<PAGE>
Smith Barney [PHOTO] [PHOTO]
Funds, Inc.
HEATH B. JAMES E.
MCLENDON CONROY
Chairman Vice President
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Funds,
Inc. -- Short-Term High Grade Bond Fund ("Portfolio"), for the period ended June
30, 1999. 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 six months ended June 30, 1999, the Portfolio posted a total return of
0.36% for Class A shares. In comparison, the Salomon Smith Barney
Treasury/Government Sponsored/Corporate 1-5 Year Index returned 0.63% for the
six months ended June 30, 1999. (The Salomon Smith Barney Treasury/Government
Sponsored/Corporate 1-5 Year Index consists of short-term U.S. treasury and
corporate debt securities. Past performance is not indicative of future
results.) In addition, the Lipper, Inc. peer group average for general U.S.
government funds posted a negative 2.56% for the same period. During the past
six months, the Portfolio distributed income dividends totaling $0.09 per Class
A share. (Lipper is a major fund-tracking organization.)
Market Update
The first half of 1999 was a period of sustained economic growth at home and
recovery abroad. Following the events surrounding the Russian debt default in
August of 1998 -- which included a decline in bond yields and a 0.75% fall in
Fed funds -- yields have risen. Investor optimism, however, was tempered by
concerns about inflation and continued economic growth. In addition, both Russia
and Argentina remain economic hot spots and deserve close monitoring. The
reconstruction of Kosovo and peacekeeping efforts in that war-torn country will
also be an ongoing challenge.
Another issue facing the bond market is Y2K, a phrase referring to the fact that
some dates were coded into computers using only the last two digits of the year,
assuming the first two digits were "19." On or after January 1, 2000, some
computers may misread or not recognize dates and cause potential dislocations.
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Smith Barney Funds, Inc. 1
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And while the extent of the Y2K problem is impossible to predict, it is safe to
say the immediate future promises to be very interesting.
During the first half of 1999, U.S. economic growth continued at a robust pace,
posting a 4.3% annualized GDP growth rate for the first quarter. Furthermore,
the labor market continued to be extremely tight, as the unemployment rate fell
to a 29-year low of 4.2% in March. Defying the expectations of many economists,
inflation -- as measured by the Consumer Price Index ("CPI") -- was virtually
absent. Productivity gains and sagging global demand were credited with keeping
inflation under control. However, in the month of April, the CPI rose by 0.7%,
its largest monthly increase in nine years. This, coupled with signs that many
world economies were in the nascent stages of growth and recovery, deepened
fears that inflationary pressures were reaching a breaking point. These concerns
brought about an increase in the yield of the benchmark 30-year U.S. Treasury
Bond, which gained 71 basis points between April 8 and June 24 to close at
6.16%.
To counter these inflationary pressures, the Federal Reserve Board ("Fed")
raised short-term interest rates by 0.25% in late June, and subsequently adopted
a neutral stance on monetary policy. Meanwhile, during the months of May and
June, the CPI remained constant, generating considerable optimism that inflation
had retreated. Further reports of rising U.S. jobless claims added to the
optimism. This sparked a rise in demand for fixed-income investments,
effectively lowering the 30-year U.S. Treasury yield to 5.89% on July 19.
However, the Fed has signaled its willingness to raise rates if there are any
signs of inflationary pressures.
Investment Strategy
The Portfolio seeks current income, preservation of capital and liquidity. The
Portfolio invests primarily in "high grade" fixed income securities. These are
securities rated by a national ratings organization at the time of purchase
within one of the top three categories, or if unrated, judged by the manager to
be comparable credit quality. Securities in which the Portfolio invests include
corporate debt securities, bank obligations and securities issued by the U.S.
government and its agencies and instrumentalities. The Portfolio may also invest
in U.S. dollar denominated fixed income securities of foreign issuers. The
Portfolio maintains an average dollar-weighted portfolio maturity of between one
and four years; the average duration of the portfolio will normally be no
greater than 3.5 years.
The Portfolio began the year and continues to maintain an average duration of
roughly 2.3 years. During the reporting period, we have reduced our
mortgage-backed securities and U.S. Treasury exposure from 54% to 39%, and have
increased our positions in select industrial companies.
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2 1999 Semi-Annual Report to Shareholders
<PAGE>
The chart below shows the yields from U.S. Treasuries during the period under
review.
Yields from U.S. Treasuries
6/30/99 12/31/98
------- --------
90-Day U.S. Treasury Bill 4.76% 4.46%
2-Year U.S. Treasury Note 5.52 4.53
5-Year U.S. Treasury Note 5.65 4.54
10-Year U.S. Treasury Bond 5.79 4.65
30-Year U.S. Treasury Bond 5.97 5.09
Market Outlook
We anticipate that interest rates will decline as the end of 1999 approaches. In
our view, the potential for more moderate economic growth should assuage current
inflation concerns. Also, we should remain in a period in which economic growth
can co-exist with relatively lower levels of inflation.
In closing, thank you for investing in the Smith Barney Funds, Inc. --
Short-Term High Grade Bond Fund. We look forward to continuing to help you
pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman Vice President
July 21, 1999
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Smith Barney Funds, Inc. 3
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Principal Risk of Investing in the
Short-Term High Grade Bond Fund
Investors could lose money on their investment in the Portfolio, or it may not
perform as well as other investments, if:
o Interest rates increase, causing the prices of fixed income securities to
decline which would reduce the value of the Portfolio. The Portfolio has
less sensitivity to changes in interest rates than a Portfolio investing
in securities with intermediate or long-term maturities;
o Prepayment or call risk: As interest rates decline, the issuers of
mortgage-related or callable securities held by the Portfolio may pay
principal earlier than scheduled or exercise a right to call the
securities, forcing the Portfolio to reinvest in lower yielding
securities;
o Extension risk: As interest rates increase, slower than expected principal
payments may extend the average life of fixed income securities, locking
in below-market interest rates and reducing the value of these securities;
and
o The manager's judgement about interest rates or the attractiveness, value
or income potential of a particular security proves incorrect.
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4 1999 Semi-Annual Report to Shareholders
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Historical Performance -- Class A Shares
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Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns
================================================================================
6/30/99 $4.13 $4.05 $0.09 $0.00 0.36%+
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12/31/98 4.09 4.13 0.20 0.00 6.07
- --------------------------------------------------------------------------------
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
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12/31/92 4.09 4.12 0.19 0.01 5.92
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Inception* - 12/31/91 4.01 4.09 0.03 0.01 2.85+
================================================================================
Total $1.54 $0.04
================================================================================
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Historical Performance -- Class Y Shares
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Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns
================================================================================
6/30/99 $4.13 $4.04 $0.10 $0.00 0.36%+
- --------------------------------------------------------------------------------
12/31/98 4.09 4.13 0.22 0.00 6.56
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12/31/97 4.05 4.09 0.24 0.00 7.20
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Inception* - 12/31/96 4.19 4.05 0.22 0.00 2.08+
================================================================================
Total $0.78 $0.00
================================================================================
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
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Average Annual Total Returns
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Without Sales Charges
--------------------------
Class A Class Y
================================================================================
Six Months Ended 6/30/99+ 0.36% 0.36%
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Year Ended 6/30/99 3.57 3.83
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Five Years Ended 6/30/99 5.68 N/A
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Inception* through 6/30/99 5.40 4.75
================================================================================
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Cumulative Total Returns
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Without Sales Charges
================================================================================
Class A (Inception* through 6/30/99) 49.40%
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Class Y (Inception* through 6/30/99) 17.04
================================================================================
* 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.
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Smith Barney Funds, Inc. 5
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Historical Performance (unaudited)
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Growth of $10,000 Invested in Class A Shares of
the Short-Term High Grade Bond Fund vs. Lehman Brothers
1-3 Year Treasury Index and Salomon Smith Barney
Treasury/Government Sponsored/Corporate 1-5 Year Index+
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November 1991 -- June 1999
[LINE GRAPH]
Short-Term Lehman Brothers Salomon Brothers
High Grade 1-3 Years Government Corporate
Bond Fund Treasury Index** 1-5 Year Index**
11/11/91 10,000 10,000 10,000
12/91 10,283 10,230 10,189
12/92 10,891 10,902 10,890
12/93 11,547 11,653 11,673
12/94 11,361 11,770 11,594
12/95 12,874 13,265 13,086
12/96 13,149 13,905 13,696
12/97 14,034 14,808 14,672
12/98 14,886 15,848 15,796
6/30/99 14,939 16,020 15,895
+ Hypothetical illustration of $10,000 invested in shares at inception on
November 11, 1991, assuming reinvestment of dividends and capital gains,
if any, at net asset value through June 30, 1999. The Lehman Brothers 1-3
Year 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 Salomon Smith Barney Treasury/Government
Sponsored/Corporate 1-5 Year Index is a broad-based index of short-term
U.S. Treasury and corporate debt securities. These indices are unmanaged
and are not subject to the same management and trading expenses of a
mutual fund. The performance of the Portfolio's other class may be greater
or less than the Class A shares' performance indicated on this chart,
depending on whether greater or lesser fees were incurred by shareholders
investing in the other class.
++ It is the opinion of management that the Salomon Smith Barney
Treasury/Government Sponsored/Corporate 1-5 Year Index more accurately
reflects the current composition of the Short-Term High Grade Bond Fund.
In future reporting, the Salomon Smith Barney Treasury/Government
Sponsored/Corporate 1-5 Year Index will be used as a basis of comparison
of the total return performance rather than the Lehman Brothers 1-3 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.
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6 1999 Semi-Annual Report to Shareholders
<PAGE>
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Schedule of Investments (unaudited) June 30, 1999
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FACE
AMOUNT SECURITY VALUE
===============================================================================
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 26.0%
$8,000,000 U.S. Treasury Notes, 6.000% due 8/15/00 $ 8,055,360
3,000,000 U.S. Treasury Notes, 5.125% due 8/31/00 2,990,220
10,000,000 U.S. Treasury Notes, 5.625% due 11/30/00 10,029,700
8,000,000 Federal National Mortgage Association, Notes,
5.625% due 3/15/01 7,987,040
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TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost -- $29,240,830) 29,062,320
===============================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
===============================================================================
CORPORATE BONDS AND NOTES -- 60.7%
Aerospace and Defense -- 3.0%
3,500,000 Baa1* Raytheon Co., Notes, 5.700% due 11/1/03 3,381,875
- -------------------------------------------------------------------------------
Banks/Savings and Loans -- 3.2%
2,000,000 Aa3* BankAmerica Corp., Sub. Notes, 7.875%
due 12/1/02 2,087,500
1,500,000 A+ Toronto-Dominion Bank, Sub. Notes, 6.500%
due 1/15/07 1,461,300
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3,548,800
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Broadcasting - TV, Cable and Radio -- 7.7%
1,000,000 BBB- CBS Corp., Notes, 8.375% due 6/15/02 1,028,750
2,000,000 BBB Continental Cablevision, Sr. Notes, 8.500%
due 9/15/01 2,085,000
2,000,000 AA- TCI Communications, Inc., Sr. Notes, 6.375%
due 5/1/03 1,985,000
Time Warner Inc., Notes:
2,000,000 BBB 7.950% due 2/1/00 2,020,000
1,355,000 BBB 9.625% due 5/1/02 1,461,706
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8,580,456
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Consumer Durables -- 3.2%
3,500,000 Baa2* The Black & Decker Corp., Notes, 6.625%
due 11/15/00 3,521,875
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Diversified/Conglomerate Manufacturing -- 3.6%
2,000,000 A+ IBM Corp., Notes, 7.250% due 11/1/02 2,057,500
2,000,000 A- Tyco International Group SA, Company Guaranteed,
6.125% due 6/15/01 1,992,500
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4,050,000
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Energy -- 2.6%
3,000,000 BBB- Union Pacific Resources, Notes, 6.800%
due 7/2/02 2,958,750
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See Notes to Financial Statements.
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Smith Barney Funds, Inc. 7
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Schedule of Investments (unaudited) (continued) June 30, 1999
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FACE
AMOUNT RATING(a) SECURITY VALUE
===============================================================================
Financial Services -- 18.3%
$1,500,000 AA- Associates Corp., Sr. Notes, 7.500%
due 4/15/02 $ 1,543,125
2,000,000 A Bear Stearns Co., Inc., Sr. Notes, 6.500%
due 8/1/02 1,995,000
2,000,000 A+ Chrysler Financial Co., LLC, Notes, 5.875%
due 2/7/01 1,997,500
2,000,000 A- Donaldson, Lufkin & Jenrette Securities Corp.,
Notes, 6.375% due 5/26/00 2,008,620
2,000,000 A1* Ford Motor Credit Co., Notes, 8.000%
due 6/15/02 2,085,000
2,000,000 A General Motors Acceptance Corp., Bonds,
5.500% due 1/14/02 1,960,000
2,500,000 A+ Goldman Sachs Group, LP, Notes, 6.250%
due 2/1/03 2,468,750
1,545,000 A+ International Lease Finance Corp., Bonds,
5.900% due 4/15/02 1,525,688
2,000,000 AA- Merrill Lynch & Co., Notes, 6.060%
due 10/15/01 1,992,500
3,000,000 BBB+ PaineWebber Group, Inc., Notes, 6.375%
due 5/15/04 2,936,250
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20,512,433
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Pollution Control/Waste Management -- 4.0%
Waste Management, Inc.:
2,500,000 BBB+ Notes, 6.250% due 10/15/00 2,503,125
2,000,000 BBB+ Sr. Notes, 6.500% due 12/15/02 1,995,000
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4,498,125
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Rail/Trucking/Overnight Delivery -- 2.6%
3,000,000 BBB- Union Pacific Corp., Notes, 6.340% due 11/25/03 2,951,250
- -------------------------------------------------------------------------------
Retail -- 6.3%
Dayton Hudson Corp., Notes:
2,000,000 A- 6.800% due 10/1/01 2,022,500
2,000,000 A- 6.400% due 2/15/03 2,002,500
3,000,000 BBB Rite Aid Corp., Notes, 6.700% due 12/15/01 2,992,500
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7,017,500
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Telecommunications -- 6.2%
2,000,000 A Airtouch Communications, Notes, 7.000%
due 10/1/03 2,022,500
2,000,000 BBB+ MCI WorldCom, Inc., Sr. Notes, 7.550%
due 4/1/04 2,060,000
3,000,000 BBB+ Sprint Capital Corp., Company Guaranteed,
5.700% due 11/15/03 2,883,750
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6,966,250
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TOTAL CORPORATE BONDS AND NOTES
(Cost -- $69,100,120) 67,987,314
===============================================================================
See Notes to Financial Statements.
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8 1999 Semi-Annual Report to Shareholders
<PAGE>
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Schedule of Investments (unaudited) (continued) June 30, 1999
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
===============================================================================
MORTGAGE-BACKED SECURITIES -- 11.9%
$13,509,301 Federal National Mortgage Association, 6.500%
due 8/1/13
(Cost -- $13,596,521) $ 13,319,226
===============================================================================
REPURCHASE AGREEMENT -- 1.4%
1,545,000 Morgan Stanley Dean Witter & Co., 4.800% due 7/1/99;
Proceeds at maturity -- $1,545,206; (Fully
collateralized by U.S. Treasury Notes, Bonds and
Bills, 0.000% to 7.750% due 10/14/99 to 11/15/27;
Market value -- $1,561,045)
(Cost -- $1,545,000) 1,545,000
===============================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $113,482,471**) $111,913,860
===============================================================================
(a) All ratings are by Standard & Poor's Ratings Service, except those
identified by an asterisk (*) are rated by Moody's Investors Service, Inc.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 10 for definitions of ratings.
See Notes to Financial Statements.
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Smith Barney Funds, Inc. 9
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Bond Ratings (unaudited)
- --------------------------------------------------------------------------------
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Service ("Standard & Poor's") -- Ratings from "AA" to
"BBB" may be modified by the addition of a plus (+) or minus (-) sign to show
relative standings within the major rating categories.
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differs from the highest rated issue only in a
small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in
higher rated categories.
Moody's Investors Service, Inc. ("Moody's") -- Numerical modifiers 1, 2 and 3
may be applied to each generic rating from "Aa" to "Baa," where 1 is the highest
and 3 the lowest ranking within its generic category.
Aaa -- Bonds rated "Aaa" are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa -- Bonds rated "Aa" are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A -- Bonds rated "A" possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa -- Bonds rated "Baa" are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
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10 1999 Semi-Annual Report to Shareholders
<PAGE>
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Statement of Assets and Liabilities (unaudited) June 30, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $113,482,471) $ 111,913,860
Cash 94
Interest receivable 1,473,780
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Total Assets 113,387,734
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LIABILITIES:
Dividends payable 263,280
Management fees payable 41,742
Distribution fees payable 6,239
Accrued expenses 23,725
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Total Liabilities 334,986
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Total Net Assets $ 113,052,748
===============================================================================
NET ASSETS:
Par value of capital shares $ 279,481
Capital paid in excess of par value 120,412,166
Undistributed net investment income 8,425
Accumulated net realized loss from security transactions (6,078,713)
Net unrealized depreciation of investments (1,568,611)
- -------------------------------------------------------------------------------
Total Net Assets $ 113,052,748
===============================================================================
Shares Outstanding:
Class A 15,703,417
-----------------------------------------------------------------------------
Class Y 12,244,720
-----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $4.05
-----------------------------------------------------------------------------
Class Y (and redemption price) $4.04
-----------------------------------------------------------------------------
See Notes to Financial Statements.
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Smith Barney Funds, Inc. 11
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- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1999
INVESTMENT INCOME:
Interest $ 3,189,963
- -------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 252,069
Distribution fees (Note 2) 113,257
Shareholder and system servicing fees 25,493
Shareholder communications 22,372
Audit and legal 11,229
Registration fees 10,160
Custody 2,340
Directors' fees 1,608
Other 3,348
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Total Expenses 441,876
- -------------------------------------------------------------------------------
Net Investment Income 2,748,087
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3):
Realized Gain (Loss) From Security Transactions
(excluding short-term securities):
Proceeds from sales 27,038,330
Cost of securities sold 27,164,051
- -------------------------------------------------------------------------------
Net Realized Loss (125,721)
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
(Depreciation) of Investments:
Beginning of period 763,604
End of period (1,568,611)
- -------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (2,332,215)
- -------------------------------------------------------------------------------
Net Loss on Investments (2,457,936)
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 290,151
===============================================================================
See Notes to Financial Statements.
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12 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1999 (unaudited)
and the Year Ended December 31, 1998
<TABLE>
<CAPTION>
1999 1998
==========================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 2,748,087 $ 5,307,489
Net realized gain (loss) (125,721) 957,511
Increase in net unrealized appreciation (depreciation) (2,332,215) 17,286
- ------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 290,151 6,282,286
- ------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,748,099) (5,307,489)
- ------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (2,748,099) (5,307,489)
- ------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 51,402,933 75,308,121
Net asset value of shares issued for
reinvestment of dividends 1,208,460 2,853,464
Cost of shares reacquired (51,186,580) (66,197,339)
- ------------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 1,424,813 11,964,246
- ------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (1,033,135) 12,939,043
NET ASSETS:
Beginning of period 114,085,883 101,146,840
- ------------------------------------------------------------------------------------------
End of period* $ 113,052,748 $ 114,085,883
==========================================================================================
* Includes undistributed net investment income of: $8,425 $8,437
==========================================================================================
</TABLE>
See Notes to Financial Statements.
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Smith Barney Funds, Inc. 13
<PAGE>
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Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Short-Term High Grade Bond Fund ("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 shareholder
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 for which market quotations are not available will be valued in
good faith at fair value by or under the direction of the Board of Directors;
(d) securities, other than U.S. government agencies, 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; (e) securities maturing within 60 days are
valued at cost plus accreted discount, or minus amortized premium, which
approximates value; (f) interest income is recorded on an accrual basis; (g)
gains or losses on the sale of securities are calculated by using the specific
identification method; (h) direct expenses are charged to each class; management
fees and general fund expenses are allocated on the basis of relative net
assets; (i) dividends and distributions to shareholders are recorded on the
ex-dividend date; (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 distributed are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. At December 31,1998, reclassifications were made to the Fund's
capital accounts to reflect permanent book/tax differences and income and gains
available for distributions under income tax regulations. Net investment income,
net realized gains and net assets were not affected by this change; and (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.
- --------------------------------------------------------------------------------
14 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
2. Management Agreements and Transactions with Affiliated Persons
SSBC Fund Management Inc. ("SSBC"), formerly known as Mutual Management Corp., a
subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), acts as investment
manager to the Fund. The Portfolio pays SSBC 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.
CFBDS, Inc. acts as the Fund's distributor. Salomon Smith Barney Inc. ("SSB"),
another subsidiary of SSBH, as well as certain other broker-dealers, continues
to sell Fund shares to the public as members of the selling group.
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.
All officers and one Director of the Fund are employees of SSB.
3. Investments
During the six months ended June 30, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
===============================================================================
Purchases $40,071,323
- -------------------------------------------------------------------------------
Sales 27,038,330
===============================================================================
At June 30, 1999, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
===============================================================================
Gross unrealized appreciation $ 38,322
Gross unrealized depreciation (1,606,933)
- -------------------------------------------------------------------------------
Net unrealized depreciation $(1,568,611)
===============================================================================
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.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
5. Reverse Repurchase Agreement
A reverse repurchase agreement involves a sale by the Portfolio of securities
that it holds with an agreement to repurchase the same securities at an agreed
upon price and date. A reverse repurchase agreement involves the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of the securities. The Portfolio will establish a segregated
account with its custodian, in which the Portfolio will maintain cash, U.S.
government securities or other liquid high grade debt obligations equal in value
to its obligations with respect to the reverse repurchase agreements.
During the six months ended June 30, 1999, the Portfolio had no open reverse
repurchase agreements.
6. Capital Shares
At June 30, 1999, the Fund had two billion shares of capital stock authorized
with a par value of $0.01 per share. The Portfolio has the ability to issue
multiple classes of shares. Each share of a class represents an identical
interest in the Portfolio and has the same rights, except that each class bears
certain expenses specifically related to the distribution of its shares.
At June 30, 1999, total paid-in capital amounted to the following for each
class:
Class A Class Y
================================================================================
Total Paid-in Capital $71,250,678 $49,440,969
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1999 December 31, 1998
--------------------------- ---------------------------
Shares Amount Shares Amount
==============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 11,090,679 $ 45,489,230 14,613,133 $ 60,380,053
Shares issued on reinvestment 295,617 1,208,460 692,314 2,853,464
Shares reacquired (12,380,711) (50,789,317) (16,035,928) (66,197,339)
- ----------------------------------------------------------------------------------------------
Net Decrease (994,415) $ (4,091,627) (730,481) $ (2,963,822)
==============================================================================================
Class Y
Shares sold 1,439,785 $ 5,913,703 3,626,421 $ 14,928,068
Shares reacquired (97,781) (397,263) -- --
- ----------------------------------------------------------------------------------------------
Net Increase 1,342,004 $ 5,516,440 3,626,421 $ 14,928,068
==============================================================================================
</TABLE>
- --------------------------------------------------------------------------------
16 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
7. Capital Loss Carryforward
At December 31, 1998, the Portfolio had for Federal income tax purposes
approximately $5,953,000 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:
2002 2003 2004
================================================================================
Carryforward Amounts $3,858,000 $1,124,000 $971,000
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
<TABLE>
<CAPTION>
Class A Shares 1999(1)(2) 1998(2) 1997 1996 1995 1994
=================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 4.13 $ 4.09 $ 4.05 $ 4.19 $ 3.91 $ 4.16
- -------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.09 0.20 0.22 0.23 0.22 0.18
Net realized and unrealized
gain (loss) (0.08) 0.04 0.04 (0.14) 0.28 (0.25)
- -------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.01 0.24 0.26 0.09 0.50 (0.07)
- -------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.09) (0.20) (0.22) (0.23) (0.22) (0.18)
- -------------------------------------------------------------------------------------------------
Total Distributions (0.09) (0.20) (0.22) (0.23) (0.22) (0.18)
- -------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 4.05 $ 4.13 $ 4.09 $ 4.05 $ 4.19 $ 3.91
- -------------------------------------------------------------------------------------------------
Total Return 0.36%++ 6.07% 6.73% 2.17% 13.16% (2.15)%
- -------------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $ 64 $ 69 $ 71 $ 83 $ 107 $ 89
- -------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.97%+ 1.04% 0.95% 0.98% 0.98% 0.91%
Net investment income 4.63+ 4.94 5.53 5.62 5.29 4.54
- -------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 25% 150% 145% 130% 29% 25%
=================================================================================================
</TABLE>
(1) For the six months ended June 30, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
18 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
Class Y Shares 1999(1)(2) 1998(2) 1997 1996(3)
================================================================================
Net Asset Value,
Beginning of Period $ 4.13 $ 4.09 $ 4.05 $ 4.19
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.10 0.22 0.24 0.22
Net realized and unrealized
gain (loss) (0.09) 0.04 0.04 (0.14)
- --------------------------------------------------------------------------------
Total Income From Operations 0.01 0.26 0.28 0.08
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.10) (0.22) (0.24) (0.22)
- --------------------------------------------------------------------------------
Total Distributions (0.10) (0.22) (0.24) (0.22)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $ 4.04 $ 4.13 $ 4.09 $ 4.05
- --------------------------------------------------------------------------------
Total Return 0.36%++ 6.56% 7.20% 2.08%++
- --------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $ 49 $ 45 $ 30 $ 32
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.51%+ 0.56% 0.50% 0.58%+
Net investment income 5.10+ 5.42 6.00 5.99+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 25% 150% 145% 130%
================================================================================
(1) For the six months ended June 30, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) 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.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 19
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On May 12, 1999, a special meeting of shareholders of the Fund was held for the
purpose of electing Directors to the Fund.
The results of the vote were as follows:
Shares Percentage Shares Percentage
Voted of Shares Voted of Shares
Name of Directors For Voted Against Voted
================================================================================
Lee Abraham 62,342,951.572 98.630% 865,940.611 1.370%
Allan J. Bloostein 62,384,540.377 98.696 824,351.806 1.304
Jane F. Dasher 62,392,002.787 98.708 816,889.396 1.292
Donald R. Foley 62,322,262.500 98.597 886,629.683 1.403
Richard E. Hanson, Jr. 62,380,877.618 98.690 828,014.565 1.310
Paul Hardin 62,379,975.324 98.689 828,916.859 1.311
Heath B. McLendon 62,370,261.215 98.673 838,630.968 1.327
Roderick C. Rasmussen 62,346,471.848 98.636 862,420.335 1.364
John P. Toolan 62,396,377.832 98.715 812,514.351 1.285
================================================================================
- --------------------------------------------------------------------------------
20 1999 Semi-Annual Report to Shareholders
<PAGE>
[GRAPHIC]
Smith Barney Funds, Inc.
U.S. Government
Securities Fund
- ------------------
SEMI-ANNUAL REPORT
- ------------------
June 30, 1999
[LOGO] Smith Barney
Mutual Funds
<PAGE>
Smith Barney
Funds, Inc.
[PHOTO] [PHOTO]
HEATH B. JAMES E.
MCLENDON CONROY
Chairman Vice President
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Funds,
Inc. -- U.S. Government Securities Portfolio ("Fund") for the period ended June
30, 1999. In this report, we summarize the period's prevailing economic and
market conditions and outline our portfolio strategy. A more detailed summary of
performance can be found in the appropriate sections that follow in the report.
Performance Update
For the six months ended June 30, 1999, the Fund posted a total return of a
negative 0.80% for Class A shares. In comparison, the Lehman Brothers MBS Index
returned 0.53% for the six months ended June 30, 1999. (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 Corporation. Past performance is not
indicative of future results.) Also, in comparison, the average total return for
general U.S. government funds according to Lipper Inc., an independent
fund-tracking organization, was a negative 2.56%. In addition, during the past
six months, the Fund distributed income dividends totaling $0.35 per Class A
share. For performance information on the Fund's other share classes, please
turn to pages five through seven.
Market Update
The first half of 1999 was a period of sustained economic growth at home and
recovery abroad. Following the events surrounding the Russian debt default in
August of 1998 -- which included a decline in bond yields -- yields have since
risen. Investor optimism, however, was tempered by concerns about inflation and
continued economic growth. In addition, both Russia and Argentina remain
economic hot spots and deserve close monitoring. The reconstruction of Kosovo
and peacekeeping efforts in that war-torn country will also be an ongoing
challenge.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 1
<PAGE>
Another issue facing the bond market is Y2K, a phrase referring to the fact that
some dates were coded into computers using only the last two digits of the year,
assuming the first two digits were "19". On or after January 1, 2000, some
computers may misread or not recognize dates and cause potential dislocations.
And while the extent of the Y2K problem is impossible to predict, it is safe to
say the immediate future promises to be very interesting.
During the first half of 1999, U.S. economic growth continued at a robust pace,
posting a 4.3% annualized Gross Domestic Product growth rate for the first
quarter. Furthermore, the labor market continued to be extremely tight, as the
unemployment rate fell to a 29-year low of 4.2% in March. Defying the
expectations of many economists, inflation--as measured by the Consumer Price
Index ("CPI")--was virtually absent. Productivity gains and sagging global
demand were credited with keeping inflation under control. However, in the month
of April, the CPI rose by 0.7%, its largest monthly increase in nine years.
This, coupled with signs that many world economies were in the nascent stages of
growth and recovery, deepened fears that inflationary pressures were reaching a
breaking point. These concerns brought about an increase in the yield of the
benchmark 30-year U.S. Treasury Bond, which gained 71 basis points between April
8 and June 24 to close at 6.16%.
To counter these inflationary pressures, the Federal Reserve Board ("Fed")
raised short-term interest rates by 0.25% in late June, and subsequently adopted
a neutral stance on monetary policy. Meanwhile, during the months of May and
June, the CPI remained constant, generating considerable optimism that inflation
had retreated. Further reports of rising U.S. jobless claims added to the
optimism. This sparked a rise in demand for fixed-income investments,
effectively lowering the 30-year U.S. Treasury yield to 5.89% on July 19.
However, the Fed has signaled its willingness to raise rates if there are any
signs of inflationary pressures.
Investment Strategy
The Fund seeks high current income, liquidity and security of principal. The
Fund invests primarily in debt securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities and in related repurchase and
reverse repurchase agreements. These U.S. government securities in which the
Fund invests consist primarily of mortgage-related securities and U.S. Treasury
securities. Mortgage-related securities issued by federal agencies or
instrumentalities may be backed by the full faith and credit of the U.S.
Treasury, by the right of the issuer to borrow from the U.S. government or only
by the credit of the issuer itself.
- --------------------------------------------------------------------------------
2 1999 Semi-Annual Report to Shareholders
<PAGE>
As rates have risen, the Fund's duration has increased from 4.34 years at
December 31, 1998, to 4.94 years. Mortgage-backed securities continue to
represent approximately 95% of current holdings with the remainder in 10-year
U.S. Treasuries. During the reporting period, we have increased the average
coupon of the Fund to take advantage of higher income potential in the
marketplace.
The chart below shows the yields from U.S. Treasuries during the period under
review.
Yields from U.S. Treasury Securities
6/30/99 12/31/98
------- --------
90-Day U.S. Treasury Bill 4.76% 4.46%
2-Year U.S. Treasury Note 4.52 4.53
5-Year U.S. Treasury Note 5.65 4.54
10-Year U.S. Treasury Bond 5.79 4.65
30-Year U.S. Treasury Bond 5.97 5.09
Market Outlook
We anticipate that interest rates will decline as the end of 1999 approaches. In
our view, the potential for more moderate economic growth should assuage current
inflation concerns. We should remain in a period in which economic growth can
co-exist with relatively low levels of inflation.
In closing, thank you for investing in the Smith Barney Funds, Inc. -- U.S.
Government Securities Portfolio. We look forward to continuing to help you
pursue your financial goals in the years ahead.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman Vice President
July 21, 1999
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 3
<PAGE>
- --------------------------------------------------------------------------------
Principal Risks of Investing in the
U.S. Government Securities Fund
Investors could lose money on their investment in the U.S. Government Securities
Fund ("Fund"), or the Fund may not perform as well as other investments, if:
. Interest rates increase, causing the prices of fixed income securities to
decline which would reduce the value of the Fund's portfolio
. Prepayment or call risk: As interest rates decline, the issuers of
mortgage-related or callable securities held by the Fund may pay principal
earlier than scheduled or exercise a right to call the securities, forcing
the Fund to reinvest in lower yielding securities
. Extension risk: As interest rates increase, slower than expected principal
payments may extend the average life of fixed income securities, locking
in below-market interest rates and reducing the value of these securities
. The manager's judgement about interest rates or the attractiveness, value
or income potential of a particular security proves incorrect
Payments of principal and interest on mortgage-backed securities issued by
instrumentalities of the U.S. government are guaranteed solely by the issuer and
not guaranteed by the U.S. government. Although payment of principal and
interest on mortgage-backed securities issued by U.S. agencies are guaranteed by
the full faith and credit of the U.S. government, this guarantee does not apply
to losses resulting from declines in the market value of these securities.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
6/30/99 $13.41 $12.95 $0.35 $0.00 (0.80)%+
- --------------------------------------------------------------------------------
12/31/98 13.61 13.41 0.72 0.27 6.04
- --------------------------------------------------------------------------------
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
================================================================================
Total $10.20 $0.56
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
6/30/99 $13.42 $12.96 $0.32 $0.00 (1.05)%+
- --------------------------------------------------------------------------------
12/31/98 13.63 13.42 0.66 0.27 5.47
- --------------------------------------------------------------------------------
12/31/97 13.26 13.63 0.80 0.00 9.12
- --------------------------------------------------------------------------------
12/31/96 13.61 13.26 0.79 0.00 3.44
- --------------------------------------------------------------------------------
12/31/95 12.51 13.61 0.86 0.00 16.03
- --------------------------------------------------------------------------------
Inception* - 12/31/94 12.47 12.51 0.21 0.00 2.04+
================================================================================
Total $3.64 $0.27
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
6/30/99 $13.40 $12.94 $0.32 $0.00 (1.05)%+
- --------------------------------------------------------------------------------
12/31/98 13.60 13.40 0.66 0.27 5.53
- --------------------------------------------------------------------------------
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 $5.46 $0.42
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 5
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
6/30/99 $13.42 $12.96 $0.38 $0.00 (0.64)%+
- --------------------------------------------------------------------------------
12/31/98 13.64 13.42 0.78 0.27 6.29
- --------------------------------------------------------------------------------
12/31/97 13.27 13.64 0.90 0.00 10.00
- --------------------------------------------------------------------------------
12/31/96 13.61 13.27 0.89 0.00 4.30
- --------------------------------------------------------------------------------
12/31/95 12.51 13.61 0.96 0.00 16.88
- --------------------------------------------------------------------------------
12/31/94 13.67 12.51 0.91 0.04 (1.53)
- --------------------------------------------------------------------------------
Inception* - 12/31/93 13.97 13.67 0.95 0.11 5.55+
================================================================================
Total $5.77 $0.42
================================================================================
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
----------------------------------------------
Class A Class B Class L Class Y
================================================================================
Six Months Ended 6/30/99+ (0.80)% (1.05)% (1.05)% (0.64)%
- --------------------------------------------------------------------------------
Year Ended 6/30/99 2.21 1.72 1.76 2.55
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 7.24 N/A 6.74 7.53
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/99 7.73 N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/99 8.94 7.42 5.60 6.16
================================================================================
With Sales Charge(2)
----------------------------------------------
Class A Class B Class L Class Y
================================================================================
Six Months Ended 6/30/99+ (5.25)% (5.39)% (3.03)% (0.64)%
- --------------------------------------------------------------------------------
Year Ended 6/30/99 (2.40) (2.58) (0.23) 2.55
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 6.26 N/A 6.52 7.53
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/99 7.23 N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/99 8.60 7.26 5.44 6.16
================================================================================
- --------------------------------------------------------------------------------
6 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (6/30/89 through 6/30/99) 110.48%
- --------------------------------------------------------------------------------
Class B (Inception* through 6/30/99) 39.47
- --------------------------------------------------------------------------------
Class L (Inception* through 6/30/99) 43.10
- --------------------------------------------------------------------------------
Class Y (Inception* through 6/30/99) 47.21
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 4.50% and 1.00%
respectively; Class B shares reflect the deduction of a 4.50% CDSC, which
applies if shares are redeemed within one year from initial purchase. This
CDSC declines by 0.50% the first year after purchase and thereafter by
1.00% per year until no CDSC is incurred. Class L shares also reflect the
deduction of a 1.00% CDSC, which applies if shares are redeemed within the
first year of purchase.
* Inception dates for Class A, B, L and Y shares are October 9, 1984,
November 7, 1994, December 2, 1992 and January 12, 1993, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 7
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of the
U.S. Government Securities Fund vs.
Lehman Brothers MBS Index+
- --------------------------------------------------------------------------------
June 1989 -- June 1999
[GRAPHIC]
U.S. Government Securities Fund Lehman Brothers MBS Index
6/89 9,598 10,000
12/89 10,075 10,572
12/90 11,037 11,706
12/91 12,783 13,546
12/92 13,623 14,489
12/93 14,450 15,480
12/94 14,204 15,231
12/95 16,552 17,791
12/96 17,208 18,743
12/97 18,873 20,521
12/98 20,012 21,939
6/99 19,852 22,055
+ Hypothetical illustration of $10,000 invested in Class A shares on June
30, 1989, assuming deduction of the maximum 4.50% sales charge in effect
at the time of investment and reinvestment of dividends (after deduction
of applicable sales charge through November 7, 1994, and thereafter at net
asset value) and capital gains, if any, at net asset value through June
30, 1999. The Lehman Brothers MBS Index is composed of about 600 15-year
to 30-year fixed-rate mortgage-backed pools of Government National
Mortgage Association, Federal National Mortgage Association and Federal
Home Loan Mortgage Corp. The index is unmanaged and is not subject to the
management and trading expenses of a mutual fund. The performance of the
Portfolio's other classes may be greater or less than the Class A shares'
performance indicated on this chart, depending on whether greater or
lesser sales charges and fees were incurred by shareholders investing in
other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
- --------------------------------------------------------------------------------
8 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) June 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
==================================================================================
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 4.6%
$24,980,000 U.S. Treasury Strips, zero coupon due 11/15/09
(Cost -- $13,044,103) $ 13,246,644
==================================================================================
U.S. GOVERNMENT AGENCIES -- 95.4%
Federal Home Loan Mortgage Corporation Gold:
137,282 6.50% due 3/1/29 133,292
781,507 7.00% due 7/1/10 787,857
Federal National Mortgage Association:
2,502 6.00% due 3/1/13 2,422
187 Dwarf 6.00% due 6/1/13 185
356,303 7.00% due 3/1/29+ 353,519
17,250,000 7.50% due 12/1/29* 17,471,016
Government National Mortgage Association Certificates:
403,729 6.00% due 4/15/29+ 379,376
34,043,387 6.50% due 10/15/29+ 32,904,976
128,438,252 7.00% due 3/15/29+ 127,233,500
15,510,791 7.50% due 12/15/27+ 15,714,293
8,113,344 8.00% due 7/15/26+ 8,349,118
13,665,150 Platinum 9.00% due 11/15/17 14,523,458
530,413 10.00% due 7/15/20+ 577,816
Government National Mortgage Association II Certificates:
327,571 10.00% due 1/20/18+ 352,342
13,325,000 7.00% due 2/22/29* 13,191,750
41,950,000 7.50% due 12/15/28* 42,474,375
- ----------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES
(Cost -- $278,819,581) 274,449,295
==================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $291,863,684**) $287,695,939
==================================================================================
</TABLE>
+ Maturity date shown represents the last in the range of maturity dates of
mortgage certificates owned.
* Security has been issued on a to-be-announced basis ("TBA") (See Note 6).
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 9
<PAGE>
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities (unaudited) June 30, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $291,863,684) $ 287,695,939
Receivable for securities sold 69,787,165
Receivable for Fund shares sold 38,270
Interest receivable 2,101,088
- -------------------------------------------------------------------------------
Total Assets 359,622,462
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 85,879,954
Payable to bank 15,616,529
Management fees payable 153,830
Payable for Fund shares purchased 43,942
Distribution fees payable 15,088
Accrued expenses 44,461
- -------------------------------------------------------------------------------
Total Liabilities 101,753,804
- -------------------------------------------------------------------------------
Total Net Assets $ 257,868,658
===============================================================================
NET ASSETS:
Par value of capital shares $ 199,171
Capital paid in excess of par value 266,465,702
Underdistributed net investment income 202,534
Accumulated net realized loss on security transactions
and future contracts (4,831,004)
Net unrealized depreciation of investments (4,167,745)
- -------------------------------------------------------------------------------
Total Net Assets $ 257,868,658
===============================================================================
Shares Outstanding:
Class A 17,494,860
----------------------------------------------------------------------------
Class B 1,073,478
----------------------------------------------------------------------------
Class L 1,132,398
----------------------------------------------------------------------------
Class Y 216,353
----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $12.95
----------------------------------------------------------------------------
Class B* $12.96
----------------------------------------------------------------------------
Class L** $12.94
----------------------------------------------------------------------------
Class Y (and redemption price) $12.96
----------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net assets value plus 4.71% of net assets
value per share) $13.56
----------------------------------------------------------------------------
Class L (net assets value plus 1.01% of net assets
value per share) $13.07
===============================================================================
* Redemption price is NAV of Class B shares reduced by 4.50% CDSC if shares
are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L shares reduced by 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1999
INVESTMENT INCOME:
Interest $ 8,884,133
- -------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 652,800
Distribution fees (Note 2) 410,560
Shareholder and system servicing fees 62,415
Registration fees 34,712
Shareholder communications 20,125
Audit and legal 8,331
Custody 7,935
Directors' fees 2,480
Other 4,960
- -------------------------------------------------------------------------------
Total Expenses 1,204,318
- -------------------------------------------------------------------------------
Net Investment Income 7,679,815
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 3 AND 7):
Realized Loss From:
Security transactions (excluding short-term securities) (3,916,004)
Futures contracts (915,000)
- -------------------------------------------------------------------------------
Net Realized Loss (4,831,004)
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments:
Beginning of period 1,076,235
End of period (4,167,745)
- -------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (5,243,980)
- -------------------------------------------------------------------------------
Net Loss on Investments and Futures Contracts (10,074,984)
- -------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (2,395,169)
===============================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 11
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1999 (unaudited)
and the Year Ended December 31, 1998
<TABLE>
<CAPTION>
1999 1998
=====================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 7,679,815 $ 16,571,257
Net realized gain (loss) (4,831,004) 6,619,679
Increase in net unrealized depreciation (5,243,980) (4,713,699)
- -------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (2,395,169) 18,477,237
- -------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (7,471,292) (17,009,666)
Net realized gains -- (6,181,782)
Capital -- (25,989)
- -------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (7,471,292) (23,217,437)
- -------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 392,603,747 110,832,636
Net asset value of shares issued for
reinvestment of dividends 4,516,666 14,619,029
Cost of shares reacquired (413,699,109) (162,864,040)
- -------------------------------------------------------------------------------------
Decrease in Net Assets
From Fund Share Transactions (16,578,696) (37,412,375)
- -------------------------------------------------------------------------------------
Decrease in Net Assets (26,445,157) (42,152,575)
NET ASSETS:
Beginning of period 284,313,815 326,466,390
- -------------------------------------------------------------------------------------
End of period* $ 257,868,658 $ 284,313,815
=====================================================================================
* Includes undistributed (overdistributed)
net investment income of: $202,534 $(5,989)
=====================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The U.S. Government Securities Fund ("Portfolio"), is a separate investment
portfolio of the Smith Barney Funds, Inc. ("Fund"). The Fund, a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The Fund consists of
this Portfolio and two other separate investment portfolios: Large Cap Value
Fund and Short-Term High Grade Bond Fund. The financial statements and financial
highlights for the other portfolios are presented in separate shareholder
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 for which market quotations are not available will be valued in
good faith at fair value by or under direction of the Board of Trustees; (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 to make distributions of
taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; (j) the character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At December 31, 1998,
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 $25,989 was reclassified to paid-in capital. Net
investment income, net realized gains and net assets were not affected by this
change; and (k) estimates and assumptions are required to be made regarding
assets, liabilities and changes in net assets resulting from operations when
financial statements are prepared. Changes in the economic environment,
financial markets and any other parameters used in determining these estimates
could cause actual results to differ.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
2. Management Agreement and Transactions with Affiliated Persons
SSBC Fund Management Inc. ("SSBC"), formerly known as Mutual Management Corp., a
subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), acts as investment
manager for the Fund. The Portfolio pays SSBC 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.
CFBDS, Inc. ("CFBDS"), acts as the Fund's distributor. Salomon Smith Barney Inc.
("SSB"), another subsidiary of SSBH, as well as certain other broker-dealers,
continues to sell Fund shares to the public as members of the selling group.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B shares,
which applies if redemption occurs within one year from purchase. This CDSC
declines by 0.50% the first year after purchase and thereafter by 1.00% per year
until no CDSC is incurred. Class L shares are being sold at net asset value plus
a maximum initial sales charge of 1.00%. Class L shares also have a 1.00% CDSC,
which applies if redemption occurs within the first year of purchase. In certain
cases, Class A shares also have a 1.00% CDSC, which applies if redemption occurs
within the first year of purchase. This CDSC only applies to those purchases of
Class A shares, which, when combined with current holdings of Class A shares,
equal or exceed $500,000 in the aggregate. These purchases do not incur an
initial sales charge.
For the six months ended June 30, 1999, CFBDS received sales charges of
approximately $51,000 and $10,000 on sales of the Fund's Class A and Class L
shares, respectively. In addition, CDSCs paid to CFBDS were approximately
$2,000, $14,000 and $1,000 for Class A, Class B and Class L shares,
respectively.
Pursuant to a Distribution Plan, the Portfolio pays a service fee with respect
to its Class A, B and L shares calculated at an annual rate of 0.25% of the
average daily net assets for each respective class. In addition, the Portfolio
also pays a distribution fee with respect to Class B and L shares calculated at
the annual rate of 0.50% and 0.45% of the average daily net assets for each
class, respectively. For the six months ended June 30, 1999, total Distribution
Plan fees were as follows:
Class A Class B Class L
================================================================================
Distribution Plan Fees $304,930 $53,698 $51,932
================================================================================
All officers and one Director of the Fund are employees of SSB.
- --------------------------------------------------------------------------------
14 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
3. Investments
During the six months ended June 30, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $371,933,360
- --------------------------------------------------------------------------------
Sales 354,749,146
================================================================================
At June 30, 1999, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 1,622,865
Gross unrealized depreciation (5,790,610)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(4,167,745)
================================================================================
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.
At June 30, 1999, the Portfolio had no open reverse repurchase agreements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
6. Securities Traded on a To-Be-Announced Basis
The Portfolio may trade securities, particularly GNMAs, on a "to-be-announced"
("TBA") basis. In a TBA transaction, the Portfolio commits to purchasing or
selling securities for which specific information is not yet known at the time
of the trade, particularly the face amount and maturity date. Securities
purchased on a TBA basis are not settled until they are delivered to the
Portfolio, normally 15 to 45 days later. These transactions are subject to
market fluctuations and their current value is determined in the same manner as
for other portfolio securities.
At June 30, 1999, the Portfolio had three TBA securities with a market value of
$73,137,141.
7. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized
as assets. Securities equal to the initial margin amount are segregated by the
custodian in the name of the broker. Additional securities are also segregated
up to the current market value of the futures contracts. During the period the
futures contract is open, changes in the value of the contract are recognized as
unrealized gains or losses by "marking to market" on a daily basis to reflect
the market value of the contract at the end of each day's trading. Variation
margin payments are made or received and recognized as assets due from or
liabilities due to broker, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Portfolio records a realized gain or
loss equal to the difference between the proceeds from (or cost of) the closing
transactions and the Portfolio's basis in the contract.
The Portfolio enters into such contracts to hedge a portion of its portfolio.
The Portfolio bears the market risk that arises from changes in the value of the
financial instruments and securities indices (futures contracts).
At June 30, 1999, the Portfolio had no open futures contracts.
8. Capital Shares
At June 30, 1999, the Fund had two billion shares of capital stock authorized
with a par value of $0.01 per share. The Portfolio has the ability to issue
multiple classes of shares. Each share of a class represents an identical
interest in the Portfolio and has the same rights. Each class bears certain
expenses specifically related to the distribution of its shares. Effective June
12, 1998, the Fund adopted the renaming of existing Class C shares as Class L
shares.
- --------------------------------------------------------------------------------
16 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At June 30, 1999, total paid-in capital amounted to the following for each
class:
Class A Class B Class L Class Y
================================================================================
Total Paid-in Capital $233,405,111 $14,036,495 $15,663,141 $3,560,126
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1999 December 31, 1998
--------------------------- --------------------------
Shares Amount Shares Amount
================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 29,435,582 $ 388,954,741 7,074,244 $ 96,446,096
Shares issued on reinvestment 305,235 4,010,349 835,229 11,318,097
Shares reacquired (30,935,289) (408,328,694) (9,182,077) (125,116,110)
- ------------------------------------------------------------------------------------------------
Net Decrease (1,194,472) $ (15,363,604) (1,272,604) $ (17,351,917)
================================================================================================
Class B
Shares sold 147,723 $ 1,958,595 461,439 $ 6,299,469
Shares issued on reinvestment 18,815 247,584 48,009 650,837
Shares reacquired (200,423) (2,654,876) (299,904) (4,090,139)
- ------------------------------------------------------------------------------------------------
Net Increase (Decrease) (33,885) $ (448,697) 209,544 $ 2,860,167
================================================================================================
Class L*
Shares sold 127,357 $ 1,685,411 235,526 $ 3,207,791
Shares issued on reinvestment 17,762 233,337 46,788 632,968
Shares reacquired (162,632) (2,150,491) (195,860) (2,665,220)
- ------------------------------------------------------------------------------------------------
Net Increase (Decrease) (17,513) $ (231,743) 86,454 $ 1,175,539
================================================================================================
Class Y
Shares sold 373 $ 5,000 -- --
Shares issued on reinvestment 1,931 25,396 5,292 $ 71,810
Shares reacquired (42,824) (565,048) (128,378) (1,760,135)
- ------------------------------------------------------------------------------------------------
Net Decrease (40,520) $ (534,652) (123,086) $ (1,688,325)
================================================================================================
Class Z+
Shares sold -- -- 356,630 $ 4,879,280
Shares issued on reinvestment -- -- 143,416 1,945,317
Shares reacquired -- -- (2,174,185) (29,232,436)
- ------------------------------------------------------------------------------------------------
Net Decrease -- -- (1,674,139) $ (22,407,839)
================================================================================================
</TABLE>
* On June 12, 1998, Class C shares were renamed Class L shares.
+ As of December 31,1998, all Class Z shares were fully redeemed.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
<TABLE>
<CAPTION>
Class A Shares 1999(1)(2) 1998(2) 1997 1996 1995 1994
======================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 13.41 $ 13.61 $ 13.24 $ 13.59 $ 12.50 $ 13.66
- ------------------------------------------------------------------------------------------------------
Income (Loss) From
Operations:
Net investment income 0.36 0.71 0.85 0.84 0.92 0.91
Net realized and
unrealized gain (loss) (0.47) 0.08 0.38 (0.33) 1.09 (1.11)
- ------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations (0.11) 0.79 1.23 0.51 2.01 (0.20)
- ------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.35) (0.72) (0.86) (0.86) (0.92) (0.91)
Net realized gains -- (0.27) (0.00)* -- -- (0.05)#
Capital -- (0.00)* -- -- -- --
- ------------------------------------------------------------------------------------------------------
Total Distributions (0.35) (0.99) (0.86) (0.86) (0.92) (0.96)
- ------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $ 12.95 $ 13.41 $ 13.61 $ 13.24 $ 13.59 $ 12.50
- ------------------------------------------------------------------------------------------------------
Total Return (0.80)%++ 6.04% 9.67% 3.97% 16.52% (1.48)%
- ------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $ 226 $ 251 $ 272 $ 312 $ 385 $ 358
- ------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.61%+ 5.22% 6.37% 6.34% 6.82% 6.83%
Interest expense -- 0.05 0.16 0.30 -- --
Other expenses 0.82+ 0.81 0.80 0.79** 0.79 0.76@
- ------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 124% 268% 130% 265% 57% 40%
======================================================================================================
</TABLE>
(1) For the six months ended June 30, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
* Amount represents less than $0.01.
# Represents distributions from paydown gains which are reported as ordinary
income for tax purposes.
** Amount has been restated from the December 31, 1996 annual report.
@ Amount has been restated from the December 31, 1994 annual report.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
18 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
<TABLE>
<CAPTION>
Class B Shares 1999(1)(2) 1998(2) 1997 1996 1995 1994(3)
========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 13.42 $ 13.63 $ 13.26 $ 13.61 $ 12.51 $ 12.47
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) From
Operations:
Net investment income 0.33 0.64 0.79 0.77 0.80 0.08
Net realized and
unrealized gain (loss) (0.47) 0.08 0.38 (0.33) 1.16 0.17
- ------------------------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations (0.14) 0.72 1.17 0.44 1.96 0.25
- ------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.32) (0.66) (0.80) (0.79) (0.86) (0.21)
Net realized gains -- (0.27) (0.00)* -- -- --
Capital -- (0.00)* -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.32) (0.93) (0.80) (0.79) (0.86) (0.21)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $ 12.96 $ 13.42 $ 13.63 $ 13.26 $ 13.61 $ 12.51
- ------------------------------------------------------------------------------------------------------------------------
Total Return (1.05)%++ 5.47% 9.12% 3.44% 16.03% 2.04%++
- ------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $ 13,910 $ 14,861 $ 12,238 $ 11,212 $ 11,116 $ 1,529
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.10%+ 4.69% 5.85% 5.85% 6.16% 6.94%+
Interest expense -- 0.05 0.16 0.30 -- --
Other expenses 1.33+ 1.31 1.31 1.28** 1.28 1.21+@
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 124% 268% 130% 265% 57% 40%
========================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) For the period from November 7, 1994 (inception date) to December 31,
1994.
* Amount represents less than $0.01.
** 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.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
<TABLE>
<CAPTION>
Class L Shares 1999(1)(2) 1998(2)(3) 1997 1996 1995 1994(4)
========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 13.40 $ 13.60 $ 13.23 $ 13.58 $ 12.50 $ 13.66
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) From
Operations:
Net investment income 0.34 0.65 0.77 0.78 0.86 0.82
Net realized and
unrealized gain (loss) (0.48) 0.08 0.40 (0.33) 1.09 (1.11)
- ------------------------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations (0.14) 0.73 1.17 0.45 1.95 (0.29)
- ------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.32) (0.66) (0.80) (0.80) (0.87) (0.83)
Net realized gains -- (0.27) (0.00)* -- -- (0.04)#
Capital -- (0.00)* -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.32) (0.93) (0.80) (0.80) (0.87) (0.87)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $ 12.94 $ 13.40 $ 13.60 $ 13.23 $ 13.58 $ 12.50
- ------------------------------------------------------------------------------------------------------------------------
Total Return (1.05)%++ 5.53% 9.18% 3.49% 15.93% (2.11)%
- ------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $ 14,652 $ 15,407 $ 14,464 $ 17,249 $ 21,559 $ 21,253
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.14%+ 4.74% 5.91% 5.87% 6.36% 6.27%
Interest expense -- 0.05 0.16 0.30 -- --
Other expenses 1.29+ 1.27 1.27 1.26** 1.25 1.21
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 124% 268% 130% 265% 57% 40%
========================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) On June 12, 1998, Class C shares were renamed Class L shares.
(4) On November 7, 1994, the former Class B shares were renamed Class C
shares.
* Amount represents less than $0.01.
# Represents distributions from paydown gains which are reported as ordinary
income for tax purposes.
** Amount has been restated from the December 31, 1996 annual report.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
20 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
<TABLE>
<CAPTION>
Class Y Shares 1999(1)(2) 1998(2) 1997 1996 1995 1994(3)
========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 13.42 $ 13.64 $ 13.27 $ 13.61 $ 12.51 $ 13.67
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) From
Operations:
Net investment income 0.39 0.75 0.88 0.88 1.00 0.89
Net realized and
unrealized gain (loss) (0.47) 0.08 0.39 (0.33) 1.06 (1.10)
- ------------------------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations (0.08) 0.83 1.27 0.55 2.06 (0.21)
- ------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.38) (0.78) (0.90) (0.89) (0.96) (0.91)
Net realized gains -- (0.27) (0.00)* -- -- (0.04)#
Capital -- (0.00)* -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.38) (1.05) (0.90) (0.89) (0.96) (0.95)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $ 12.96 $ 13.42 $ 13.64 $ 13.27 $ 13.61 $ 12.51
- ------------------------------------------------------------------------------------------------------------------------
Total Return (0.64)%++ 6.29% 10.00% 4.30% 16.88% (1.53)%
- ------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $ 2,803 $ 3,447 $ 5,182 $ 5,589 $ 6,992 $ 13,903
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.88%+ 5.52% 6.65% 6.64% 7.22% 6.82%
Interest expense -- 0.05 0.16 0.30 -- --
Other expenses 0.53+ 0.52 0.51 0.50** 0.49 0.61
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 124% 268% 130% 265% 57% 40%
========================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) On November 7, 1994, the former Class C shares were renamed Class Y
shares.
* Amount represents less than $0.01.
# Represents distributions from paydown gains which are reported as ordinary
income for tax purposes.
** Amount has been restated from the December 31, 1996 annual report.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 21
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On May 12, 1999, a special meeting of shareholders of the Fund was held for the
purpose of electing Directors to the Fund.
The results of the vote were as follows:
<TABLE>
<CAPTION>
Shares Voted Percentage Shares Voted Percentage
Name of Directors For Shares Voted Against Shares Voted
==========================================================================================
<S> <C> <C> <C> <C>
Lee Abraham 62,342,951.572 98.630% 865,940.611 1.370%
Allan J. Bloostein 62,384,540.377 98.696 824,351.806 1.304
Jane F. Dasher 62,392,002.787 98.708 816,889.396 1.292
Donald R. Foley 62,322,262.500 98.597 886,629.683 1.403
Richard E. Hanson, Jr. 62,380,877.618 98.690 828,014.565 1.310
Paul Hardin 62,379,975.324 98.689 828,916.859 1.311
Heath B. McLendon 62,370,261.215 98.673 838,630.968 1.327
Roderick C. Rasmussen 62,346,471.848 98.636 862,420.335 1.364
John P. Toolan 62,396,377.832 98.715 812,514.351 1.285
==========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
22 1999 Semi-Annual Report to Shareholders
<PAGE>
[This page intentionally left blank]
<PAGE>
[This page intentionally left blank]
<PAGE>
SALOMON SMITH BARNEY
---------------------------
A member of citigroup{LOGO]
Directors
Lee Abraham
Allan J. Bloostein
Jane F. Dasher
Donald R. Foley
Richard E. Hanson, Jr.
Paul Hardin
Heath B. McLendon, Chairman
Roderick C. Rasmussen
John P. Toolan
Joseph H. Fleiss, Emeritus
Officers
Heath B. McLendon
President and
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
James E. Conroy
Vice President
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Manager
SSBC Fund Management Corp.
Distributor
CFBDS, Inc.
Custodian
PNC Bank, N.A.
Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Funds, Inc. -- U.S. Government Securities Fund. It is not
authorized for distribution to prospective investors unless accompanied or
preceded by a current Prospectus for the Portfolio, which contains information
concerning the Portfolio's investment policies and expenses as well as other
pertinent information.
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Smith Barney
Funds, Inc.
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD0631 8/99
<PAGE>
[PHOTO]
[PHOTO] Smith Barney Funds, Inc.
Large Cap
Value Fund
-------------------
SEMI-ANNUAL REPORT
-------------------
June 30, 1999
[LOGO] Smith Barney
Mutual Funds
<PAGE>
Smith Barney Funds, Inc.
Large Cap Value Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Large Cap Value Fund ("Portfolio") seeks current income and long-term growth
of income and capital primarily through investments in common stocks. It invests
primarily in common stocks of companies having market capitalizations of at
least $5 billion.
Smith Barney Funds, Inc.
Large Cap Value Fund
Average Annual Total Returns
June 30, 1999
Without Sales Charges(1)
------------------------------------------------
Class A Class B Class L
================================================================================
Six Month+ 9.14% 8.70% 8.75%
- --------------------------------------------------------------------------------
One-Year 10.46 9.57 9.64
- --------------------------------------------------------------------------------
Five-Year 19.74 N/A 18.81
- --------------------------------------------------------------------------------
Ten-Year 14.00 N/A N/A
- --------------------------------------------------------------------------------
Since Inception++ 11.92 20.24 15.85
================================================================================
Without Sales Charges(2)
------------------------------------------------
Class A Class B Class L
================================================================================
Six Month+ 3.70% 3.70% 6.69%
- --------------------------------------------------------------------------------
One-Year 4.94 4.57 7.56
- --------------------------------------------------------------------------------
Five-Year 18.52 N/A 18.57
- --------------------------------------------------------------------------------
Ten-Year 13.42 N/A N/A
- --------------------------------------------------------------------------------
Since Inception++ 11.74 20.13 15.68
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 5.00% and 1.00%,
respectively; and Class B shares reflect the deduction of a 5.00% CDSC,
which applies if shares are redeemed within one year from purchase.
Thereafter, the CDSC declines by 1.00% per year until no CDSC is incurred.
Class L shares also reflect the deduction of a 1.00% CDSC which applies if
shares are redeemed within the first year of purchase.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
++ Inception dates for Class A, B and L shares are May 18, 1967, November 7,
1994 and December 2, 1992, respectively.
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Overall, our investment strategy remains unchanged. We continue to focus on
identifying high-quality, attractively valued companies with adequate earnings
visibility and clearly identifiable fundamental catalysts.
- --------------------------------------------------------------------------------
NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A SBCIX
Class B SBCCX
Class L SBGLX
- --------------------------------------------------------------------------------
WHAT'S INSIDE
- --------------------------------------------------------------------------------
Shareholder Letter............................................................ 1
Historical Performance........................................................ 5
Large Cap Value Fund at a Glance.............................................. 8
Schedule of Investments....................................................... 9
Statement of Assets and Liabilities...........................................12
Statement of Operations.......................................................13
Statements of Changes in Net Assets...........................................14
Notes to Financial Statements.................................................15
Financial Highlights..........................................................19
Additional Shareholder Information............................................23
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO] [PHOTO]
HEATH B. McLENDON ELLEN CARDOZO SONSINO
Chairman Vice President
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Funds Inc.
- -- Large Cap Value Fund ("Fund"), for the period ended June 30, 1999. We hope
you find this report to be useful and informative. 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.
A Style Pure Fund
The Large Cap Value Fund is a Style Pure Fund. Style Pure Series mutual funds
are Smith Barney Mutual Funds that are the basic building blocks of asset
allocation. Other than for the purposes of maintaining minimal cash or
responding to extraordinary market conditions, each Style Pure Series Fund is
totally invested 100% of the time within designated asset classes and a
designated investment style.
Portfolio Performance
For the six months ended June 30, 1999, the Fund generated total returns of
9.14%, 8.70% and 8.75% for its Class A, B and L shares without sales charges,
respectively. In comparison, the Russell 1000 Value Index, posted a total return
of 11.54% for the same period. (The Russell 1000 Value Index contains those
stocks in the major Russell indexes with a less-than-average growth orientation.
Companies that are categorized in this index generally have lower price-to-book
and price-earnings ratios, higher dividend yields and lower forecasted growth
values. A price-earnings ratio is a widely used gauge of a stock's valuation
that indicates what investors are paying for an interest in a company based on
its earnings. A price-to-book ratio shows the price of a stock compared to the
company's book value. Past performance is not indicative of future results.) In
addition, the Fund underperformed its Lipper Inc. peer group average, which
posted a return of 10.19% for the six months ended June 30, 1999. (Lipper is a
major fund-tracking organization.)
Market Update
The multitude of rate reductions administered by global policy makers last fall
has proven to be quite an effective antidote for the financial crises which
roiled international markets last year. Indeed, as the 150-plus central bank
easings have begun to impact their respective regions, those economists and
strategists, who predicted single-digit market returns, sluggish global economic
growth and mediocre corporate profits have been forced to alter their
projections. In response to evidence of a bottoming in global economic growth,
improving prospects for a broad recovery in corporate earnings and the
associated increase in overall investor optimism, major equity markets rallied
through the first half of the year.
Stocks have not ascended without significant pockets of volatility as investors
have only begrudgingly come to accept the fact that with rousing domestic
growth, a rebounding manufacturing sector and an improving global outlook, the
Federal Reserve Board's ("Fed") continued willingness to take an accommodative
position for the sake of maintaining a global `customer of last resort' can no
longer be assumed. Such concerns, along with a disquieting April Consumer Price
Index ("CPI") reading, inspired a
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 1
<PAGE>
shift in focus among investors away from risks linked to global concerns towards
analyzing domestic economic data for evidence of inflation. In the process,
long-term rates rose above 6% and toward their highest levels since 1997, as
market participants grappled with the implications of reduced global tensions on
the direction of future monetary policy.
Ultimately, the Fed viewed the degree of reduction in global tensions as
sufficient to warrant a reversal of at least one of the three rate cuts
administered last fall and following the most recent policy meeting, the
federal-funds rate was raised 25 basis points to 5%. Surprisingly, Fed officials
also reversed a monetary policy tightening bias adopted during May in favor of
re-establishing a neutral posture. In our opinion, this unexpected combination
of actions suggests that in the Fed's view, existing evidence of inflation,
though mixed, does not pose a threat and the likelihood of a sustained global
economic recovery, though unquestionably improved, remain nonetheless
precarious.
Portfolio Strategy*
Overall, our investment strategy remains unchanged. We continue to focus on
identifying high-quality, attractively valued companies with adequate earnings
visibility and clearly identifiable fundamental catalysts.
Over the course of the past six months we established positions in the shares of
Williams Companies, up about 36% year-to-date through June 30, 1999, Raytheon,
higher by roughly 33%, and Marsh & McLennan, up approximately 31%. The
performance of each company ranked near the top among the Fund's major holdings.
Enthusiasm associated with Williams increased in part due to the announcement of
an aggressive plan to accelerate the expansion of its fiber optics network in
response to a rapidly growing book of business and acceleration in the overall
demand for bandwidth. Williams has clearly begun to build substantial momentum
behind the telecom side of its business and now anticipates an initial public
offering ("IPO") of Williams Communications this summer. Although investors have
recently become concerned about a delay in this widely anticipated IPO, we
expect federal approval of the transaction to be attained within a reasonable
time frame and believe that pricing of the deal will drive the performance of
shares of Williams in the near term.
Shares of Marsh & McLennan rose significantly on the basis of upbeat assessments
by executives of several major Property & Casualty insurers, providing anecdotal
evidence that a deceleration in the rate of decline in commercial pricing is
likely to occur in coming months. As the world's largest insurance broker, Marsh
is positioned to be a major beneficiary of any such `turn' in pricing. The
company also reported earnings significantly higher than analyst's expectations
and continues to experience significant growth in assets under management within
its Putnam Investments unit. Lastly, we recently sought to uncover military
equipment manufacturers positioned to benefit disproportionately from the first
meaningful increase in the defense procurement budget in twelve years and
subsequently increased our exposure to the sector through shares of Raytheon. We
share the view of many observers that the implications of the NATO-Yugoslav
conflict supports a more positive conceptual outlook for the aerospace/defense
industry and we believe Raytheon is well-positioned as the leading provider of
high-precision, sophisticated weaponry to capture a sizeable share of planned
and supplemental budget increases.
Another theme influencing portfolio positioning during the reporting period
revolves around growing optimism regarding the likelihood that the impact of
global easings should indeed spark a sustainable recovery in growth among
international economies and form the basis for a broadening of corporate
earnings growth. As our confidence in such a scenario has strengthened, we have
increased the Fund's exposure to securities with earnings highly leveraged to a
stabilizing outlook for global consumer demand and
- ----------
* Please note the Fund's holdings are subject to change.
- --------------------------------------------------------------------------------
2 1999 Semi-Annual Report to Shareholders
<PAGE>
recovery among emerging economies. This framework has led us to increase
weightings within the capital goods, raw materials, and energy sectors.
Throughout the year we have also steadily increased our exposure to the
financial sector. Globalization, attractive demographics both domestically and
internationally, merger synergies, emerging strategies to capitalize on the
growing popularity of consumer online banking and the potential for further
regulatory changes have created compelling growth opportunities for
well-positioned firms.
Indeed, the recent additions of Marsh & McLennan, Chubb, Unum and Bank One to
the portfolio reflect efforts to identify long-term winners within this dynamic
industry. During the first half of 1999 we did however, eliminate our position
in First Union, down roughly 25%, following management's disclosure that
earnings for the year would be meaningfully lower than anticipated. This
shortfall is largely related to the higher costs associated with technology
spending initiatives and lower revenue synergies derived from recent
acquisitions. The negative earnings surprise was poorly communicated and
conflicting messages from varying levels of management served to erode our
confidence in management's ability to deliver on stated operating and
profitability objectives.
A combination of industry-wide and company-specific factors caused Unilever,
down 20%, to be particularly weak during recent months. Specifically, diminished
global risks, resilient economic strength, concerns about the impact of retail
consolidation on food manufacturers, and a general lack of organic growth
continues to constrain the appeal of food stocks among a broad constituency of
investors. Fundamentally, Unilever's reported results were uninspiring with
profits essentially flat and volume trends down across all major geographies.
Although the margin expansion story at Unilever remains intact, we chose to
gradually reduce our holdings. In our view, given an environment in which
earnings growth is less scarce, investors are likely to generally continue
displaying an aversion toward food stocks in favor of companies with better
top-line driven prospects for achieving organic growth.
The valuations of pharmaceutical companies' stocks have been significant
beneficiaries of investors' preference for companies displaying steady,
consistent growth characteristics and the group has consistently ranked among
the top-performing sectors in recent years. However, considering the strong
relative performance of our drug holdings and reduced potential for further
valuation expansion, we recently viewed the timing as appropriate to reduce the
fund's exposure to the health care sector by trimming American Home Products and
Bristol Myers-Squibb. We remain positively disposed toward the long-term growth
prospects and favorable demographic trends impacting well positioned drug
companies. We expect the pharmaceutical stocks in the Fund will continue to
perform relatively well over time and will remain among the Fund's core
holdings.
Market Outlook
Whereas in recent years, amid tepid global growth and lackluster corporate
profits, investors favored an increasingly narrow group of large-cap stocks
displaying steady earnings growth, investors recent behavior suggests a
meaningful shift in their perceptions of risk and relative value. Beginning in
April, droves of investors, encouraged by the prospect of bottoming profits of
companies in several long-suffering sectors and signs of economic improvement
among previously troubled regions, aggressively shifted from relatively
expensive though heretofore predictable growth stocks into securities with more
reasonable valuations that should benefit from improving global demand.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 3
<PAGE>
Notably, the return differential between the Barra Value and Barra Growth
indices in April was the largest absolute monthly spread between the benchmarks
since 1974, its inception. (The Barra Growth Index is a capitalization-weighted
index composed of stocks of the Standard & Poor's 500 Index ("S&P 500") with
lower book-to-price ratios relative to the S&P 500 as a whole. The Barra Value
Index is also a capitalization-weighted index composed of stocks of the S&P 500
with higher book-to-price ratios relative to the S&P 500 as a whole.)
Encouragingly, the outperformance of value stocks toward the beginning of the
quarter marked an inflection point and such securities on average continued to
outperform growth-oriented names over the duration of the second quarter of
1999.
We believe market sentiment has changed in response to several positive
fundamental developments confirming improved prospects for global economic
growth and an associated broadening of corporate earnings. While the magnitude
of the rotation into value may become more subdued in future months, several
reasons cause us to remain optimistic that strengthening economies, stable to
rising rates and changing perceptions of risk/reward among investors make
improved relative performance among value-biased portfolios increasingly likely
in future months. Historical data provides evidence that value-oriented
securities have meaningfully and consistently outperformed growth stocks during
periods corresponding with positive inflection points in the growth outlook for
corporate profits and global Gross Domestic Product. In our opinion, such an
inflection has been reached regarding each of these historically reliable
determinants of relative performance, as the mosaic of economic clues coming
into focus suggests an improvement in corporate profitability likely is
sustainable. Of course, past performance is not indicative of future results.
In closing, thank you for your investment in the Smith Barney Large Cap Value
Fund. We look forward to continuing to help you pursue your financial goals in
the years to come.
Sincerely,
/s/ Heath B. McLendon /s/ Ellen Cardozo Sonsino
Heath B. McLendon Ellen Cardozo Sonsino
Chairman Vice President
July 15, 1999
- --------------------------------------------------------------------------------
4 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
6/30/99 $18.28 $19.85 $0.10 $0.00 9.14%+
- --------------------------------------------------------------------------------
12/31/98 17.09 18.28 0.23 1.06 14.61
- --------------------------------------------------------------------------------
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
================================================================================
Total $4.89 $7.41
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
6/30/99 $18.21 $19.77 $0.02 $0.00 8.70%+
- --------------------------------------------------------------------------------
12/31/98 17.03 18.21 0.09 1.06 13.71
- --------------------------------------------------------------------------------
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 $0.88 $5.67
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 5
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
6/30/99 $18.22 $19.79 $0.02 $0.00 8.75%+
- --------------------------------------------------------------------------------
12/31/98 17.05 18.22 0.10 1.06 13.73
- --------------------------------------------------------------------------------
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 $1.57 $6.80
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
6/30/99 $18.28 $19.86 $0.13 $0.00 9.36%+
- --------------------------------------------------------------------------------
12/31/98 17.09 18.28 0.29 1.06 14.96
- --------------------------------------------------------------------------------
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 $1.18 $4.35
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class Z Shares
- --------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
6/30/99 $18.31 $19.89 $0.13 $0.00 9.35%+
- --------------------------------------------------------------------------------
12/31/98 17.12 18.31 0.29 1.06 14.95
- --------------------------------------------------------------------------------
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 $1.72 $5.67
================================================================================
It is the Fund's policy to distribute dividends quarterly and capital gains, if
any, annually.
- --------------------------------------------------------------------------------
6 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
---------------------------------------------------
Class A Class B Class L Class Y Class Z
================================================================================
Six Months Ended 6/30/99+ 9.14% 8.70% 8.75% 9.36% 9.35%
- --------------------------------------------------------------------------------
Year Ended 6/30/99 10.46 9.57 9.64 10.85 10.83
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 19.74 N/A 18.81 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/99 14.00 N/A N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/99 11.92 20.24 15.85 19.28 21.66
================================================================================
With Sales Charges(2)
---------------------------------------------------
Class A Class B Class L Class Y Class Z
================================================================================
Six Months Ended 6/30/99+ 3.70% 3.70% 6.69% 9.36% 9.35%
- --------------------------------------------------------------------------------
Year Ended 6/30/99 4.94 4.57 7.56 10.85 10.83
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99 18.52 N/A 18.57 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/99 13.42 N/A N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/99 11.74 20.13 15.68 19.28 21.66
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
================================================================================
Class A (6/30/89 through 6/30/99) 270.58%
- --------------------------------------------------------------------------------
Class A (Inception* through 6/30/99) 3,629.14
- --------------------------------------------------------------------------------
Class B (Inception* through 6/30/99) 135.52
- --------------------------------------------------------------------------------
Class L (Inception* through 6/30/99) 163.26
- --------------------------------------------------------------------------------
Class Y (Inception* through 6/30/99) 81.92
- --------------------------------------------------------------------------------
Class Z (Inception* through 6/30/99) 148.69
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
contingent deferred sales charges ("CDSC") with respect to Class B and L
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 5.00% and 1.00%,
respectively; and Class B shares reflect the deduction of a 5.00% CDSC,
which applies if shares are redeemed within one year from purchase.
Thereafter the CDSC declines by 1.00% per year until no CDSC is incurred.
Class L shares also reflect the deduction of a 1.00% CDSC, which applies
if shares are redeemed within the first year of purchase.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception dates for Class A, B, L, Y and Z shares are May 18, 1967,
November 7, 1994, December 2, 1992, February 6, 1996 and November 7, 1994,
respectively.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 7
<PAGE>
- --------------------------------------------------------------------------------
Large Cap Value Fund at a Glance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of the Large Cap Value Fund vs. the
Standard & Poor's 500 Index and the Russell 1000 Value Index+
- --------------------------------------------------------------------------------
June 1989 -- June 1999
[GRAPHIC]
Large Cap Value Fund Standard & Poor's 500 Index++ Russell 1000++
-------------------- ----------------------------- --------------
June 1989 9,423 10,000 10,000
Dec 1989 10083 11297 10801
Dec 1990 9137 10946 9929
Dec 1991 11840 14274 12371
Dec 1992 12515 15361 14079
Dec 1993 14776 16905 16630
Dec 1994 14138 17128 16300
Dec 1995 18811 23556 22549
Dec 1996 21833 28962 27428
Dec 1997 27915 38624 37077
Dec 1998 31993 49669 42875
June 1999 34918 55818 48393
+ Hypothetical illustration of $10,000 invested in Class A shares on June
30, 1989, assuming deduction of the maximum 5.00% sales charge and
reinvestment of dividends and capital gains, if any, at net asset value
through June 30, 1999. The Standard & Poor's 500 Index is composed of 500
widely held common stocks listed on the New York Stock Exchange, American
Stock Exchange and over-the-counter market. Figures for the index include
reinvestment of dividends. The Russell 1000 Value Index contains those
securities in the Russell 1000 Index with a less than average growth
orientation. Companies in this index generally have low price to book and
price/earnings ratios, higher dividend yields and lower forecasted growth
values. The indexes are unmanaged and are not subject to the same
management and trading expenses as a mutual fund. The performance of the
Fund's other classes may be greater or less than the Class A shares'
performance indicated on this chart, depending on whether greater or
lesser sales charges and fees were incurred by shareholders investing in
the other classes.
++ It is the opinion of management that the Russell 1000 Value Index more
accurately reflects the current composition of the Large Cap Value Fund
rather than the Standard & Poor's 500 Index. In future reporting, the
Russell 1000 Value Index will be used as a basis for comparison of total
return performance rather than the Standard & Poor's 500 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 shareholders tax liability on dividends or capital
gains.
Industry Diversification of Common Stock*
- --------------------------------------------------------------------------------
[GRAPHIC]
Aerospace & Defense 5.5%
Banking 10.0%
Drugs 6.9%
Energy 8.6%
Insurance 8.1%
Integrated Oil 9.8%
Office Equipment 7.4%
Other 33.5%
Telephone 10.2%
* As a percentage of total common stock.
Top Ten Holdings*
- --------------------------------------------------------------------------------
1. Enron Corp. 4.1%
- --------------------------------------------------------------------------------
2. Chase Manhattan Corp. 3.5
- --------------------------------------------------------------------------------
3. Xerox Corp. 3.2
- --------------------------------------------------------------------------------
4. Williams Cos., Inc. 3.2
- --------------------------------------------------------------------------------
5. American Telephone & Telegraph Corp. 2.9
- --------------------------------------------------------------------------------
6. United Technologies Corp. 2.9
- --------------------------------------------------------------------------------
7. Bristol-Myers Squibb Co. 2.7
- --------------------------------------------------------------------------------
8. Masco Corp. 2.7
- --------------------------------------------------------------------------------
9. GTE Corp. 2.7
- --------------------------------------------------------------------------------
10. General Electric Co. 2.6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) June 30, 1999
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 99.6%
Aerospace & Defense -- 5.5%
63,000 Allied Signal Inc.+ $ 3,969,000
500,000 Raytheon Co., Class A Shares 34,437,500
600,000 United Technologies Corp. 43,012,500
- --------------------------------------------------------------------------------
81,419,000
- --------------------------------------------------------------------------------
Automobiles -- 3.1%
400,000 Ford Motor Co. 22,575,000
350,000 General Motors Corp. 23,100,000
- --------------------------------------------------------------------------------
45,675,000
- --------------------------------------------------------------------------------
Banking -- 10.0%
525,000 Banc One Corp. 31,270,312
435,000 BankAmerica Corp. 31,890,938
600,000 Chase Manhattan Corp. 51,975,000
900,000 Mellon Bank Corp. 32,737,500
- --------------------------------------------------------------------------------
147,873,750
- --------------------------------------------------------------------------------
Capital Goods -- 5.1%
575,000 Emerson Electric Co.+ 36,153,125
350,000 General Electric Co. 38,893,750
- --------------------------------------------------------------------------------
75,046,875
- --------------------------------------------------------------------------------
Chemicals -- 2.2%
475,000 E.I. du Pont de Nemours & Co. 32,448,437
- --------------------------------------------------------------------------------
Drugs -- 6.9%
600,000 Abbott Laboratories 27,300,000
600,000 American Home Products Corp. 34,500,000
575,000 Bristol-Myers Squibb Co. 40,501,563
- --------------------------------------------------------------------------------
102,301,563
- --------------------------------------------------------------------------------
Energy -- 8.5%
475,000 Duke Energy Corp. 25,828,125
400,000 El Paso Thermal Gas Co.+ 14,075,000
750,000 Enron Corp. 61,312,500
650,000 Unicom Corp. 25,065,625
- --------------------------------------------------------------------------------
126,281,250
- --------------------------------------------------------------------------------
Foods -- 3.6%
430,000 H.J. Heinz & Co. 21,553,750
820,000 PepsiCo, Inc. 31,723,750
- --------------------------------------------------------------------------------
53,277,500
- --------------------------------------------------------------------------------
Instruments - Controls -- 4.8%
490,000 Chubb Corp.+ 34,055,000
315,000 Honeywell Inc. 36,500,625
- --------------------------------------------------------------------------------
70,555,625
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1999
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Insurance -- 8.1%
370,000 CIGNA Corp. $ 32,930,000
550,000 Hartford Financial Services, Inc. 32,071,875
500,000 Marsh & McLennan Cos., Inc. 37,750,000
320,000 UnumProvident Corp.+ 17,520,000
- --------------------------------------------------------------------------------
120,271,875
- --------------------------------------------------------------------------------
Integrated Oil -- 9.7%
200,000 Atlantic Richfield Co. 16,712,500
159,000 BP Amoco PLC ADR+ 17,251,500
300,000 Chevron Corp. 28,556,250
700,000 Conoco Inc., Class A Shares+ 19,512,500
325,000 Exxon Corp. 25,065,625
380,000 Mobil Oil Corp. 37,620,000
- --------------------------------------------------------------------------------
144,718,375
- --------------------------------------------------------------------------------
Medical Products & Supplies -- 2.7%
225,000 Baxter International Inc. 13,640,625
475,000 Pharmacia & Upjohn, Inc. 26,985,938
- --------------------------------------------------------------------------------
40,626,563
- --------------------------------------------------------------------------------
Natural Gas -- 3.2%
1,100,000 Williams Cos., Inc. 46,818,750
- --------------------------------------------------------------------------------
Office Equipment -- 7.4%
465,000 International Paper Co. 23,482,500
600,000 Pitney Bowes, Inc. 38,550,000
800,000 Xerox Corp. 47,250,000
- --------------------------------------------------------------------------------
109,282,500
- --------------------------------------------------------------------------------
Publishing -- 1.2%
340,000 McGraw Hill Inc. 18,338,750
- --------------------------------------------------------------------------------
Raw & Intermediate Materials -- 5.3%
365,000 Alcoa Inc. 22,584,375
244,625 Delphi Automative Systems Corp. 4,540,852
1,400,000 Masco Corp.+ 40,425,000
200,500 Reynolds Metals Co. 11,829,500
- --------------------------------------------------------------------------------
79,379,727
- --------------------------------------------------------------------------------
Retail -- 2.2%
600,000 Avon Products Inc. 33,300,000
- --------------------------------------------------------------------------------
Telephone -- 10.1%
775,000 American Telephone & Telegraph Corp.+ 43,254,687
475,000 Ameritech Corp. 34,912,500
525,000 GTE Corp. 39,768,750
620,000 Sprint Corp. 32,743,750
- --------------------------------------------------------------------------------
150,679,687
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $1,062,521,889) $1,478,295,227
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1999
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENT -- 0.4%
$ 6,682,000 Goldman, Sachs & Co., 4.800% due 8/1/99;
Proceeds at maturity -- $6,682,891;
(Fully Collateralized by U.S. Treasury Notes
and Bonds, 0.000% to 7.250% due 3/2/00 to
5/15/17; Market value -- $6,815,640)
(Cost -- $6,682,000) $ 6,682,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $1,069,203,889**) $1,484,977,227
================================================================================
+ All or a portion of this security is on loan (See Note 5).
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 11
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) June 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $1,069,203,889) $1,484,977,227
Cash 723
Collateral for securities on loan (Note 5) 103,612,220
Receivable for Fund shares sold 2,987,155
Dividends and interest receivable 2,056,615
- --------------------------------------------------------------------------------------
Total Assets 1,593,633,940
- --------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note 5) 103,612,220
Management fees payable 733,599
Distribution fees payable 13,380
Payable for Fund shares purchased 24,863
Accrued expenses 349,797
- --------------------------------------------------------------------------------------
Total Liabilities 104,733,859
- --------------------------------------------------------------------------------------
Total Net Assets $1,488,900,081
======================================================================================
NET ASSETS:
Par value of capital shares $ 750,212
Capital paid in excess of par value 987,826,873
Undistributed net investment income 205,993
Accumulated net realized gain on security transactions 84,343,665
Net unrealized appreciation of investments 415,773,338
- --------------------------------------------------------------------------------------
Total Net Assets $1,488,900,081
======================================================================================
Shares Outstanding:
Class A 43,841,314
----------------------------------------------------------------------------------
Class B 6,431,433
----------------------------------------------------------------------------------
Class L 5,283,966
----------------------------------------------------------------------------------
Class Y 9,563,263
----------------------------------------------------------------------------------
Class Z 9,901,199
----------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $19.85
----------------------------------------------------------------------------------
Class B * $19.77
----------------------------------------------------------------------------------
Class L ** $19.79
----------------------------------------------------------------------------------
Class Y (and redemption price) $19.86
----------------------------------------------------------------------------------
Class Z (and redemption price) $19.89
----------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 5.26% of net asset value per share) $20.89
----------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $19.99
======================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if
shares are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited) For the Six Months Ended June 30, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 13,194,369
Interest 150,699
Less: Foreign withholding tax (10,653)
- --------------------------------------------------------------------------------
Total Investment Income 13,334,415
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 3,780,743
Distribution fees (Note 2) 1,892,289
Shareholder and system servicing fees 383,629
Shareholder communications 59,707
Registration fees 41,700
Custody 34,353
Audit and legal 20,067
Directors' fees 13,881
Other 5,604
- --------------------------------------------------------------------------------
Total Expenses 6,231,973
- --------------------------------------------------------------------------------
Net Investment Income 7,102,442
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 324,281,241
Cost of securities sold 238,863,308
- --------------------------------------------------------------------------------
Net Realized Gain 85,417,933
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 387,481,636
End of period 415,773,338
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 28,291,702
- --------------------------------------------------------------------------------
Net Gain on Investments 113,709,635
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 120,812,077
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 13
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1999 (unaudited) and the Year Ended December
31, 1998
<TABLE>
<CAPTION>
1999 1998
=========================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 7,102,442 $ 15,625,393
Net realized gain 85,417,933 69,968,356
Increase in net unrealized appreciation 28,291,702 75,404,104
- ---------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 120,812,077 160,997,853
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (6,887,577) (15,626,789)
Net realized gains -- (71,127,486)
- ---------------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (6,887,577) (86,754,275)
- ---------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sales 165,139,209 195,965,272
Net asset value of shares issued for reinvestment of dividends 5,186,137 69,891,960
Cost of shares reacquired (98,764,979) (121,731,558)
- ---------------------------------------------------------------------------------------------------------
Increase in Net Assets From Fund Share Transactions 71,560,367 144,125,674
- ---------------------------------------------------------------------------------------------------------
Increase in Net Assets 185,484,867 218,369,252
NET ASSETS:
Beginning of period 1,303,415,214 1,085,045,962
- ---------------------------------------------------------------------------------------------------------
End of period* $ 1,488,900,081 $ 1,303,415,214
=========================================================================================================
* Includes undistributed (overdistributed) net investment income of: $205,993 $(8,872)
=========================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Large Cap Value Fund ("Portfolio") is a separate investment portfolio of the
Smith Barney Funds, Inc. ("Fund"). The Fund, a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company and consists of this
Portfolio and two other separate investment portfolios: U.S. Government
Securities Fund and Short-Term High Grade Bond Fund. The financial statements
and financial highlights for the other portfolios are presented in separate
shareholder 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, other than U.S. government agencies and obligations, 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, 1998, 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
SSBC Fund Management Inc. ("SSBC"), formerly known as Mutual Management Corp., a
subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), acts as investment
manager of the Fund. The Portfolio pays SSBC a management fee calculated at an
annual rate of 0.60% on the Portfolio's average daily net assets up to $500
million, 0.55% on the next $500 million and 0.50% on average daily net assets in
excess of $1.0 billion. These fees are calculated daily and paid monthly.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
CFBDS, Inc. acts as the Fund's distributor. Salomon Smith Barney Inc. ("SSB"),
another subsidiary of SSBH, as well as certain other broker-dealers, continues
to sell Fund shares to the public as members of the selling group.
SSB acts as the primary broker for its portfolio agency transactions. For the
six months ended June 30, 1999, SSB received total brokerage commissions of
$21,216.
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 L shares also have
a 1.00% CDSC, which applies if redemption occurs within the first year of
purchase. In certain cases, Class A shares also have a 1.00% CDSC, which applies
if redemption occurs within the first year of purchase. This CDSC only applies
to those purchases of Class A shares, which when combined with current holdings
of Class A shares equal or exceed $500,000 in the aggregate. These purchases do
not incur an initial sales charge.
For the six months ended June 30, 1999, SSB received sales charges of $534,000
and $320,000 on sales of the Fund's Class A and L shares, respectively. In
addition, CDSCs paid to SSB were approximately as follows:
Class B Class L
================================================================================
CDSCs $74,000 $12,000
================================================================================
Pursuant to a Distribution Plan, the Portfolio pays a service fee with respect
to its Class A, B and L shares calculated at the annual rate of 0.25% of the
average daily net assets of each respective class. In addition, the Portfolio
also pays a distribution fee with respect to Class B and L shares calculated at
the annual rate of 0.75% of the average daily net assets of each class. For the
six months ended June 30, 1999, total Distribution Plan fees were as follows:
Class A Class B Class L
================================================================================
Distribution Plan Fees $1,034,734 $454,180 $403,375
================================================================================
All officers and one Director of the Fund are employees of SSB.
3. Investments
During the six months ended June 30, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $397,789,740
- --------------------------------------------------------------------------------
Sales 324,281,241
================================================================================
At June 30, 1999, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $422,588,815
Gross unrealized depreciation (6,815,477)
- --------------------------------------------------------------------------------
Net unrealized appreciation $415,773,338
================================================================================
4. Repurchase Agreements
The Portfolio purchases (and its custodian take possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Portfolio requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
- --------------------------------------------------------------------------------
16 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
5. Lending of Portfolio Securities
The Portfolio has an agreement with its custodian whereby the custodian may lend
securities owned by the Portfolio to brokers, dealers and other financial
organizations. Fees earned by the Portfolio on securities lending are recorded
in interest income. Loans of securities by the Portfolio are collateralized by
cash, U.S. government securities or high quality money market instruments that
are maintained at all times in an amount at least equal to the current market
value of the loaned securities, plus a margin which may vary depending on the
type of securities loaned. The custodian establishes and maintains the
collateral in a segregated account. The Portfolio maintains exposure for the
risk of any losses in the investment of amounts received as collateral.
At June 30, 1999, the Portfolio loaned stocks having a value of approximately
$101,276,332 and holds the following collateral for loaned securities:
Security Descriptions Value
================================================================================
Time Deposits:
Banco Bilbao Vizcaya, 5.750% due 7/1/99 $ 30,126,962
Bank of Montreal, 5.937% due 7/1/99 3,973,595
Bank of Montreal, 5.250% due 7/1/99 20,957,887
Banque Paribas, 5.875% due 7/1/99 31,787,468
Barclays Bank PLC, 5.750% due 7/1/99 16,766,308
- --------------------------------------------------------------------------------
Total $103,612,220
================================================================================
For the six months ended June 30, 1999, interest income earned by the Portfolio
from securities lending was $41,204.
6. Capital Shares
At June 30, 1999, the Fund had two billion shares of capital stock authorized
with a par value of $0.01 per share. The Portfolio has the ability to issue
multiple classes of shares. Each share of a class represents an identical
interest in the Portfolio and has the same rights, except that each class bears
certain expenses specifically related to the distribution of its shares.
At June 30, 1999, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class L Class Y Class Z
===========================================================================================
<S> <C> <C> <C> <C> <C>
Total Paid-in Capital $481,227,588 $115,918,149 $87,668,382 $165,907,684 $137,855,282
===========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1999 December 31, 1998
-------------------------- --------------------------
Shares Amount Shares Amount
============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 2,097,829 $ 40,113,692 2,930,454 $ 53,653,695
Shares issued on reinvestment 195,986 3,704,111 2,761,372 50,701,617
Shares reacquired (3,370,862) (63,517,626) (5,175,572) (94,163,370)
- --------------------------------------------------------------------------------------------
Net Increase (Decrease) (1,077,047) $(19,699,823) 516,254 $ 10,191,942
============================================================================================
Class B
Shares sold 3,076,875 $ 58,908,583 2,474,028 $ 45,218,249
Shares issued on reinvestment 6,571 124,483 208,508 3,803,115
Shares reacquired (484,661) (9,109,194) (525,055) (9,395,016)
- --------------------------------------------------------------------------------------------
Net Increase 2,598,785 $ 49,923,872 2,157,481 $ 39,626,348
============================================================================================
Class L*
Shares sold 2,075,876 $ 39,664,732 1,444,291 $ 26,485,334
Shares issued on reinvestment 5,724 108,445 206,008 3,760,225
Shares reacquired (430,284) (8,074,818) (487,633) (8,820,378)
- --------------------------------------------------------------------------------------------
Net Increase 1,651,316 $ 31,698,359 1,162,666 $ 21,425,181
============================================================================================
Class Y
Shares sold 890,551 $ 16,552,907 2,165,372 $ 39,371,723
Shares issued on reinvestment -- -- -- --
Shares reacquired (28,659) (562,000) -- --
- --------------------------------------------------------------------------------------------
Net Increase 861,892 $ 15,990,907 2,165,372 $ 39,371,723
============================================================================================
Class Z
Shares sold 527,506 $ 9,899,295 1,704,869 $ 31,236,271
Shares issued on reinvestment 65,993 1,249,098 631,826 11,627,003
Shares reacquired (923,252) (17,501,341) (518,759) (9,352,794)
- --------------------------------------------------------------------------------------------
Net Increase (Decrease) (329,753) $ (6,352,948) 1,817,936 $ 33,510,480
============================================================================================
</TABLE>
* On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
18 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
<TABLE>
<CAPTION>
Class A Shares 1999(1)(2) 1998(2) 1997 1996 1995 1994(3)
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 18.28 $ 17.09 $ 14.79 $ 14.59 $ 12.18 $ 13.31
- ----------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.10 0.24 0.29 0.36 0.39 0.43
Net realized and unrealized gain (loss) 1.57 2.24 3.80 1.99 3.59 (1.00)
- ----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.67 2.48 4.09 2.35 3.98 (0.57)
- ----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.10) (0.23) (0.29) (0.36) (0.39) (0.42)
Net realized gains(4) -- (1.06) (1.50) (1.79) (1.18) (0.14)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.10) (1.29) (1.79) (2.15) (1.57) (0.56)
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 19.85 $ 18.28 $ 17.09 $ 14.79 $ 14.59 $ 12.18
- ----------------------------------------------------------------------------------------------------------------------------
Total Return 9.14%++ 14.61% 27.86% 16.06% 33.05% (4.31)%
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 870,307 $ 821,003 $ 758,708 $ 645,935 $ 617,431 $ 544,572
- ----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.91%+ 0.90% 0.92% 0.95% 1.02% 0.96%
Net investment income 1.05+ 1.29 1.71 2.28 2.78 3.31
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 24% 48% 40% 49% 51% 27%
============================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) 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.
(4) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
<TABLE>
<CAPTION>
Class B Shares 1999(1)(2) 1998(2) 1997 1996 1995 1994(3)
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 18.21 $ 17.03 $ 14.74 $ 14.54 $ 12.15 $ 12.54
- ----------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.03 0.09 0.16 0.25 0.24 0.03
Net realized and unrealized gain (loss) 1.55 2.24 3.78 1.98 3.62 (0.19)
- ----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.58 2.33 3.94 2.23 3.86 (0.16)
- ----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.02) (0.09) (0.15) (0.24) (0.29) (0.09)
Net realized gains(4) -- (1.06) (1.50) (1.79) (1.18) (0.14)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.02) (1.15) (1.65) (2.03) (1.47) (0.23)
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 19.77 $ 18.21 $ 17.03 $ 14.74 $ 14.54 $ 12.15
- ----------------------------------------------------------------------------------------------------------------------------
Total Return 8.70%++ 13.71% 26.83% 15.22% 32.07% (1.28)%++
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 127,175 $ 69,786 $ 28,525 $ 14,883 $ 6,065 $ 354
- ----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.68%+ 1.69% 1.71% 1.71% 1.73% 1.59%+*
Net investment income 0.28+ 0.51 0.92 1.55 1.83 2.11+
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 24% 48% 40% 49% 51% 27%
============================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) For the period from November 7, 1994 (inception date) to December 31,
1994.
(4) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
* 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.
- --------------------------------------------------------------------------------
20 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
<TABLE>
<CAPTION>
Class L Shares 1999(1)(2) 1998(2)(3) 1997 1996 1995 1994(4)
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 18.22 $ 17.05 $ 14.76 $ 14.57 $ 12.18 $ 13.30
- ---------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.03 0.09 0.16 0.24 0.27 0.31
Net realized and unrealized gain (loss) 1.56 2.24 3.79 1.98 3.59 (0.95)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.59 2.33 3.95 2.22 3.86 (0.64)
- ---------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.02) (0.10) (0.16) (0.24) (0.29) (0.34)
Net realized gains(5) -- (1.06) (1.50) (1.79) (1.18) (0.14)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.02) (1.16) (1.66) (2.03) (1.47) (0.48)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 19.79 $ 18.22 $ 17.05 $ 14.76 $ 14.57 $ 12.18
- ---------------------------------------------------------------------------------------------------------------------------------
Total Return 8.75%++ 13.73% 26.85% 15.15% 32.01% (4.91)%
- ---------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 104,568 $ 66,190 $ 42,115 $ 33,365 $ 29,758 $ 27,507
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.67%+ 1.67% 1.69% 1.73% 1.79% 1.75%
Net investment income 0.29+ 0.52 0.93 1.50 2.00 2.49
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 24% 48% 40% 49% 51% 27%
=================================================================================================================================
Class Y Shares 1999(1)(2) 1998(2) 1997 1996(2)(6)
=================================================================================================================================
Net Asset Value, Beginning of Period $ 18.28 $ 17.09 $ 14.80 $ 15.06
- ---------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.13 0.30 0.38 0.36
Net realized and unrealized gain 1.58 2.24 3.76 1.58
- ---------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.71 2.54 4.14 1.94
- ---------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.13) (0.29) (0.35) (0.41)
Net realized gains(5) -- (1.06) (1.50) (1.79)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.13) (1.35) (1.85) (2.20)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 19.86 $ 18.28 $ 17.09 $ 14.80
- ---------------------------------------------------------------------------------------------------------------------------------
Total Return 9.36%++ 14.96% 28.21% 12.86%++
- ---------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 189,912 $159,084 $ 111,690 $ 30,169
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.58%+ 0.58% 0.60% 0.66%+
Net investment income 1.38+ 1.61 2.06 3.02+
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 24% 48% 40% 49%
=================================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) On June 12, 1998, Class C shares were renamed Class L shares.
(4) On November 7, 1994, the former Class B shares were renamed Class C
shares.
(5) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
(6) For the period from February 6, 1996 (inception date) to December 31,
1996.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- -------------------------------------------------------------------------------
Smith Barney Funds, Inc. 21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
<TABLE>
<CAPTION>
Class Z Shares 1999(1)(2) 1998(2) 1997 1996 1995 1994(3)
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 18.31 $ 17.12 $ 14.82 $ 14.61 $ 12.19 $ 12.54
- -----------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.13 0.30 0.35 0.42 0.43 0.07
Net realized and unrealized gain (loss) 1.58 2.24 3.80 1.99 3.59 (0.16)
- -----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.71 2.54 4.15 2.41 4.02 (0.09)
- -----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.13) (0.29) (0.35) (0.41) (0.42) (0.12)
Net realized gains(4) -- (1.06) (1.50) (1.79) (1.18) (0.14)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.13) (1.35) (1.85) (2.20) (1.60) (0.26)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 19.89 $ 18.31 $ 17.12 $ 14.82 $ 14.61 $ 12.19
- -----------------------------------------------------------------------------------------------------------------------------
Total Return 9.35%++ 14.95% 28.27% 16.47% 33.41% (0.73)%++
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 196,938 $ 187,352 $ 144,008 $ 113,160 $ 98,661 $ 80,010
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.58%+ 0.59% 0.60% 0.62% 0.69% 0.42%+
Net investment income 1.38+ 1.61 2.03 2.62 3.11 3.88+
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 24% 48% 40% 49% 51% 27%
=============================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) For the period from November 7, 1994 (inception date) to December 31,
1994.
(4) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
22 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On May 12, 1999, a special meeting of shareholders of the Fund was held for the
purpose of electing Directors to the Fund.
The results of the vote were as follows:
<TABLE>
<CAPTION>
Shares Voted Percentage Shares Voted Percentage
Name of Directors For Shares Voted Against Shares Voted
=========================================================================================
<S> <C> <C> <C> <C>
Lee Abraham 62,342,951.572 98.630% 865,940.611 1.370%
Allan J. Bloostein 62,384,540.377 98.696 824,351.806 1.304
Jane F. Dasher 62,392,002.787 98.708 816,889.396 1.292
Donald R. Foley 62,322,262.500 98.597 886,629.683 1.403
Richard E. Hanson, Jr. 62,380,877.618 98.690 828,014.565 1.310
Paul Hardin 62,379,975.324 98.689 828,916.859 1.311
Heath B. McLendon 62,370,261.215 98.673 838,630.968 1.327
Roderick C. Rasmussen 62,346,471.848 98.636 862,420.335 1.364
John P. Toolan 62,396,377.832 98.715 812,514.351 1.285
=========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 23
<PAGE>
[This page intentionally left blank]
<PAGE>
Smith Barney
Funds, Inc.
Directors
Lee Abraham
Allan J. Bloostein
Jane F. Dasher
Donald R. Foley
Richard E. Hanson, Jr.
Paul Hardin
Heath B. McLendon, Chairman
Roderick C. Rasmussen
John P. Toolan
Joseph H. Fleiss, Emeritus
Officers
Heath B. McLendon
President and Chief Executive Officer
Lewis E. Daidone
Senior Vice President and Treasurer
Ellen Cardozo Sonsino
Vice President
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Adviser
SSBC Fund Management Inc.
Distributor
CFBDS, Inc.
Custodian
PNC Bank, N.A.
Shareholder Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Funds, Inc. -- Large Cap Value Fund. It is not for distribution to
prospective investors unless accompanied by a current Prospectus for the Fund,
which contains information concerning the Fund's investment policies and
expenses as well as other pertinent information.
SALOMON SMITH BARNEY
- ---------------------------
A member of citigroup[LOGO]
Solomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Smith Barney Funds, Inc.
Smith Barney Mutual Funds
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD0628 8/99
