67
- --------------------------------------------------------------------------------------------------------------------------------
Total Return 10.00% 4.30% 16.88% (1.53)% 5.55%++
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $5,182 $5,589 $6,992 $13,903 $14,118
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.51% 0.50%** 0.49% 0.61% 0.69%+
Net investment income 6.65 6.64 7.22 6.82 7.29+
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 130% 265% 57% 40% 57%
================================================================================================================================
</TABLE>
(1) On November 7, 1994, the former Class B shares were renamed Class C shares.
(2) On November 7, 1994, the former Class C shares were renamed Class Y shares.
(3) 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.
18
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class Z Shares 1997 1996 1995 1994(1)
======================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.26 $13.60 $12.50 $12.47
- ----------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.89 0.88 0.94 0.14
Net realized and unrealized gain (loss) 0.38 (0.33) 1.11 0.13
- ----------------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.27 0.55 2.05 0.27
- ----------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.90) (0.89) (0.95) (0.24)
Net realized gains (0.00)# -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions (0.90) (0.89) (0.95) (0.24)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.63 $13.26 $13.60 $12.50
- ----------------------------------------------------------------------------------------------------------------------
Total Return 9.98% 4.31% 16.89% 2.15%++
- ----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $22,815 $19,511 $20,923 $18,580
- ----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.51% 0.49% 0.50% 0.34%+
Net investment income 6.64 6.64 7.12 7.55+
- ----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 130% 265% 57% 40%
======================================================================================================================
</TABLE>
(1) 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.
================================================================================
Tax Information (unaudited)
================================================================================
A total of 27.74% of the ordinary income dividends paid by the Portfolio
have been derived from federal obligations and may be exempt from taxation at
the state level.
19
<PAGE>
================================================================================
Independent Auditors' Report
================================================================================
The Shareholders and Board of Directors of
Smith Barney Funds, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the U.S. Government Securities
Portfolio of Smith Barney Funds, Inc. as of December 31, 1997, the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian. As to securities
purchased or sold but not yet received or delivered, we performed other
appropriate auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
U.S. Government Securities Portfolio of Smith Barney Funds, Inc. as of December
31, 1997, the results of its operations for the year then ended, the changes in
its net assets for each of the years in the two-year period then ended and the
financial highlights for each of the years in the five-year period then ended,
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 10, 1998
20
<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.
Bruce D. Sargent
John P. Toolan Custodian
PNC Bank, N.A.
Joseph H. Fleiss, Emeritus
C. Richard Youngdahl, Emeritus Shareholder
Servicing Agent
Officers First Data Investor Services Group, Inc.
Heath B. McLendon P.O. Box 9134
President and Boston, MA 02205-9134
Chief Executive Officer
Lewis E. Daidone
Senior Vice President This report is submitted for the general
and Treasurer information of the shareholders of
Smith Barney Funds, Inc. -- U.S.
James E. Conroy Government Securities Fund. It is not
Vice President authorized for distribution to prospective
investors unless accompanied or
Bruce D. Sargent preceded by a current Prospectus for the
Vice President Portfolio, which contains information
concerning the Portfolio's investment
Thomas M. Reynolds policies and expenses as well as other
Controller pertinent information.
Christina T. Sydor
Secretary
Smith Barney Funds, Inc.
388 Greenwich Street
New York, New York 10013
www.smithbarney.com
FD01086 2/98
<PAGE>
================================================================================
ANNUAL REPORT
================================================================================
1997
1997
1997
1997
1997
Smith Barney
Funds, Inc.
Short-Term U.S.
Treasury Securities
Fund
----------------------------------------------
December 31, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
- --------------------------------------------------------------------------------
<PAGE>
========================================
Short-Term U.S. Treasury Securities Fund
========================================
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Funds, Inc. --
Short-Term U.S. Treasury Securities Fund ("Portfolio") for the year ended
December 31, 1997. 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.
Performance Update
For the year ended December 31, 1997, the Portfolio's Class A shares had a total
return of 6.73%, which was above its Lipper Analytical Services, Inc. ("Lipper")
peer group total return average of 6.30%. (Lipper is a major independent
fund-tracking organization.) Moreover, over the past twelve months, the
Portfolio's Class A shares distributed income dividends totaling $0.22 per
share.
Investment Strategy
The Portfolio seeks current income, preservation of capital and liquidity. We
seek income from the standpoint of paying dividends to shareholders, but our
overriding concern is preserving asset values in all market conditions. For
example, if interest rates are expected to 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 a lower interest-rate environment.
Market Update and Outlook
In our view, one of the most important events for the market in 1997 was the
widely publicized currency and economic turmoil in Asia, specifically in Korea,
Japan and Indonesia. As these currencies were devalued, the U.S. dollar was
clearly a beneficiary. Other notable events during the reporting period include:
o As a result of the unexpected strength in the U.S. economy, the
Federal Reserve Board ("Fed") raised the federal-funds rate by 25
basis points, or 0.25%, at its March 1997 meeting. (The federal-funds
rate is the interest rate banks charge each other for overnight loans
and is a closely watched indicator of the direction of interest
rates.)
o The not-so-successful introduction of inflation-indexed bonds by the
U.S. Treasury.
1
<PAGE>
o The drastic reduction in the U.S. budget deficit. According to the
latest report by the Congressional Budget Office, the deficit will go
down to $5 billion in fiscal 1998 and may actually run annual
surpluses in 2001 if present policies continue.
o As a result of lower rates, mortgage refinancing has increased.
o The drive toward the European Monetary Union continues to be on target
for 1999.
As you can see from the chart below, interest rates declined during the year.
Yields from U.S. Treasurys:
<TABLE>
<CAPTION>
12/31/97 12/31/96
-------- --------
<S> <C> <C>
2-Year U.S. Treasury Note 5.642% 5.868%
3-Year U.S. Treasury Note 5.669 6.010
5-Year U.S. Treasury Note 5.705 6.206
10-Year U.S. Treasury Bond 5.741 6.418
30-Year U.S. Treasury Bond 5.924 6.641
</TABLE>
Looking ahead to 1998, we anticipate the following events to have an impact on
the bond market:
o The turmoil in Asia may end up worse than what is being reported.
Therefore, the troubles in Asia will depress U.S. economic activity
even more than current consensus expectations.
o The Fed will probably ease monetary policy and lower rates. In fact,
several Fed Governors have recently shifted to a more "dovish" view
regarding interest rates.
o Interest rates will be lower and the yield on the 30-Year U.S.
Treasury bond should trend toward 5 1/2%.
Moderate economic growth, combined with historically low inflation and the
threat of financial and economic turmoil in Southeast Asia, should provide more
than enough ammunition for rates to go lower. While non-believers would suggest
rates are too low, there is no compelling evidence to warrant a reversal of the
present trend. High real rates, a lesser supply of U.S. Treasurys and a strong
dollar are just some of the reasons why we remain bullish on bonds.
On a more somber note, we are saddened by the loss of an outstanding physician
and Director of the Portfolio, Dr. Francis P. Martin. His knowledge and wisdom
will be missed.
2
<PAGE>
In closing, thank you for investing in the Smith Barney Funds, Inc. --
Short-Term U.S. Treasury 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
February 20, 1998
3
<PAGE>
================================================================================
Historical Performance -- Class A Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns
================================================================================
<S> <C> <C> <C> <C> <C>
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 $1.25 $0.04
================================================================================
</TABLE>
================================================================================
Historical Performance -- Class Y Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns
================================================================================
<S> <C> <C> <C> <C> <C>
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 $0.46 $0.00
================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
================================================================================
Average Annual Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge
-------------------------
Class A Class Y
================================================================================
<S> <C> <C>
Year Ended 12/31/97 6.73% 7.20%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/97 5.20 N/A
- --------------------------------------------------------------------------------
Inception* through 12/31/97 5.67 4.87
================================================================================
</TABLE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge
================================================================================
<S> <C>
Class A (Inception* through 12/31/97) 40.34%
- --------------------------------------------------------------------------------
Class Y (Inception* through 12/31/97) 9.44
================================================================================
</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.
4
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of
the Short-Term U.S. Treasury Securities Fund vs.
Salomon Smith Barney 3-Year Treasury Index and
Lehman Brothers 1-3 Years Treasury Index+
- --------------------------------------------------------------------------------
November 1991 -- December 1997
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Short-Term Salomon Smith Barney Lehman Brothers 1-3
U.S. Treasury 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
</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 December 31, 1997. 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 classes 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 classes.
++ It is the opinion of management that the Lehman Brothers 1-3 Years Treasury
Index more accurately reflects the composition of the Short-Term U.S.
Treasury Securities 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.
5
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
Schedule of Investments December 31, 1997
========================================================================================
FACE
AMOUNT SECURITY VALUE
========================================================================================
<S> <C>
U.S. GOVERNMENT OBLIGATIONS -- 99.2%
$5,300,000 U.S. Treasury Note, 5.125% due 11/30/98 $ 5,278,535
10,300,000 U.S. Treasury Note, 6.500% due 4/30/99 10,414,536
11,000,000 U.S. Treasury Note, 6.250% due 5/31/99 11,090,750
19,600,000 U.S. Treasury Note, 6.750% due 5/31/99 19,893,020
21,500,000 U.S. Treasury Note, 6.000% due 8/15/00 21,663,400
18,500,000 U.S. Treasury Note, 5.875% due 11/30/01 18,578,625
12,300,000 U.S. Treasury Note, 5.875% due 9/30/02 12,371,832
- ----------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost-- $98,544,380) 99,290,698
========================================================================================
REPURCHASE AGREEMENT -- 0.8%
797,000 Goldman, Sachs & Co., 6.348% due 1/2/98;
Proceeds at maturity -- $797,281; (Fully collateralized
by U.S. Treasury Note, 5.625% due 12/31/99;
Market value -- $813,291) (Cost -- $797,000) 797,000
========================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $99,341,380*) $100,087,698
========================================================================================
</TABLE>
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
6
<PAGE>
================================================================================
Statement of Assets and Liabilities December 31, 1997
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $99,341,380) $100,087,698
Cash 725
Interest receivable 1,098,872
Receivable for Fund shares sold 198,073
Other assets 39,741
- --------------------------------------------------------------------------------
Total Assets 101,425,109
- --------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 107,076
Payable for Fund shares purchased 92,883
Management fees payable 39,352
Distribution fees payable 8,484
Accrued expenses 30,474
- --------------------------------------------------------------------------------
Total Liabilities 278,269
- --------------------------------------------------------------------------------
Total Net Assets $101,146,840
================================================================================
NET ASSETS:
Par value of capital shares $ 247,046
Capital paid in excess of par value 107,055,542
Accumulated net realized loss on security transactions (6,902,066)
Net unrealized appreciation of investments 746,318
- --------------------------------------------------------------------------------
Total Net Assets $101,146,840
================================================================================
Shares Outstanding:
Class A 17,428,313
------------------------------------------------------------------------------
Class Y 7,276,295
------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $4.09
------------------------------------------------------------------------------
Class Y (and redemption price) $4.09
------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
================================================================================
Statement of Operations For the Year Ended December 31, 1997
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 7,769,414
Less: Interest expense (Note 5) (10,326)
- --------------------------------------------------------------------------------
Total Investment Income 7,759,088
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 538,831
Distribution fees (Note 2) 272,848
Shareholder and system servicing fees 59,316
Shareholder communications 28,833
Audit and legal 25,997
Registration fees 17,644
Custody 4,798
Directors' fees 3,111
Other 1,204
- --------------------------------------------------------------------------------
Total Expenses 952,582
- --------------------------------------------------------------------------------
Net Investment Income 6,806,506
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 179,923,247
Cost of securities sold 177,781,968
- --------------------------------------------------------------------------------
Net Realized Gain 2,141,279
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
of Investments:
Beginning of year 1,420,421
End of year 746,318
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (674,103)
- --------------------------------------------------------------------------------
Net Gain on Investments 1,467,176
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 8,273,682
================================================================================
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
================================================================================
Statements of Changes in Net Assets For the Years Ended December 31,
================================================================================
<TABLE>
<CAPTION>
1997 1996
================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 6,806,506 $ 6,043,370
Net realized gain (loss) 2,141,279 (970,497)
Decrease in net unrealized appreciation (674,103) (2,503,346)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 8,273,682 2,569,527
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (6,806,506) (6,043,370)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (6,806,506) (6,043,370)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 52,065,590 44,968,002
Net asset value of shares issued for
reinvestment of dividends 3,694,867 4,448,261
Cost of shares reacquired (71,518,650) (37,603,657)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions (15,758,193) 11,812,606
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (14,291,017) 8,338,763
NET ASSETS:
Beginning of year 115,437,857 107,099,094
- --------------------------------------------------------------------------------
End of year $ 101,146,840 $ 115,437,857
================================================================================
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
The Short-Term U.S. Treasury Securities Fund ("Portfolio"), formerly known
as Short-Term U.S. Treasury Securities Portfolio, 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. The financial statements and financial
highlights for the other portfolios are presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) security transactions are accounted for on trade date; (b) 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"), formerly known as Smith Barney Mutual
Funds Management Inc., 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.
10
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
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 0.10% and 0.25% of its average daily net assets,
respectively. For the year ended December 31, 1997, total Distribution Plan fees
incurred was $272,848.
All officers and two Directors of the Fund are employees of SB.
3. INVESTMENTS
During the year ended December 31, 1997, 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 $165,220,875
- --------------------------------------------------------------------------------
Sales 179,923,247
================================================================================
</TABLE>
At December 31, 1997, aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $746,896
Gross unrealized depreciation (578)
- --------------------------------------------------------------------------------
Net unrealized appreciation $746,318
================================================================================
</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
11
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
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 year ended December 31, 1997 the Portfolio had entered into one
reverse repurchase agreement. The total market value of the reverse repurchase
agreement was $10,793,750 and had an interest rate of 4.92% which incurred
interest expense of $10,326.
At December 31, 1997, the Portfolio had no open reverse repurchase
agreements.
6. CAPITAL SHARES
At December 31, 1997, 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 December 31, 1997, total paid-in-capital amounted to the following for
each class:
<TABLE>
<CAPTION>
Class A Class Y
================================================================================
<S> <C> <C>
Total Paid-in Capital $78,306,127 $28,996,461
================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
---------------------------- --------------------------
Shares Amount Shares Amount
============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 6,333,523 $ 25,620,854 3,206,711 $ 13,018,952
Shares issued on reinvestment 914,485 3,694,867 1,099,875 4,448,261
Shares redeemed (10,417,386) (42,121,325) (9,277,889) (37,603,657)
- --------------------------------------------------------------------------------------------
Net Decrease (3,169,378) $(12,805,604) (4,971,303) $(20,136,444)
============================================================================================
Class Y
Shares sold 6,558,594 $ 26,444,736 7,937,830 $ 31,949,050
Shares redeemed (7,220,129) (29,397,325) -- --
- --------------------------------------------------------------------------------------------
Net Increase (Decrease) (661,535) $ (2,952,589) 7,937,830 $ 31,949,050
============================================================================================
</TABLE>
12
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
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>
13
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares 1997 1996 1995 1994 1993
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $4.05 $4.19 $3.91 $4.16 $4.12
- -----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.22 0.23 0.22 0.18 0.18
Net realized and unrealized gain (loss) 0.04 (0.14) 0.28 (0.25) 0.06
- -----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.26 0.09 0.50 (0.07) 0.24
- -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.22) (0.23) (0.22) (0.18) (0.18)
Net realized gains -- -- -- -- (0.02)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.22) (0.23) (0.22) (0.18) (0.20)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $4.09 $4.05 $4.19 $3.91 $4.16
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return 6.73% 2.17% 13.16% (2.15)% 6.01%
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $71,361 $83,324 $107,099 $88,707 $205,758
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.95% 0.98% 0.98% 0.91% 0.88%
Net investment income 5.53 5.62 5.29 4.54 4.40
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 145% 130% 29% 25% 41%
===================================================================================================================================
<CAPTION>
Class Y Shares 1997 1996(1)
===================================================================================================================================
<S> <C> <C>
Net Asset Value, Beginning of Year $4.05 $4.19
- -----------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.24 0.22
Net realized and unrealized gain (loss) 0.04 (0.14)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.28 0.08
- -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.24) (0.22)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.24) (0.22)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $4.09 $4.05
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return 7.20% 2.08%++
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $29,786 $32,114
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.50% 0.58%+
Net investment income 6.00 5.99+
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 145% 130%
===================================================================================================================================
</TABLE>
(1) 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
<PAGE>
================================================================================
Independent Auditors' Report
================================================================================
The Shareholders and Board of Directors of
Smith Barney Funds, Inc.:
We have audited the accompanying statements of assets and liabilities,
including the schedule of investments, of Short-Term U.S. Treasury Securities
Portfolio of Smith Barney Funds, Inc. as of December 31, 1997, the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended and financial
highlights for each of the years in the five-year period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Short-Term U.S. Treasury Securities Portfolio of Smith Barney Funds, Inc. as of
December 31, 1997, the results of its operations for the year then ended, the
changes in its net assets for each of the years in the two-year period then
ended and financial highlights for each of the years in the five-year period
then ended, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 10, 1998
15
<PAGE>
================================================================================
Tax Information (unaudited)
================================================================================
A total of 97.89% of the ordinary income dividends paid by the Portfolio
have been derived from federal obligations and may be exempt from taxation at
the state level.
16
<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.
Bruce D. Sargent
John P. Toolan Custodian
PNC Bank, N.A.
Joseph H. Fleiss, Emeritus
C. Richard Youngdahl, Emeritus Shareholder
Servicing Agent
Officers First Data Investor Services Group, Inc.
Heath B. McLendon P.O. Box 9134
President and Boston, MA 02205-9134
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer This report is submitted for the
general information of the shareholders
James E. Conroy of Smith Barney Funds, Inc. --
Vice President Short-Term U.S. Treasury Securities
Fund. It is not authorized for
Bruce D. Sargent distribution to prospective investors
Vice President unless accompanied or preceded by a
current Prospectus for the Portfolio,
Thomas M. Reynolds which contains information concerning
Controller the Portfolio's investment policies and
expenses as well as other pertinent
Christina T. Sydor information.
Secretary
Smith Barney Funds, Inc.
388 Greenwich Street
New York, New York 10013
www.smithbarney.com
FD0854 2/98
<PAGE>
- ---------
1967-1997
- ---------
30th
Anniversary
================================================================================
[GRAPHIC]
Smith Barney Funds, Inc.
Large Cap
Value Fund
[GRAPHIC]
ANNUAL REPORT
December 31, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(SM)
================================================================================
<PAGE>
Smith Barney Funds, Inc.
Large Cap Value Fund
================================================================================
================================================================================
The Large Cap Value Fund ("Fund"), formerly known as the Equity Income
Portfolio, seeks current income and long-term growth of income and capital
primarily through investments in common stocks.
Smith Barney Funds, Inc.
Large Cap Value Fund's
Average Annual Total Returns Ended
December 31, 1997
<TABLE>
<CAPTION>
Without Sales Charges*
-------------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
One-Year 27.86% 26.83% 26.85%
- --------------------------------------------------------------------------------
Five-Year 17.07 N/A 16.18
- --------------------------------------------------------------------------------
Ten-Year 14.80 N/A N/A
- --------------------------------------------------------------------------------
Since Inception+ 11.72 22.70 16.02
================================================================================
<CAPTION>
With Sales Charges**
-------------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
One-Year 21.45% 21.83% 25.85%
- --------------------------------------------------------------------------------
Five-Year 15.87 N/A 16.18
- --------------------------------------------------------------------------------
Ten-Year 14.22 N/A N/A
- --------------------------------------------------------------------------------
Since Inception+ 11.53 22.29 16.02
================================================================================
</TABLE>
* Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
** Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00% and Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from purchase. Thereafter, the CDSC declines by 1.00% per year until
no CDSC is incurred. Class C shares reflect the deduction of a 1.00% CDSC
which applies if shares are redeemed within the first year of purchase.
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.
+ Inception dates for Class A, B and C shares are May 18, 1967, November 7,
1994 and December 2, 1992, respectively.
================================================================================
A PROUD HISTORY...
================================================================================
This year we proudly celebrate the 30th anniversary of the Large Cap Value Fund.
Since it began in May 1967, the Fund has delivered consistently competitive
returns through two wars, seven administrations and a number of market downturns
as well as the current historic bull market.
================================================================================
NASDAQ SYMBOL
================================================================================
Class A SBCIX
Class B SBCCX
Class C SBGCX
================================================================================
WHAT'S INSIDE
================================================================================
<TABLE>
<S> <C>
Shareholder Letter ........................................................ 1
Historical Performance .................................................... 4
Schedule of Investments ................................................... 8
Statement of Assets and Liabilities ....................................... 11
Statement of Operations ................................................... 12
Statements of Changes in Net Assets ....................................... 13
Notes to Financial Statements ............................................. 14
Financial Highlights ...................................................... 18
Independent Auditors' Report .............................................. 23
Tax Information ........................................................... 24
</TABLE>
<PAGE>
================================================================================
Shareholder Letter
================================================================================
[PHOTO] [PHOTO]
HEATH B. BRUCE D.
MCLENDON SARGENT, CFA
Chairman Vice President
Dear Shareholder:
It is with pleasure that we provide the annual report for the Smith Barney
Funds, Inc. -- Large Cap Value Fund ("Fund"), formerly known as the Equity
Income Portfolio, for the year ended December 31, 1997. 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.
As you can see, your Fund's name was changed from the Equity Income Portfolio to
the Large Cap Value Fund. However, the Fund's investment style has remained
unchanged and the portfolio managers will continue to follow a highly
disciplined bottom-up approach to investing. In selecting stocks for the Fund,
the managers will search for undervalued stocks of established well-recognized,
yet temporarily out-of-favor companies or ones that offer potential
opportunities yet unrecognized by the broader marketplace. Typically, these are
companies that may have performed poorly in the past, yet, in the view of the
managers, are poised to turn around because of a new management team, new
product or new business strategy. In addition, the managers will look at the
dividend level and the company's ability to increase their dividends over time.
Celebrating 30 Years of Solid Performance
We are proud to celebrate the 30th anniversary of the Large Cap Value Fund.
Since it began in May 1967, the Fund has delivered consistently competitive
returns through two wars, seven administrations and a number of market downturns
as well as the current historic bull market. Over the years, the Fund has grown
to serve approximately 36,000 shareholders and now has more than $1 billion in
assets under management as of December 31, 1997.
Portfolio Performance and Investment Strategy
For the year ended December 31, 1997, the Fund generated a total return of
27.86%, 26.83% and 26.85% for its Class A, B and C shares without sales charges,
respectively. In comparison, the Lipper Analytical Services, Inc. peer group
average was 27.44% for the same period. (Lipper is an independent fund-tracking
organization.)
Since its inception, the Fund has maintained a consistent investment strategy.
The Fund seeks to provide shareholders with current income and long-term growth
of capital by investing primarily in large-capitalization companies that tend to
be familiar household names. Our approach involves visiting hundreds of
companies each year and meeting regularly with management to understand a
company's business and industry, identifying outstanding management teams and
targeting promising long-term investment opportunities.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 1
<PAGE>
We strive to minimize risk in the Fund in a number of ways. As of December 31,
1997, the Fund owned 61 securities and no single security made up more than 5%
in the Fund. In addition to this broad diversification, the Fund's holdings tend
to be highly liquid and the dividends they generate help to cushion the Fund
from the effects of volatile markets. In fact, a principal aspect of our
management strategy is that every stock we own must provide a dividend that is
greater than or equal to the average for the Standard & Poor's 500 Stock Index
("S&P 500"), an index composed of widely held common stocks.
Market Update and Outlook
During 1997 the stock market continued the impressive returns of the past few
years. The S&P 500 has never before reported three consecutive years of 20%+
growth. The reasons behind these returns center on a specific confluence of
events that have occurred over recent years. Company earnings have been very
robust, and returns on assets and capital have been enhanced by an increased
emphasis on cost cutting and efficient use of capital. Simultaneously, interest
rates have declined over the past two years. As governments restrained public
spending worldwide and competitive forces placed a lid on price increases, the
yield on bonds fell in the major markets. The combination of these events made
stocks more attractive.
Looking ahead at 1998, we believe the main risk to the stock market is the
potential reduction in corporate earnings. With worldwide price inflation low,
especially given the recent events in Southeast Asia, the margin for error is
small. The restructurings that many domestic companies have undergone since the
beginning of the decade have kept costs under control and will be important
going forward as margins come under more pressure.
Our investment emphasis on dividend-paying companies should help cushion
disappointments. With stock price performance expected to return to more
historical levels, the dividend component will become a more critical part of
the total return. However, the U.S. economy continues to report low inflation,
moderate growth and productivity increases. We think these factors bode well for
stocks over the medium to longer term.
Fund's Portfolio Update
During the reporting period, we invested in Dow Jones & Company Inc., a
multi-national media company specializing in business news. Early in the year,
Dow Jones announced its intention to invest roughly $650 million in Dow Jones
Markets Service (formerly Telerate). Many investment professionals thought the
better course of action would be to sell off this chronically underperforming
division. Yet, we believe the asset value of Dow Jones alone made it a good
value despite the drag of Dow Jones Markets Service. If there's a positive
catalyst in the coming year, we expect the upside potential to Dow Jones to be
significant.
Our pharmaceutical holdings helped the Fund's performance during the period
under review. Drug companies such as Bristol-Meyers Squibb Co. and Eli Lilly &
Co., which were earlier undervalued by the marketplace, came out with exciting
new products and investors began to view these stocks much more favorably. In
addition, the Fund also benefited from its holdings in financial services
companies and electric utilities.
However, the Fund's performance was negatively impacted by its cyclical stock
holdings even though their valuations appeared to be inexpensive when we first
identified them. A slowdown in domestic economic growth and the turmoil in Asia
had an
- --------------------------------------------------------------------------------
2 Special 30th Anniversary -- 1997 Annual Report to Shareholders
<PAGE>
adverse affect on the earnings of most cyclicals. Another disappointment for the
Fund during the reporting period was Eastman Kodak. The company became
aggressive and competitor Fuji responded in kind. In our view, Eastman Kodak
painted themselves into a corner when its competitive strategy backfired and the
company was forced to cut prices.
In closing, thank you for your investment in the Smith Barney Funds, Inc. --
Large Cap Value Fund. We at Smith Barney look forward to continuing to help you
pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Bruce Sargent
Heath B. McLendon Bruce Sargent, CFA
Chairman Vice President
February 20, 1998
================================================================================
Top Ten Holdings* As of December 31, 1997
================================================================================
<TABLE>
<S> <C>
1. Bristol-Myers Squibb Co. 3.7%
- --------------------------------------------------------------------------------
2. Unilever, N.V 3.4
- --------------------------------------------------------------------------------
3. Sprint Corp. 3.2
- --------------------------------------------------------------------------------
4. Chubb Corp. 3.0
- --------------------------------------------------------------------------------
5. Xerox Corp. 2.9
- --------------------------------------------------------------------------------
6. American Home Products Corp. 2.8
- --------------------------------------------------------------------------------
7. Eli Lilly & Co. 2.7
- --------------------------------------------------------------------------------
8. Mobil Corp. 2.7
- --------------------------------------------------------------------------------
9. Baxter International, Inc. 2.6
- --------------------------------------------------------------------------------
10. General Electric Co. 2.5
- --------------------------------------------------------------------------------
</TABLE>
* As a percentage of total common stocks.
- --------------------------------------------------------------------------------
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
Year Ended of Year of Year Dividends Distributions Returns(1)
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
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 $5.19 $6.52
===========================================================================================================================
<CAPTION>
===========================================================================================================================
Historical Performance -- Class B Shares
===========================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
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 $0.77 $4.61
===========================================================================================================================
<CAPTION>
===========================================================================================================================
Historical Performance -- Class C Shares
==========================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
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 $1.45 $5.74
===========================================================================================================================
===========================================================================================================================
Historical Performance -- Class Y Shares
===========================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
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 $0.76 $3.29
===========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
4 Special 30th Anniversary -- 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
Historical Performance -- Class Z Shares
===========================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
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 $1.30 $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 C Class Y Class Z
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 12/31/97 27.86% 26.83% 26.85% 28.21% 28.27%
- ---------------------------------------------------------------------------------------------------------------------------
Five Years Ended 12/31/97 17.07 N/A 16.18 N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 12/31/97 14.80 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Inception* through 12/31/97 11.72 22.70 16.02 21.48 24.18
===========================================================================================================================
<CAPTION>
With Sales Charge(2)
-----------------------------------------------------------------------------
Class A Class B Class C Class Y Class Z
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 12/31/97 21.45% 21.83% 25.85% 28.21% 28.27%
- ---------------------------------------------------------------------------------------------------------------------------
Five Years Ended 12/31/97 15.87 N/A 16.18 N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 12/31/97 14.22 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Inception* through 12/31/97 11.53 22.29 16.02 21.48 24.18
===========================================================================================================================
</TABLE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
===============================================================================
<S> <C>
Class A (12/31/87 through 12/31/97) 297.73%
- -------------------------------------------------------------------------------
Class A (Inception* through 12/31/97) 2,881.22
- -------------------------------------------------------------------------------
Class B (Inception* through 12/31/97) 90.53
- -------------------------------------------------------------------------------
Class C (Inception* through 12/31/97) 112.84
- -------------------------------------------------------------------------------
Class Y (Inception* through 12/31/97) 44.70
- -------------------------------------------------------------------------------
Class Z (Inception* through 12/31/97) 97.85
===============================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the contingent
deferred sales charges ("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00% and Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from purchase. Thereafter the CDSC declines by 1.00% per year until no
CDSC is incurred. Class C shares reflect the deduction of a 1.00% CDSC,
which applies if shares are redeemed within the first year of purchase.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception dates for Class A, B, C, Y and Z shares are May 18, 1967,
November 7, 1994, December 2, 1992, February 6, 1996 and November 7, 1994,
respectively.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 5
<PAGE>
Smith Barney Funds, Inc.
Large Cap Value Fund
Growth of $10,000 invested in Class A Shares
of the Smith Barney Funds, Inc. -- Large Cap Value Fund
vs. the Standard & Poor's 500 Stock Index*
(unaudited)
May 18, 1967 -- December 31, 1997
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Smith Barney Funds, Inc. S&P 500
Date Large Cap Value Fund Index
- ---- -------------------- -------
<S> <C> <C> <C>
5/18/67 9,427 10,000
12/31/67 9,670 11,031
12/31/68 Assassination of Martin Luther King, Jr. 11,945 12,252
12/31/69 United States puts the first man on the moon 10,636 11,218
12/31/70 War in Cambodia escalates 10,887 11,661
12/31/71 Freeze on wages and prices 12,073 13,329
NASDAQ introduced
[ARROW] SMITH BARNEY
------------
February 1972 --
An affiliate of Smith Barney
assumes management of
Large Cap Value Fund
12/31/72 Watergate break-in 12,652 15,861
Nixon visits China
12/31/73 OPEC oil embargo 10,134 13,531
12/31/74 Nixon resigns as President 8,357 9,949
12/31/75 U.S. involvement in Vietnam ends 11,282 13,654
12/31/76 Bicentennial celebration 15,461 16,921
12/31/77 U.S. energy crisis 15,709 15,709
12/31/78 Genocide in Cambodia 15,997 16,743
Camp David accords
12/31/79 Three Mile island disaster 19,370 19,857
Iran hostage crisis begins
12/31/80 Reagan elected President in landslide 25,639 26,311
12/31/81 Assassination attempts on Reagan and Pope 28,703 25,016
First space shuttle launch
</TABLE>
* 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 December 31, 1997. The Standard & Poor's 500 Stock
Index ("S&P 500") is an index composed of widely held common stocks listed
on the New York Stock Exchange, American Stock Exchange and the Nasdaq
Stock 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, depending on whether greater or lesser sales charges and fees
were incurred by shareholders investing in other classes. All figures
represent past performance and are not a guarantee of future results.
Investment returns and principal value will fluctuate, and redemption value
may be more or less than the original cost. No adjustment has been made for
shareholder tax liability on dividends or capital gains.
- --------------------------------------------------------------------------------
6 Special 30th Anniversary -- 1997 Annual Report to Shareholders
<PAGE>
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>
Smith Barney Funds, Inc. S&P 500
Date Large Cap Value Fund Index
- ---- -------------------- -------
<S> <C> <C> <C>
12/31/82 Worst U.S. recession in 40 years 36,575 30,407
12/31/83 Beirut bombing 42,934 37,267
12/31/84 Iran/Iraq conflict 47,195 39,604
12/31/85 U.S. becomes debtor nation 60,077 52,170
Gramm-Rudman Act
12/31/86 Tax reform 72,719 61,905
Bombing of Libya
12/31/87 Market correction 70,663 65,156
12/31/88 RJR Nabisco buyout 83,150 75,945
12/31/89 Collapse of high-yield bond market 104,029 99,967
Beruit Wall falls
12/31/90 Iraq invasion of Kuwait 94,188 96,858
12/31/91 U.S. recession 119,208 126,303
12/31/92 Riots in Los Angeles 127,818 135,914
12/31/93 World Trade Center terrorist bombing 148,760 149,587
Passage of NAFTA
12/31/94 Orange County bankruptcy 142,341 151,547
12/31/95 Dow rises above 4000, then 5000 189,386 208,422
12/31/96 Dow rises above 6500 219,811 256,255
12/31/97 Dow rises above 7000 281,046 341,741
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 7
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Schedule of Investments December 31, 1997
===================================================================================================================================
SHARES SECURITY VALUE
===================================================================================================================================
<S> <C> <C> <C>
COMMON STOCK -- 93.5%
Aerospace -- 0.0%
9,565 Raytheon Co., Class A Shares $ 471,699
- -----------------------------------------------------------------------------------------------------------------------------------
Automotive -- 2.0%
250,000 Ford Motor Corp. 12,171,875
150,000 General Motors 9,093,750
- -----------------------------------------------------------------------------------------------------------------------------------
21,265,625
- -----------------------------------------------------------------------------------------------------------------------------------
Capital Goods -- 6.0%
400,000 Emerson Electric Co. 22,575,000
350,000 General Electric Co. 25,681,250
350,000 National Services Industries, Inc. 17,346,875
- -----------------------------------------------------------------------------------------------------------------------------------
65,603,125
- -----------------------------------------------------------------------------------------------------------------------------------
Chemicals -- 2.1%
350,000 Imperial Chemical Industries ADR+ 22,728,125
- -----------------------------------------------------------------------------------------------------------------------------------
Conglomerates -- 1.9%
200,000 Pitney Bowes Inc. 17,987,500
100,000 Seagram Co., Ltd. 3,231,250
- -----------------------------------------------------------------------------------------------------------------------------------
21,218,750
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer Cyclicals -- 2.9%
100,000 McGraw Hill Cos., Inc. 7,400,000
500,000 Stanley Works, Inc. 23,593,750
- -----------------------------------------------------------------------------------------------------------------------------------
30,993,750
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer Staples -- 17.6%
375,000 American Home Products Corp. 28,687,500
520,000 Baxter International, Inc. 26,227,500
400,000 Bristol-Myers Squibb Co. 37,850,000
400,000 Eli Lilly & Co. 27,850,000
350,000 Federal Mogul Corp.+ 14,175,000
450,000 H.J. Heinz & Co. 22,865,625
560,000 Unilever, N.V.+ 34,965,000
- -----------------------------------------------------------------------------------------------------------------------------------
192,620,625
- -----------------------------------------------------------------------------------------------------------------------------------
Energy -- 7.6%
200,000 AMP Inc. 8,400,000
350,000 Ashland, Inc. 18,790,625
325,000 Dresser Industries, Inc. 13,629,688
400,000 Duke Energy Corp. 22,150,000
91,890 Enron Corp. 3,819,178
450,000 Keyspan Energy Corp. 16,565,625
- -----------------------------------------------------------------------------------------------------------------------------------
83,355,116
- -----------------------------------------------------------------------------------------------------------------------------------
Financial Services -- 16.8%
150,000 American General Corp.+ 8,109,375
105,000 Aon Corp. 6,155,625
208,000 Chase Manhattan Corp. 22,776,000
400,000 Chubb Corp. 30,250,000
400,000 Dow Jones & Co.+ 21,475,000
300,000 First Chicago NBD Corp. 25,050,000
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 Special 30th Anniversary -- 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Schedule of Investments (continued) December 31, 1997
===================================================================================================================================
SHARES SECURITY VALUE
===================================================================================================================================
<S> <C> <C> <C>
Financial Services -- 16.8% (continued)
150,000 Fleet Financial Group $ 11,240,625
200,000 Marsh & McLennan Cos., Inc. 14,912,500
300,000 St. Paul Companies, Inc. 24,618,750
300,000 Washington Mutual Inc. 19,143,750
- -----------------------------------------------------------------------------------------------------------------------------------
183,731,625
- -----------------------------------------------------------------------------------------------------------------------------------
Food Processing -- 2.2%
250,000 Quaker Oats Corp. 13,187,500
200,000 Sara Lee Corp. 11,262,500
- -----------------------------------------------------------------------------------------------------------------------------------
24,450,000
- -----------------------------------------------------------------------------------------------------------------------------------
Oil Integrated -- 7.6%
250,000 Chevron Corp. 19,250,000
240,000 Exxon Corp. 14,685,000
380,000 Mobil Corp. 27,431,250
400,000 Royal Dutch Petroleum Co., ADR 21,675,000
- -----------------------------------------------------------------------------------------------------------------------------------
83,041,250
- -----------------------------------------------------------------------------------------------------------------------------------
Natural Gas -- 1.0%
400,000 William Cos.+ 11,350,000
- -----------------------------------------------------------------------------------------------------------------------------------
Raw & Intermediate Materials -- 5.5%
350,000 International Paper Co. 15,093,750
350,000 Kimberly-Clark Corp. 17,259,373
300,000 Masco Corp.+ 15,262,500
200,000 Reynolds Metals Co. 12,000,000
- -----------------------------------------------------------------------------------------------------------------------------------
59,615,623
- -----------------------------------------------------------------------------------------------------------------------------------
Retail - Specialty Apparel -- 1.9%
800,000 Limited, Ltd. 20,400,000
- -----------------------------------------------------------------------------------------------------------------------------------
Technology -- 5.2%
100,000 Eastman Kodak Co. 6,081,250
220,000 Lockheed Martin Corp. 21,670,000
400,000 Xerox Corp.+ 29,525,000
- -----------------------------------------------------------------------------------------------------------------------------------
57,276,250
- -----------------------------------------------------------------------------------------------------------------------------------
Telephone -- 7.8%
250,000 American Telephone & Telegraph 15,312,500
300,000 Bellsouth Corp. 16,893,750
400,000 GTE Corp. 20,900,000
550,000 Sprint Corp. 32,243,750
- -----------------------------------------------------------------------------------------------------------------------------------
85,350,000
- -----------------------------------------------------------------------------------------------------------------------------------
Transportation -- 2.3%
80,000 Alexander Baldwin, Inc. 2,185,000
375,000 Union Pacific Corp. 23,414,064
- -----------------------------------------------------------------------------------------------------------------------------------
25,599,064
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 9
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Schedule of Investments (continued) December 31, 1997
===================================================================================================================================
SHARES SECURITY VALUE
===================================================================================================================================
<S> <C> <C> <C>
Utilities -- 3.1%
250,000 Boston Edison Co. $ 9,468,750
300,000 El Paso Natural Gas 19,950,000
100,000 NIPSCO Industries Inc. 4,943,750
- -----------------------------------------------------------------------------------------------------------------------------------
34,362,500
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $715,355,095) 1,023,433,127
===================================================================================================================================
CONVERTIBLE PREFERRED STOCK -- 1.0%
Financial Services -- 1.0%
100,000 Banc One Corp., Series C, Exchangeable $3.50
(Cost -- $6,830,625) 10,512,500
===================================================================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
===================================================================================================================================
<S> <C> <C> <C>
CONVERTIBLE DEBENTURE -- 0.5%
Energy -- 0.5%
$ 5,800,000 Oryx Energy, 7.50% due 5/15/14
(Cost -- $5,547,625) 5,865,250
===================================================================================================================================
REPURCHASE AGREEMENT -- 5.0%
53,818,000 Goldman, Sachs & Co., 6.348% due 1/2/98; Proceeds at
maturity -- $53,836,980; (Fully collateralized by
U.S. Treasury Notes, 5.625% due 12/31/99;
Market value -- $54,918,060) (Cost -- $53,818,000) 53,818,000
===================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $781,551,345*) $1,093,628,877
===================================================================================================================================
</TABLE>
+ A portion of the security is on loan (See Note 5).
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 Special 30th Anniversary - 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Statement of Assets and Liabilities December 31, 1997
================================================================================
<S> <C>
ASSETS:
Investments, at value (Cost -- $781,551,345) $ 1,093,628,877
Cash 90
Collateral for securities loaned (Note 5) 80,477,361
Receivable for Fund shares sold 4,726,791
Dividends and interest receivable 2,177,346
- --------------------------------------------------------------------------------
Total Assets 1,181,010,465
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities loaned (Note 5) 80,477,361
Dividends payable 13,958,215
Payable for Fund shares purchased 606,550
Management fees payable 525,280
Distribution fees payable 308,164
Accrued expenses 88,933
- --------------------------------------------------------------------------------
Total Liabilities 95,964,503
- --------------------------------------------------------------------------------
Total Net Assets $ 1,085,045,962
================================================================================
NET ASSETS:
Par value of capital shares $ 634,963
Capital paid in excess of par value 772,256,081
Overdistributed net investment income (7,476)
Accumulated net realized gain on security transactions 84,862
Net unrealized appreciation of investments 312,077,532
- --------------------------------------------------------------------------------
Total Net Assets $ 1,085,045,962
================================================================================
Shares Outstanding:
Class A 44,402,107
---------------------------------------------------------------------------
Class B 1,675,167
---------------------------------------------------------------------------
Class C 2,469,984
---------------------------------------------------------------------------
Class Y 6,535,999
---------------------------------------------------------------------------
Class Z 8,413,016
---------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $17.09
---------------------------------------------------------------------------
Class B* $17.03
---------------------------------------------------------------------------
Class C** $17.05
---------------------------------------------------------------------------
Class Y (and redemption price) $17.09
---------------------------------------------------------------------------
Class Z (and redemption price) $17.12
---------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $17.99
================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. - Large Cap Value Fund 11
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Statement of Operations For the Year Ended December 31, 1997
================================================================================
<S> <C>
INVESTMENT INCOME:
Dividends $ 21,375,288
Interest 4,127,189
Less: Foreign withholding tax (174,166)
- -------------------------------------------------------------------------------
Total Investment Income 25,328,311
- -------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 5,536,984
Distribution fees (Note 2) 2,372,282
Shareholder and system servicing fees 544,255
Registration fees 93,449
Shareholder communications 85,206
Custody 37,011
Audit and legal 29,375
Directors' fees 23,959
Other 10,080
- -------------------------------------------------------------------------------
Total Expenses 8,732,601
- -------------------------------------------------------------------------------
Net Investment Income 16,595,710
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 355,950,030
Cost of securities sold 267,493,115
- -------------------------------------------------------------------------------
Net Realized Gain 88,456,915
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 185,094,122
End of year 312,077,532
- -------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 126,983,410
- -------------------------------------------------------------------------------
Net Gain on Investments 215,440,325
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 232,036,035
===============================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 Special 30th Anniversary - 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
Statements of Changes in Net Assets For the Year Ended December 31,
========================================================================================================
1997 1996
========================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 16,595,710 $ 18,225,859
Net realized gain 88,456,915 90,148,657
Increase in net unrealized appreciation 126,983,410 10,795,938
- --------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 232,036,035 119,170,454
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (16,833,261) (18,560,723)
Net realized gains (88,392,744) (90,678,646)
- --------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (105,226,005) (109,239,369)
- --------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sales of shares 164,777,053 77,117,814
Net asset value of shares issued for
reinvestment of dividends 88,143,626 98,396,742
Cost of shares reacquired (132,196,413) (99,848,727)
- --------------------------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 120,724,266 75,665,829
- --------------------------------------------------------------------------------------------------------
Increase in Net Assets 247,534,296 85,596,914
NET ASSETS:
Beginning of year 837,511,666 751,914,752
- --------------------------------------------------------------------------------------------------------
End of year* $ 1,085,045,962 $ 837,511,666
========================================================================================================
* Includes undistributed (overdistributed) net investment income of: $(7,476) $230,075
========================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. - Large Cap Value Fund 13
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
1. Significant Accounting Policies
The Large Cap Value Fund ("Portfolio"), formerly known as Equity Income
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 and Short-Term U.S. Treasury
Securities Portfolios. The financial statements and financial highlights for the
other portfolios are presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolio are:
(a) 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"), formerly known as Smith Barney Mutual Funds
Management Inc., 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 $500 million, 0.55% on the next $500 million
- --------------------------------------------------------------------------------
14 Sprecial 30th Anniversary -- 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (contined)
================================================================================
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
year ended December 31, 1997, SB received brokerage commissions of $276,012 and
sales charges of approximately $458,000 on sales of the Portfolio's Class A
shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B shares,
which applies if redemption occurs less than one year from purchase and declines
thereafter by 1.00% per year until no CDSC is incurred. Class C shares have a
1.00% CDSC, which applies if redemption occurs within the first year of
purchase. For the year ended December 31, 1997, CDSCs paid to SB were
approximately:
<TABLE>
<CAPTION>
Class B Class C
================================================================================
<S> <C> <C>
CDSCs $43,000 $2,000
================================================================================
</TABLE>
Pursuant to a Distribution Plan, the Portfolio pays a service fee with respect
to its Class A, B and C shares calculated at the annual rate of 0.25% of the
average daily net assets of each respective class. In addition, the Portfolio
also pays a distribution fee with respect to Class B and C shares calculated at
the annual rate of 0.75% of the average daily net assets of each class. For the
year ended December 31, 1997, total Distribution Plan fees were as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $1,785,010 $212,156 $375,116
================================================================================
</TABLE>
All officers and two Directors of the Fund are employees of SB.
3. Investments
During the year ended December 31, 1997, 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 $394,453,233
- --------------------------------------------------------------------------------
Sales 355,950,030
================================================================================
</TABLE>
At December 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $315,532,987
Gross unrealized depreciation (3,455,455)
- --------------------------------------------------------------------------------
Net unrealized appreciation $312,077,532
================================================================================
</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 Fund has an agreement with its custodian whereby the custodian may lend
securities owned by the Fund to brokers, dealers and other financial
organizations. Fees earned by the Fund on securities lending are recorded in
interest income. Loans of securities by the Fund 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 Fund maintains exposure for the risk of any losses in
the investment of amounts received as collateral.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 15
<PAGE>
================================================================================
Notes to Financial Statements (contined)
================================================================================
At December 31, 1997, the Fund loaned stocks having a value of approximately
$78,978,552 and holds the following collateral for loaned securities.
<TABLE>
<CAPTION>
Security Description Value
================================================================================
<S> <C>
Time Deposits:
Bank of Tokyo, 10.000% due 1/2/98 $ 4,940,898
Instituto Bancario San Paolo, 7.000% due 1/2/98 13,834,514
Keycorp Bank, N.A., 4.000% due 1/2/98 3,157,889
Repurchase Agreements:
Goldman, Sachs & Co., 6.800% due 1/2/98 49,156,355
Merrill Lynch, 7.000% due 1/2/98 9,387,705
- --------------------------------------------------------------------------------
Total $80,477,361
================================================================================
</TABLE>
6. Capital Shares
At December 31, 1997, 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 December 31, 1997, 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 $490,735,469 $26,367,929 $34,544,842 $110,545,054 $110,697,750
====================================================================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
----------------------------------- ---------------------------------
Shares Amount Shares Amount
====================================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 1,441,479 $ 24,457,765 1,572,895 $ 23,892,544
Shares issued on reinvestment 3,970,126 67,884,054 5,161,353 77,820,683
Shares redeemed (4,677,363) (78,829,273) (5,390,653) (83,086,170)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 734,242 $ 13,512,546 1,343,595 $ 18,627,057
====================================================================================================================================
Class B
Shares sold 731,383 $ 12,514,579 622,419 $ 9,553,511
Shares issued on reinvestment 135,875 2,316,326 110,323 1,654,996
Shares redeemed (201,810) (3,394,313) (110,106) (2,171,232)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 665,448 $ 11,436,592 592,636 $ 9,037,275
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
16 Sprecial 30th Anniversary -- 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (contined)
================================================================================
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
----------------------------------- ---------------------------------
Shares Amount Shares Amount
====================================================================================================================================
<S> <C> <C> <C> <C>
Class C
Shares sold 324,275 $ 5,556,018 309,334 $ 4,772,481
Shares issued on reinvestment 208,453 3,556,014 256,939 3,861,171
Shares redeemed (322,821) (5,333,286) (348,965) (5,369,299)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 209,907 $ 3,778,746 217,308 $ 3,264,353
====================================================================================================================================
Class Y
Shares sold 6,479,279 $ 114,285,256 2,038,995 $ 31,633,477
Shares redeemed (1,982,275) (35,361,534) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 4,497,004 $ 78,923,722 2,038,995 $ 31,633,477
====================================================================================================================================
Class Z
Shares sold 484,651 $ 7,963,435 478,209 $ 7,265,801
Shares issued on reinvestment 839,710 14,387,232 996,127 15,059,892
Shares redeemed (545,481) (9,278,007) (592,793) (9,222,026)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 778,880 $ 13,072,660 881,543 $ 13,103,667
====================================================================================================================================
</TABLE>
* For Class Y shares, transactions are for the period from February 6, 1996
(inception date) to December 31, 1996.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund 17
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares 1997 1996 1995 1994(1) 1993
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $14.79 $14.59 $12.18 $13.31 $12.48
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.29 0.36 0.39 0.43 0.46
Net realized and unrealized gain (loss) 3.80 1.99 3.59 (1.00) 1.56
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 4.09 2.35 3.98 (0.57) 2.02
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.29) (0.36) (0.39) (0.42) (0.46)
Net realized gains(2) (1.50) (1.79) (1.18) (0.14) (0.73)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.79) (2.15) (1.57) (0.56) (1.19)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $17.09 $14.79 $14.59 $12.18 $13.31
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 27.86% 16.06% 33.05% (4.31)% 16.38%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $758,708 $645,935 $617,431 $544,572 $627,870
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.92% 0.95% 1.02% 0.96% 0.91%
Net investment income 1.71 2.28 2.78 3.31 3.42
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 40% 49% 51% 27% 46%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $0.06 $0.06 $0.06 -- --
====================================================================================================================================
</TABLE>
(1) On October 10, 1994 the former Class C shares were exchanged into Class A
shares; therefore for the period from January 1, 1994 to October 9, 1994
the Class C share activity is included with the Class A share activity.
(2) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
- --------------------------------------------------------------------------------
18 Special 30th Anniversary - 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class B Shares 1997 1996 1995 1994(1)
====================================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $14.74 $14.54 $12.15 $12.54
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.16 0.25 0.24 0.03
Net realized and unrealized gain (loss) 3.78 1.98 3.62 (0.19)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 3.94 2.23 3.86 (0.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.15) (0.24) (0.29) (0.09)
Net realized gains(2) (1.50) (1.79) (1.18) (0.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.65) (2.03) (1.47) (0.23)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $17.03 $14.74 $14.54 $12.15
Total Return 26.83% 15.22% 32.07% (1.28)%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $28,525 $14,883 $6,065 $354
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.71% 1.71% 1.73% 1.59%+*
Net investment income 0.92 1.55 1.83 2.11+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 40% 49% 51% 27%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $0.06 $0.06 $0.06 --
====================================================================================================================================
</TABLE>
(1) For the period from November 7, 1994 (inception date) to December 31, 1994.
(2) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
(3) 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 19
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares 1997 1996 1995 1994(1) 1993
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $14.76 $14.57 $12.18 $13.30 $12.48
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.16 0.24 0.27 0.31 0.38
Net realized and unrealized gain (loss) 3.79 1.98 3.59 (0.95) 1.53
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 3.95 2.22 3.86 (0.64) 1.91
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.16) (0.24) (0.29) (0.34) (0.36)
Net realized gains(2) (1.50) (1.79) (1.18) (0.14) (0.73)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.66) (2.03) (1.47) (0.48) (1.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $17.05 $14.76 $14.57 $12.18 $13.30
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 26.85% 15.15% 32.01% (4.91)% 15.46%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $42,115 $33,365 $29,758 $27,507 $15,408
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.69% 1.73% 1.79% 1.75% 1.65%
Net investment income 0.93 1.50 2.00 2.49 2.59
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 40% 49% 51% 27% 46%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $0.06 $0.06 $0.06 -- --
====================================================================================================================================
</TABLE>
(1) On November 7, 1994, the former Class B shares were renamed Class C shares.
(2) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
- --------------------------------------------------------------------------------
20 Special 30th Anniversary -- 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class Y Shares 1997 1996(1)(2)
================================================================================
<S> <C> <C>
Net Asset Value, Beginning of Year $14.80 $15.06
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.38 0.36
Net realized and unrealized gain 3.76 1.58
- --------------------------------------------------------------------------------
Total Income From Operations 4.14 1.94
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.35) (0.41)
Net realized gains(3) (1.50) (1.79)
- --------------------------------------------------------------------------------
Total Distributions (1.85) (2.20)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $17.09 $14.80
- --------------------------------------------------------------------------------
Total Return 28.21% 12.86%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $111,690 $30,169
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.60% 0.66%+
Net investment income 2.06 3.02+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 40% 49%
- --------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4) $0.06 $0.06
================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from February 6, 1996 (inception date) to December 31, 1996.
(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.
- --------------------------------------------------------------------------------
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 year:
<TABLE>
<CAPTION>
Class Z Shares 1997 1996 1995 1994(1)
====================================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $14.82 $14.61 $12.19 $12.54
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.35 0.42 0.43 0.07
Net realized and unrealized gain (loss) 3.80 1.99 3.59 (0.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 4.15 2.41 4.02 (0.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.35) (0.41) (0.42) (0.12)
Net realized gains(2) (1.50) (1.79) (1.18) (0.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.85) (2.20) (1.60) (0.26)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $17.12 $14.82 $14.61 $12.19
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 28.27% 16.47% 33.41% (0.73)%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $144,008 $113,160 $98,661 $80,010
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.60% 0.62% 0.69% 0.42%+
Net investment income 2.03 2.62 3.11 3.88+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 40% 49% 51% 27%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $0.06 $0.06 $0.06 --
====================================================================================================================================
</TABLE>
(1) For the period from November 7, 1994 (inception date) to December 31, 1994.
(2) Net short term gains, if any, are included and reported as ordinary income
for income tax purposes.
(3) 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 Special 30th Anniversary - 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Independent Auditors' Report
================================================================================
To the Board of Directors and Shareholders of
Smith Barney Funds, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Large Cap Value Fund of Smith
Barney Funds, Inc., as of December 31, 1997, the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended and financial highlights for each of the
years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Large Cap Value Fund of Smith Barney Funds, Inc. as of December 31, 1997, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended and the financial
highlights for each of the years in the five-year period then ended, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 10, 1998
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. - Large Cap Value Fund 23
<PAGE>
================================================================================
Tax Information (unaudited)
================================================================================
For Federal tax purposes the Fund hereby designates for the fiscal year ended
December 31, 1997:
o 70.20% of the ordinary dividends paid as qualifying for the corporate
dividends received deduction.
o The Taxpayer Relief Act of 1997 enacted differing rates of tax on
various long-term capital gain transactions. As a result, the Fund
designates:
o Total long-term capital gain distributions paid $77,728,759.
$36,493,229 are considered "28 percent rate gains".
$41,235,530 are considered "20 percent rate gains".
- --------------------------------------------------------------------------------
24 Special 30th Anniversary -- 1997 Annual Report to Shareholders
<PAGE>
Smith Barney
Funds, Inc.
<TABLE>
<S> <C>
Directors Investment Adviser
Donald R. Foley Mutual Management Corp.
Paul Hardin
Heath B. McLendon, Chairman
Roderick C. Rasmussen Distributor
Bruce D. Sargent Smith Barney Inc.
John P. Toolan
Joseph H. Fleiss, Emeritus Custodian
C. Richard Youngdahl, 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
Bruce D. Sargent, CFA This report is submitted for the general
Vice President information of the shareholders of Smith
Barney Funds, Inc. -- Large Cap Value Fund.
Thomas M. Reynolds It is not for distribution to prospective
Controller investors unless accompanied by an effective
Prospectus for the Fund, which contains
Christina T. Sydor information concerning the Fund's investment
Secretary 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
FD0853 2/98
</TABLE>
