<PAGE>
[LOGO OF SMITH BARNEY MUTUAL FUNDS]
SMITH BARNEY
FUNDS, INC.
LARGE CAP VALUE Fund
STYLE PURE SERIES
ANNUAL REPORT
DECEMBER 31,1999
[LOGO OF SMITH BARNEY MUTUAL FUNDS]
NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE
<PAGE>
Smith Barney Funds, Inc.
Large Cap Value Fund
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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
December 31, 1999
Without Sales Charges(1)
---------------------------------------
Class A Class B Class L
=====================================================================
One-Year (0.91)% (1.66)% (1.65)%
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Five-Year 17.53 16.63 16.61
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Ten-Year 11.86 N/A N/A
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Since Inception+ 11.39 15.82 13.03
=====================================================================
With Sales Charges(2)
---------------------------------------
Class A Class B Class L
=====================================================================
One-Year (5.86)% (6.31)% (3.54)%
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Five-Year 16.33 16.53 16.38
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Ten-Year 11.29 N/A N/A
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Since Inception+ 11.22 15.82 12.87
=====================================================================
(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.
+ Inception dates for Class A, B and L shares are May 18, 1967, November 7,
1994 and December 2, 1992, respectively.
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FUND HIGHLIGHT
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We continue to view strengthening global demand as a compelling investment theme
and believe the raw materials, capital goods and energy sectors should perform
well in the coming months. Although no guarantees can be made, we believe we've
identified several attractively valued, high-quality companies poised to benefit
from our expectation of higher global demand.
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NASDAQ SYMBOL
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Class A SBCIX
Class B SBCCX
Class L SBGLX
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WHAT'S INSIDE
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Shareholder Letter ......................................................... 1
Historical Performance ..................................................... 5
Large Cap Value Fund at a Glance ........................................... 8
Schedule of Investments .................................................... 9
Statement of Assets and Liabilities ........................................ 11
Statement of Operations .................................................... 12
Statements of Changes in Net Assets ........................................ 13
Notes to Financial Statements .............................................. 14
Financial Highlights ....................................................... 18
Independent Auditors' Report ............................................... 22
Additional Shareholder Information ......................................... 23
Tax Information ............................................................ 24
<PAGE>
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Shareholder Letter
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[PHOTO] [PHOTO]
HEATH B. ELLEN CARDOZO
MCLENDON SONSINO
Chairman Vice President
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Funds Inc. -
Large Cap Value Fund ("Fund") for the period ended December 31, 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. Any discussion of the Fund's holdings is as of December 31,
1999. Please refer to pages nine and ten for the Fund's holdings. A detailed
summary of performance and current holdings can be found in the appropriate
sections that follow.
Portfolio Performance
For the year ended December 31, 1999, the Fund generated negative total returns
of 0.91%, 1.66% and 1.65% for its Class A, B and L shares, without the effects
of sales charges, respectively. In comparison, the Russell 1000 Value Index1
posted a total return of 7.35% for the same period. Past performance is not an
indication of future results. Additional performance information begins on page
five.
Market Update
As 1999 drew to a close, optimism among many investors reached new heights as
enthusiasm about jobs, wages, the economy and a continuation of the solid stock
market gains of recent years contributed to the second-highest reading of
consumer confidence in the 32-year history of the index. The exuberance was seen
both in the performance of the economy and the financial markets.
The Dow Jones Industrial Average ("DJIA"),2 up 27.29% for the year, and the
Standard and Poor's 500 Index ("S&P 500"),3 higher by 21.03% during the year,
registered solid gains representing a record fifth consecutive year of
double-digit growth. While clearly the returns of these more established stock
indices were exceptional on a historical basis, the tech-heavy NASDAQ Composite
Index ("NASDAQ")4 generated truly outstanding returns. The NASDAQ was up 85.59%
for the year ended December 31, 1999. However, with few exceptions, positive
returns were isolated to a small group of mega-sized, highly valued technology
growth stocks. For the S&P 500 in 1999 ten stocks accounted for 65% of its
performance, without them it would have been up only 6.9%.
In fact, the NASDAQ's 1999 annual return surpassed the previous record,
established in 1915, for the largest annualized return of 81.7%. Continuing a
trend
- ----------
1 The Russell 1000 Value Index contains those stocks in the major Russell
indexes with a less-than-average growth orientation. Companies that are
categorized in this index generally have lower price-to-book and
price-earnings ratios, higher dividend yields and lower forecasted growth
values. A price-earnings ratio is a widely used gauge of a stock's
valuation that indicates what investors are paying for an interest in a
company based on its prior earnings. A price-to-book ratio shows the price
of a stock compared to the company's book value.
2 The DJIA is a price-weighted average of 30 actively traded blue chip
stocks. Figures for the DJIA include reinvestment of dividends
3 The S&P 500 Index is an index of widely held common stocks listed on the
New York and American Stock Exchanges and the over-the-counter markets.
Figures for the S&P 500 Index include reinvestment of dividends.
4 The NASDAQ is a market value-weighted index that measures all domestic and
non-U.S. based securities listed on the NASDAQ Stock Market.
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Smith Barney Funds, Inc. 1
<PAGE>
in recent years, the NASDAQ's performance came from a relatively small group of
technology stocks that helped propel the index past 60 records during the year,
even as the majority of other stocks did not perform well. In fact, in both the
NYSE and NASDAQ, two-thirds of the stocks finished the year down at least 20
percent from their peaks. While technology stocks rose to new heights, most
value-oriented stocks posted only modest returns.
The volatility of the U.S. stock market and the fact that so few stocks did well
during 1999 was challenging for value-oriented investors like us. Popular
market-capitalization weighted indices such as the S&P 500 posted performance
results that hid the lackluster returns of the overall market. In fact, the
median return in the S&P 500 was actually negative in 1999, with close to 28% of
the stocks in the index posting returns that were down 20%, and 38% registering
returns that were down more than 10%. The performance of the Russell 1000 Value
Index can largely be attributed to the performance of only a few stocks. Similar
to the S&P 500, the median stock in the Russell 1000 Value Index also posted a
negative return, though the median Russell 1000 Value Stock posted a more severe
5.75% decline, with 32.9% of the stocks in the index down over 20%, and 45% down
more than 10%. The technology sector contributed 42% of the Russell 1000 Value
Index's return, even though the sector made up only 7.4% of the Index at year
end.5
Just as the major stock indices reached new records, the economy's expansion
became the longest in American history. In our opinion, the robust U.S. economy
put into question longstanding theories of employment, productivity and
inflation and challenged conventional wisdom as to how much an economy can grow
without triggering inflation. Although many more investors now accept the
realities of the New Economy than might have just a year ago, strong economic
growth put Federal Reserve Board ("Fed") officials on guard, as evidenced by
their reversal of its three interest rate reductions last fall. Core inflation
nevertheless remains benign. Additionally, with productivity rising faster than
wages, pressures on companies to raise prices remain modest. However, because of
growth restraints such as a strong dollar, a manufacturing profit recession and
weak global demand (now abating), the expansion's ability to defy time-honored
links between growth and inflation will be tested in coming months. Indeed,
recent data on retail sales, consumer spending and job growth caused economists
to revise their estimates on economic growth upward.
In our view, with scarce evidence of the economy slowing, despite the three rate
rises in 1999, a measure of caution seems appropriate in 2000. We think that the
Fed may raise rates in the coming months, and we expect this tightening to cool
off the economy and stop any inflationary pressures from building.
Investment Strategy and Portfolio Update
Our investment strategy in the Large Cap Value Fund remained unchanged during
the period. We continued to focus on identifying high-quality, attractively
valued companies with adequate earnings visibility and clearly identifiable
catalysts.
International Paper and Alcoa were clear beneficiaries of global economic growth
and we established substantial positions in both companies. In our opinion,
International Paper's management team is aggressively reducing costs,
eliminating less efficient production and capitalizing on economies of scale. We
think this has enabled International Paper, which recently completed its
acquisition of Union Camp, to improve margins even before the benefits of better
pricing begin to positively impact earnings.
- ----------
5 This information was supplied by FactSet Research Systems Inc.
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2 1999 Annual Report to Shareholders
<PAGE>
Two years ago, as Asian demand collapsed and aluminum prices fell, Alcoa's focus
on reducing costs and sticking to strict financial goals lessened its dependence
on price increases and allowed the company to exhibit higher levels of
profitability than its peers. With aluminum prices rising, a superior operating
structure and merger benefits from its recent Alumax acquisition, we expect
Alcoa to generate significant earnings growth in the coming months.
Recently, we changed the Fund's exposure within the financial industry,
de-emphasizing traditional banks more vulnerable to the margin compression
associated with rising rates in favor of financial institutions with more
diversified earnings streams. In our view, many of these companies are better
positioned to benefit from globalization, favorable retirement trends and the
maturation of the capital markets abroad. Although fears of rising rates hurt
the performance of most financials, Marsh & McLennan performed well. Anecdotal
accounts of price increases by senior insurance executives suggests to us that
pricing for standard commercial insurance likely will rise throughout 2000. As
the world's largest insurance broker, we think that Marsh & McLennan stands to
benefit from any such expected turn in pricing. In fact, Marsh & McLennan's
stock also rose significantly after the head of its Putnam Investments unit
reported that assets under management were expected to rise from $318 billion to
$350 billion in the last months of 1999.
We think that the unleashing of competition in previously tightly regulated
industries continues to create both investment risks and opportunities, acting
as a positive agent of change for well-positioned companies and a drag on the
performance of companies that are unwilling to change. Enron and Sprint have
established some of the strongest competitive positions within their respective
deregulated industries.
We think that the broad scope of Enron's global wholesale and retail energy
franchises alone has created a formidable barrier to entry and the company
strengthened its competitive position throughout the period. Enron also posted
accelerating earnings growth driven by deregulation of the U.S. electricity
markets, outsourcing by major corporations for much of their energy needs and
the deregulation of the European gas and electricity markets.
Sprint, the nation's third largest provider of long distance services, continued
to enter new markets and benefited from growing demand for wireless
communication and Internet services. The company's shares also took advantage of
merger-related catalysts, when BellSouth, in an unexpected move, put together a
competing bid against MCI Worldcom's initial offer for the company. Ultimately,
Sprint agreed to be acquired by MCI Worldcom in a $115 billion deal.
Although Raytheon has grown through acquisitions to become a large and
competitive player in the aerospace/defense industry, the stock's performance
proved disappointing during the period. The company revised earnings downward
several times during the second half of 1999 and cited delays in procurement
decisions, slowness in booking international awards and an unfavorable program
mix change as the reasons for the earnings shortfall. We believe the challenges
facing Raytheon will dampen intermediate-term enthusiasm for the shares and that
is why we sold our positions.
We also eliminated positions in First Union earlier in the year, after
management revised earnings expectations lower twice in three months and it
became apparent to us that anticipated operational momentum would not
materialize in 1999. Higher than expected technology costs, sluggish revenue
growth and merger-related lower cost savings versus expectations also
contributed to a string of disappointments.
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Smith Barney Funds, Inc. 3
<PAGE>
Xerox was down after several earnings disappointments throughout the second half
of 1999. Management attributed disappointing results to a wide range of issues
including Y2K-related delays in purchase orders, declining productivity linked
to a massive sales reorganization and persistent economic weakness in Brazil.
And while no guarantees can be given, Xerox's current valuation is near
historically low levels and we believe a turnaround and improvement in earnings
may be likely by the second half of 2000.
Market Outlook
We suspect that a critical factor influencing returns related to value and other
non-tech investment strategies will be the breadth of the market returns.
Consider that only 50% of the stocks in the S&P 500 had a positive return last
year, while correspondingly the rest declined. With the largest multiple point
spread differential among S&P 500 constituents in the past 20 years, it is
difficult to imagine the dichotomy of market returns becoming significantly more
extreme. With global demand accelerating, industry analysts projecting 17%
earnings growth for 2000 and the narrowness of market returns at historical
highs, the prospects for improved relative performance for value-driven
investment strategies appear favorable in our opinion.
In closing, thank you for your continued 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
January 15, 2000
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4 1999 Annual Report to Shareholders
<PAGE>
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Historical Performance -- Class A Shares
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<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=======================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/99 $18.28 $17.00 $0.20 $0.85 $0.06 (0.91)%
- ---------------------------------------------------------------------------------------
12/31/98 17.09 18.28 0.23 1.06 0.00 14.61
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12/31/97 14.79 17.09 0.29 1.50 0.00 27.86
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12/31/96 14.59 14.79 0.36 1.79 0.00 16.06
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12/31/95 12.18 14.59 0.39 1.18 0.00 33.05
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12/31/94 13.31 12.18 0.42 0.14 0.00 (4.31)
- ---------------------------------------------------------------------------------------
12/31/93 12.48 13.31 0.46 0.73 0.00 16.38
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12/31/92 12.51 12.48 0.51 0.40 0.00 7.23
- ---------------------------------------------------------------------------------------
12/31/91 10.54 12.51 0.73 0.05 0.00 26.57
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12/31/90 12.69 10.54 0.70 0.25 0.00 (9.46)
=======================================================================================
Total $4.29 $7.95 $0.06
=======================================================================================
</TABLE>
Historical Performance -- Class B Shares
<TABLE>
<CAPTION>
Net Asset Value
---------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=====================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/99 $18.21 $16.94 $0.05 $0.85 $0.06 (1.66)%
- -----------------------------------------------------------------------------------------------------
12/31/98 17.03 18.21 0.09 1.06 0.00 13.71
- -----------------------------------------------------------------------------------------------------
12/31/97 14.74 17.03 0.15 1.50 0.00 26.83
- -----------------------------------------------------------------------------------------------------
12/31/96 14.54 14.74 0.24 1.79 0.00 15.22
- -----------------------------------------------------------------------------------------------------
12/31/95 12.15 14.54 0.29 1.18 0.00 32.07
- -----------------------------------------------------------------------------------------------------
Inception*-- 12/31/94 12.54 12.15 0.09 0.14 0.00 (1.28)+
=====================================================================================================
Total $0.91 $6.52 $0.06
=====================================================================================================
</TABLE>
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Smith Barney Funds, Inc. 5
<PAGE>
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Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
======================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/99 $18.22 $16.95 $0.05 $0.85 $0.06 (1.65)%
- ------------------------------------------------------------------------------------------------------
12/31/98 17.05 18.22 0.10 1.06 0.00 13.73
- ------------------------------------------------------------------------------------------------------
12/31/97 14.76 17.05 0.16 1.50 0.00 26.85
- ------------------------------------------------------------------------------------------------------
12/31/96 14.57 14.76 0.24 1.79 0.00 15.15
- ------------------------------------------------------------------------------------------------------
12/31/95 12.18 14.57 0.29 1.18 0.00 32.01
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12/31/94 13.30 12.18 0.34 0.14 0.00 (4.91)
- ------------------------------------------------------------------------------------------------------
12/31/93 12.48 13.30 0.36 0.73 0.00 15.46
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Inception*-- 12/31/92 12.87 12.48 0.06 0.40 0.00 (0.57)+
======================================================================================================
Total $1.60 $7.65 $0.06
======================================================================================================
</TABLE>
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Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
==================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/99 $18.28 $17.01 $0.26 $0.85 $0.06 (0.54)%
- --------------------------------------------------------------------------------------------------
12/31/98 17.09 18.28 0.29 1.06 0.00 14.96
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12/31/97 14.80 17.09 0.35 1.50 0.00 28.21
- --------------------------------------------------------------------------------------------------
Inception*-- 12/31/96 15.06 14.80 0.41 1.79 0.00 12.86+
==================================================================================================
Total $1.31 $5.20 $0.06
==================================================================================================
<CAPTION>
Historical Performance -- Class Z Shares
Net Asset Value
------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/99 $18.31 $17.04 $0.26 $0.85 $0.06 (0.54)%
- ----------------------------------------------------------------------------------------------------------
12/31/98 17.12 18.31 0.29 1.06 0.00 14.95
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12/31/97 14.82 17.12 0.35 1.50 0.00 28.27
- ----------------------------------------------------------------------------------------------------------
12/31/96 14.61 14.82 0.41 1.79 0.00 16.47
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12/31/95 12.19 14.61 0.42 1.18 0.00 33.41
- ----------------------------------------------------------------------------------------------------------
Inception*-- 12/31/94 12.54 12.19 0.12 0.14 0.00 (0.73)+
==========================================================================================================
Total $1.85 $6.52 $0.06
==========================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends quarterly and capital gains, if
any, annually.
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6 1999 Annual Report to Shareholders
<PAGE>
Average Annual Total Returns
<TABLE>
<CAPTION>
Without Sales Charges(1)
----------------------------------------------------------------
Class A Class B Class L Class Y Class Z
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 12/31/99 (0.91)% (1.66)% (1.65)% (0.54)% (0.54)%
- -----------------------------------------------------------------------------------------------------------------------
Five Years Ended 12/31/99 17.53 16.63 16.61 N/A 17.91
- -----------------------------------------------------------------------------------------------------------------------
Ten Years Ended 12/31/99 11.86 N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Inception* through 12/31/99 11.39 15.82 13.03 13.79 17.17
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
With Sales Charges(2)
-----------------------------------------------------------------
Class A Class B Class L Class Y Class Z
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 12/31/99 (5.86)% (6.31)% (3.54)% (0.54)% (0.54)%
- -----------------------------------------------------------------------------------------------------------------------
Five Years Ended 12/31/99 16.33 16.53 16.38 N/A 17.91
- -----------------------------------------------------------------------------------------------------------------------
Ten Years Ended 12/31/99 11.29 N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Inception* through 12/31/99 11.22 15.82 12.87 13.79 17.17
=======================================================================================================================
</TABLE>
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Cumulative Total Returns
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Without Sales Charges(1)
================================================================================
Class A (12/31/89 through 12/31/99) 206.81%
- --------------------------------------------------------------------------------
Class A (Inception* through 12/31/99) 3,285.62
- --------------------------------------------------------------------------------
Class B (Inception* through 12/31/99) 113.06
- --------------------------------------------------------------------------------
Class L (Inception* through 12/31/99) 138.06
- --------------------------------------------------------------------------------
Class Y (Inception* through 12/31/99) 65.45
- --------------------------------------------------------------------------------
Class Z (Inception* through 12/31/99) 126.20
================================================================================
(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.
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Smith Barney Funds, Inc. 7
<PAGE>
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Large Cap Value Fund at a Glance (unaudited)
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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+
- --------------------------------------------------------------------------------
December 1989 -- December 1999
[GRAPH]
Large Cap Standard & Poor's
Value Fund 500 Index++ Russell 1000++
Dec/1989 9,428 10,000 10,000
Dec/1990 8,337 9,690 9,192
Dec/1991 10,804 12,636 11,454
Dec/1992 11,584 13,598 13,035
Dec/1993 12,787 14,964 15,397
Dec/1994 12,754 15,161 15,091
Dec/1995 17,164 20,852 20,877
Dec/1996 19,921 25,637 25,394
Dec/1997 25,351 34,189 34,327
Dec/1998 27,647 43,967 39,695
Dec/1999 28,926 53,214 46,995
+ Hypothetical illustration of $10,000 invested in Class A shares on December
31, 1989, assuming deduction of the maximum 5.00% sales charge and
reinvestment of dividends and capital gains, if any, at net asset value
through December 31, 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. An investor may not
invest directly in an index. 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*
8.4% Banking
7.0% Capital Goods
9.4% Energy
8.2% Insurance
12.2% Integrated Oil
5.7% Office Equipment
31.7% Other
5.7% Raw & Intermediate Materials
11.7% Telephone
* As a percentage of total investments.
Top Ten Holdings*
- ---------------------------------------------------------
1. Enron Corp. 5.1%
- ---------------------------------------------------------
2. Exxon Mobil Corp. 5.0
- ---------------------------------------------------------
3. General Electric Co. 4.5
- ---------------------------------------------------------
4. Marsh & McLennan Cos., Inc. 3.6
- ---------------------------------------------------------
5. The Chase Manhattan Corp. 3.6
- ---------------------------------------------------------
6. AT&T Corp. 3.2
- ---------------------------------------------------------
7. Sprint Corp. 3.2
- ---------------------------------------------------------
8. United Technologies Corp. 3.0
- ---------------------------------------------------------
9. Honeywell International Inc. 2.9
- ---------------------------------------------------------
10. GTE Corp. 2.8
- ---------------------------------------------------------
- --------------------------------------------------------------------------------
8 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1999
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 100%
Aerospace & Defense -- 3.0%
600,000 United Technologies Corp. $ 39,000,000
- --------------------------------------------------------------------------------
Automobiles -- 3.0%
350,000 General Motors Corp. 25,440,625
325,000 Union Pacific Corp. (a) 14,178,125
- --------------------------------------------------------------------------------
39,618,750
- --------------------------------------------------------------------------------
Banking -- 8.4%
425,000 Bank of America Corp. 21,329,687
600,000 The Chase Manhattan Corp. 46,612,500
1,075,000 Mellon Financial Corp. (a) 36,617,188
75,000 Merrill Lynch & Co., Inc. 6,262,500
- --------------------------------------------------------------------------------
110,821,875
- --------------------------------------------------------------------------------
Capital Goods -- 7.0%
575,000 Emerson Electric Co. 32,990,625
380,000 General Electric Co. 58,805,000
- --------------------------------------------------------------------------------
91,795,625
- --------------------------------------------------------------------------------
Chemicals -- 2.4%
100,000 The Dow Chemical Co. (a) 13,362,500
277,204 E.I. du Pont de Nemours & Co. (a) 18,260,754
- --------------------------------------------------------------------------------
31,623,254
- --------------------------------------------------------------------------------
Drugs -- 4.8%
650,000 American Home Products Corp. 25,634,375
575,000 Bristol-Myers Squibb Co. 36,907,812
- --------------------------------------------------------------------------------
62,542,187
- --------------------------------------------------------------------------------
Energy -- 9.4%
450,000 Duke Energy Corp. (a) 22,556,250
1,500,000 Enron Corp. (a) 66,562,500
349,975 Halliburton Co. 14,086,494
607,500 Unicom Corp. (a) 20,351,250
- --------------------------------------------------------------------------------
123,556,494
- --------------------------------------------------------------------------------
Foods -- 3.5%
405,000 H.J. Heinz Co. 16,124,063
850,000 PepsiCo, Inc. (a) 29,962,500
- --------------------------------------------------------------------------------
46,086,563
- --------------------------------------------------------------------------------
Instruments - Controls -- 4.7%
417,000 The Chubb Corp. 23,482,312
653,625 Honeywell International Inc. 37,705,992
- --------------------------------------------------------------------------------
61,188,304
- --------------------------------------------------------------------------------
Insurance -- 8.2%
170,000 CIGNA Corp. (a) 13,695,625
575,000 The Hartford Financial Services Group, Inc. 27,240,625
500,000 Marsh & McLennan Cos., Inc. (a) 47,843,750
605,000 UnumProvident Corp. 19,397,813
- --------------------------------------------------------------------------------
108,177,813
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1999
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
- --------------------------------------------------------------------------------
Integrated Oil -- 12.2 %
- --------------------------------------------------------------------------------
200,000 Atlantic Richfield Co. (a) $ 17,300,000
318,000 BP Amoco PLC (a) 18,861,375
300,000 Chevron Corp. 25,987,500
700,000 Conoco Inc., Class A Shares (a) 17,325,000
583,498 Conoco Inc., Class B Shares 14,514,513
821,657 Exxon Mobil Corp. (a) 66,194,712
- --------------------------------------------------------------------------------
160,183,100
- --------------------------------------------------------------------------------
Medical Products & Supplies -- 2.9%
215,000 Baxter International Inc. 13,504,687
535,000 Pharmacia & Upjohn, Inc. 24,075,000
- --------------------------------------------------------------------------------
37,579,687
- --------------------------------------------------------------------------------
Natural Gas -- 2.6%
1,100,000 The Williams Cos., Inc. 33,618,750
- --------------------------------------------------------------------------------
Office Equipment -- 5.7%
490,000 International Paper Co. (a) 27,654,375
600,000 Pitney Bowes Inc. (a) 28,987,500
800,000 Xerox Corp. 18,150,000
- --------------------------------------------------------------------------------
74,791,875
- --------------------------------------------------------------------------------
Publishing -- 1.6%
345,000 The McGraw-Hill Cos., Inc. 21,260,625
- --------------------------------------------------------------------------------
Raw & Intermediate Materials -- 5.7%
390,000 Alcoa Inc. (a) 32,370,000
1,300,000 Masco Corp. 32,987,500
115,500 Reynolds Metals Co. 8,850,188
- --------------------------------------------------------------------------------
74,207,688
- --------------------------------------------------------------------------------
Retail -- 3.2%
317,000 Avon Products, Inc. 10,461,000
475,000 Kimberly-Clark Corp. 30,993,750
- --------------------------------------------------------------------------------
41,454,750
- --------------------------------------------------------------------------------
Telephone -- 11.7%
825,000 AT&T Corp. (a) 41,868,750
525,000 GTE Corp. 37,045,313
675,000 SBC Communications Inc. 32,906,250
620,000 Sprint Corp. 41,733,750
- --------------------------------------------------------------------------------
153,554,063
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost-- $1,019,638,686*) $1,311,061,403
================================================================================
(a) 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.
- --------------------------------------------------------------------------------
10 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $1,019,638,686) $1,311,061,403
Collateral for securities on loan (Note 5) 151,452,968
Receivable for securities sold 4,296,020
Receivable for Fund shares sold 1,997,600
Dividends and interest receivable 1,978,477
- --------------------------------------------------------------------------------
Total Assets 1,470,786,468
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note 5) 151,452,968
Payable to bank 7,450,328
Payable for Fund shares purchased 2,591,542
Management fees payable 629,460
Distribution fees payable 1,800
Accrued expenses 275,904
- --------------------------------------------------------------------------------
Total Liabilities 162,402,002
- --------------------------------------------------------------------------------
Total Net Assets $1,308,384,466
================================================================================
NET ASSETS:
Par value of capital shares $ 769,718
Capital paid in excess of par value 1,016,826,899
Overdistributed net investment income (14,608)
Accumulated net realized loss on security transactions (620,260)
Net unrealized appreciation of investments 291,422,717
- --------------------------------------------------------------------------------
Total Net Assets $1,308,384,466
================================================================================
Shares Outstanding:
Class A 43,781,300
-----------------------------------------------------------------------------
Class B 6,994,636
-----------------------------------------------------------------------------
Class L 5,765,888
-----------------------------------------------------------------------------
Class Y 10,875,356
-----------------------------------------------------------------------------
Class Z 9,554,612
-----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $17.00
-----------------------------------------------------------------------------
Class B * $16.94
-----------------------------------------------------------------------------
Class L ** $16.95
-----------------------------------------------------------------------------
Class Y (and redemption price) $17.01
-----------------------------------------------------------------------------
Class Z (and redemption price) $17.04
-----------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 5.26% of net asset value per share) $17.89
-----------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $17.12
===============================================================================
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 11
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended December 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 26,898,032
Interest 504,428
Less: Foreign withholding tax (31,800)
- --------------------------------------------------------------------------------
Total Investment Income 27,370,660
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 7,651,395
Distribution fees (Note 2) 4,042,765
Shareholder and system servicing fees 716,754
Shareholder communications 90,155
Registration fees 73,000
Custody 37,011
Audit and legal 29,375
Directors' fees 23,959
Other 71,300
- --------------------------------------------------------------------------------
Total Expenses 12,735,714
- --------------------------------------------------------------------------------
Net Investment Income 14,634,946
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 461,958,425
Cost of securities sold 398,028,508
- --------------------------------------------------------------------------------
Net Realized Gain 63,929,917
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 387,481,636
End of year 291,422,717
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (96,058,919)
- --------------------------------------------------------------------------------
Net Loss on Investments (32,129,002)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (17,494,056)
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
============================================================================================================
OPERATIONS:
<S> <C> <C>
Net investment income $ 14,634,946 $ 15,625,393
Net realized gain 63,929,917 69,968,356
Increase (decrease) in net unrealized appreciation (96,058,919) 75,404,104
- ------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (17,494,056) 160,997,853
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (14,579,182) (15,626,789)
Net realized gains (63,537,409) (71,127,486)
Capital (4,214,738) --
- ------------------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (82,331,329) (86,754,275)
- ------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sales 286,875,651 195,965,272
Net asset value of shares issued for reinvestment of dividends 64,751,969 69,891,960
Cost of shares reacquired (246,832,983) (121,731,558)
- ------------------------------------------------------------------------------------------------------------
Increase in Net Assets From Fund Share Transactions 104,794,637 144,125,674
- ------------------------------------------------------------------------------------------------------------
Increase in Net Assets 4,969,252 218,369,252
NET ASSETS:
Beginning of year 1,303,415,214 1,085,045,962
- ------------------------------------------------------------------------------------------------------------
End of year* $1,308,384,466 $1,303,415,214
============================================================================================================
* Includes overdistributed net investment income of: $(14,608) $(8,872)
============================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
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, 1999, 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
SSB Citi Fund Management LLC ("SSBC"), formerly known as SSBC Fund Management
Inc., a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH") which, in
turn, is a subsidiary of Citigroup Inc. ("Citigroup"), acts as investment
manager of the Fund. The Portfolio
- --------------------------------------------------------------------------------
14 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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.
Effective October 1999, Smith Barney Private Trust Company ("Private Trust"),
another subsidiary of Citigroup, became the Portfolio's transfer agent and PFPC
Global Fund Services ("PFPC") became the Portfolio's sub-transfer agent. Private
Trust receives account fees and asset-based fees that vary according to the
account size and type of account. PFPC is responsible for shareholder
recordkeeping and financial processing for all shareholder accounts. During the
period October 1, 1999 through December 31, 1999, the Portfolio paid transfer
agent fees of $161,449 to Private Trust.
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.
SSB acts as the primary broker for its portfolio agency transactions. For the
year ended December 31, 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 year ended December 31, 1999, CFBDS and SSB received sales charges of
$820,000 and $453,000 on sales of the Fund's Class A and L shares, respectively.
In addition, CDSCs paid to CFBDS were approximately as follows:
Class A Class B Class L
================================================================================
CDSCs $4,000 $176,000 $27,000
================================================================================
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
year ended December 31, 1999, total Distribution Plan fees were as follows:
Class A Class B Class L
================================================================================
Distribution Plan Fees $2,037,311 $1,087,146 $918,308
================================================================================
All officers and one Director of the Fund are employees of SSB.
3. Investments
During the year ended December 31, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $514,071,737
- --------------------------------------------------------------------------------
Sales 461,958,425
================================================================================
At December 31, 1999, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $327,973,566
Gross unrealized depreciation (36,550,849)
- --------------------------------------------------------------------------------
Net unrealized appreciation $291,422,717
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
4. Repurchase Agreements
The Portfolio purchases (and its custodian take possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Portfolio requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
5. Lending of Portfolio Securities
The Portfolio has an agreement with its custodian whereby the custodian may lend
securities owned by the Portfolio to brokers, dealers and other financial
organizations. Fees earned by the Portfolio on securities lending are recorded
in interest income. Loans of securities by the Portfolio are collateralized by
cash, U.S. government securities or high quality money market instruments that
are maintained at all times in an amount at least equal to the current market
value of the loaned securities, plus a margin which may vary depending on the
type of securities loaned. The custodian establishes and maintains the
collateral in a segregated account. The Portfolio maintains exposure for the
risk of any losses in the investment of amounts received as collateral.
At December 31, 1999, the Portfolio loaned stocks having a value of
approximately $149,111,880 and holds the following collateral for loaned
securities:
Security Descriptions Value
================================================================================
Time Deposits:
CAISSE, 12.00% due 1/3/00 $ 4,289,325
Chase Bank, 4.50% due 1/3/00 7,279,770
Deutsche Bank, 11.00% due 1/3/00 25,649,714
Marshal & Isley, 2.00% due 1/3/00 745,227
Suntrust Bank, 13.00% due 1/3/00 5,225,383
Suntrust Bank, 4.50% due 1/3/00 7,863,762
Certificates of Deposit:
Deutsche Bank, 6.04% due 1/3/00 4,843,875
Toronto Dominion, 6.74% due 1/14/00 9,573,056
Commercial Paper:
American Home, 5.90% due 3/3/00 1,739,002
Atlantis One, 5.99% due 1/25/00 16,510,061
CC USA Disc, 5.94% due 2/22/00 10,287,815
Corp Receivable, 6.19% due 1/20/00 11,621,889
Delaware Funding, 6.00% due 1/24/00 6,335,184
Moriarity Disc, 5.91% due 2/1/00 10,308,171
Moriarity Disc, 5.95% due 2/18/00 1,415,602
Moriarity Disc, 5.98% due 2/14/00 16,995,239
Sigma Finance, 5.93% due 3/6/00 3,268,994
Floating Rate Notes:
American Home, 5.51% due 4/20/00 1,570,284
KeyBank, 5.90% due 4/20/00 5,314,758
Sigma Finance, 6.25% due 4/4/00 615,857
- --------------------------------------------------------------------------------
Total $151,452,968
================================================================================
For the year ended December 31, 1999, income earned by the Portfolio from
securities lending was $103,972.
- --------------------------------------------------------------------------------
16 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
6. Capital Shares
At December 31, 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 December 31, 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 $475,786,563 $126,034,587 $96,222,421 $189,091,918 $130,461,128
====================================================================================================================================
<CAPTION>
Transactions in shares of each class were as follows:
Year Ended Year Ended
December 31, 1999 December 31, 1998
----------------------------- ----------------------------------
Shares Amount Shares Amount
===========================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 5,013,895 $ 92,920,169 2,930,454 $ 53,653,695
Shares issued on reinvestment 2,501,796 42,790,540 2,761,372 50,701,617
Shares reacquired (8,652,752) (158,447,531) (5,175,572) (94,163,370)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (1,137,061) $ (22,736,822) 516,254 $ 10,191,942
===========================================================================================================================
Class B
Shares sold 4,427,025 $ 83,969,932 2,474,028 $ 45,218,249
Shares issued on reinvestment 361,942 6,119,426 208,508 3,803,115
Shares reacquired (1,626,979) (29,674,516) (525,055) (9,395,016)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase 3,161,988 $ 60,414,842 2,157,481 $ 39,626,348
===========================================================================================================================
Class L*
Shares sold 3,011,037 $ 57,035,420 1,444,291 $ 26,485,334
Shares issued on reinvestment 299,065 5,059,969 206,008 3,760,225
Shares reacquired (1,176,864) (21,533,421) (487,633) (8,820,378)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase 2,133,238 $ 40,561,968 1,162,666 $ 21,425,181
===========================================================================================================================
Class Y
Shares sold 2,202,645 $ 40,349,777 2,165,372 $ 39,371,723
Shares issued on reinvestment -- -- -- --
Shares reacquired (28,660) (562,000) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase 2,173,985 $ 39,787,777 2,165,372 $ 39,371,723
===========================================================================================================================
Class Z
Shares sold 670,713 $ 12,600,353 1,704,869 $ 31,236,271
Shares issued on reinvestment 626,698 10,782,034 631,826 11,627,003
Shares reacquired (1,973,751) (36,615,515) (518,759) (9,352,794)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (676,340) $ (13,233,128) 1,817,936 $ 33,510,480
===========================================================================================================================
</TABLE>
* On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class A Shares 1999(1) 1998(1) 1997 1996 1995
=================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $18.28 $17.09 $14.79 $14.59 $12.18
- ----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.20 0.24 0.29 0.36 0.39
Net realized and unrealized gain (loss) (0.37) 2.24 3.80 1.99 3.59
- ----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.17) 2.48 4.09 2.35 3.98
- ----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.20) (0.23) (0.29) (0.36) (0.39)
Net realized gains(2) (0.85) (1.06) (1.50) (1.79) (1.18)
Capital (0.06) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.11) (1.29) (1.79) (2.15) (1.57)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $17.00 $18.28 $17.09 $14.79 $14.59
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return (0.91)% 14.61% 27.86% 16.06% 33.05%
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $744,405 $821,003 $758,708 $645,935 $617,431
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.90% 0.90% 0.92% 0.95% 1.02%
Net investment income 1.09 1.29 1.71 2.28 2.78
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 34% 48% 40% 49% 51%
==================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
- --------------------------------------------------------------------------------
18 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class B Shares 1999(1) 1998(1) 1997 1996 1995
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $18.21 $17.03 $14.74 $14.54 $12.15
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.06 0.09 0.16 0.25 0.24
Net realized and unrealized gain (loss) (0.37) 2.24 3.78 1.98 3.62
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.31) 2.33 3.94 2.23 3.86
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.05) (0.09) (0.15) (0.24) (0.29)
Net realized gains(2) (0.85) (1.06) (1.50) (1.79) (1.18)
Capital (0.06) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.96) (1.15) (1.65) (2.03) (1.47)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $16.94 $18.21 $17.03 $14.74 $14.54
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (1.66)% 13.71% 26.83% 15.22% 32.07%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $118,477 $69,786 $28,525 $14,883 $6,065
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.67% 1.69% 1.71% 1.71% 1.73%
Net investment income 0.32 0.51 0.92 1.55 1.83
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 34% 48% 40% 49% 51%
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Class L Shares 1999(1) 1998(1)(2) 1997 1996 1995
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $18.22 $17.05 $14.76 $14.57 $12.18
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.06 0.09 0.16 0.24 0.27
Net realized and unrealized gain (loss) (0.37) 2.24 3.79 1.98 3.59
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.31) 2.33 3.95 2.22 3.86
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.05) (0.10) (0.16) (0.24) (0.29)
Net realized gains(3) (0.85) (1.06) (1.50) (1.79) (1.18)
Capital (0.06) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.96) (1.16) (1.66) (2.03) (1.47)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $16.95 $18.22 $17.05 $14.76 $14.57
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (1.65)% 13.73% 26.85% 15.15% 32.01%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $97,745 $66,190 $42,115 $33,365 $29,758
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.66% 1.67% 1.69% 1.73% 1.79%
Net investment income 0.34 0.52 0.93 1.50 2.00
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 34% 48% 40% 49% 51%
====================================================================================================================================
<CAPTION>
Class Y Shares 1999(1) 1998(1) 1997 1996(1)(4)
====================================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $18.28 $17.09 $14.80 $15.06
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.26 0.30 0.38 0.36
Net realized and unrealized gain (loss) (0.36) 2.24 3.76 1.58
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.10) 2.54 4.14 1.94
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.26) (0.29) (0.35) (0.41)
Net realized gains(3) (0.85) (1.06) (1.50) (1.79)
Capital (0.06) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.17) (1.35) (1.85) (2.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $17.01 $18.28 $17.09 $14.80
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (0.54)% 14.96% 28.21% 12.86%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $184,974 $159,084 $111,690 $30,169
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.58% 0.58% 0.60% 0.66%+
Net investment income 1.41 1.61 2.06 3.02+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 34% 48% 40% 49%
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) On June 12, 1998, Class C shares were renamed Class L shares.
(3) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
(4) 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.
- --------------------------------------------------------------------------------
20 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class Z Shares 1999(1) 1998(1) 1997 1996 1995
==============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $18.31 $17.12 $14.82 $14.61 $12.19
- --------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.26 0.30 0.35 0.42 0.43
Net realized and unrealized gain (loss) (0.36) 2.24 3.80 1.99 3.59
- --------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.10) 2.54 4.15 2.41 4.02
- --------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.26) (0.29) (0.35) (0.41) (0.42)
Net realized gains(2) (0.85) (1.06) (1.50) (1.79) (1.18)
Capital (0.06) -- -- -- --
- --------------------------------------------------------------------------------------------------------------
Total Distributions (1.17) (1.35) (1.85) (2.20) (1.60)
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $17.04 $18.31 $17.12 $14.82 $14.61
- --------------------------------------------------------------------------------------------------------------
Total Return (0.54)% 14.95% 28.27% 16.47% 33.41%
- --------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $162,783 $187,352 $144,008 $113,160 $98,661
- --------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.58% 0.59% 0.60% 0.62% 0.69%
Net investment income 1.40 1.61 2.03 2.62 3.11
- --------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 34% 48% 40% 49% 51%
==============================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 21
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
Smith Barney Funds, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Large Cap Value Fund of Smith Barney Funds,
Inc., as of December 31, 1999, the related statement of operations for the year
then ended, the statements of changes in net assets for each of the years in the
two-year period then ended and the financial highlights for each of the years in
the five-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999, by correspondence with the custodian. As to securities sold,
but not yet delivered we performed other appropriate auditing procedures. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Large Cap Value Fund of Smith Barney Funds, Inc. as of December 31, 1999, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended and the financial
highlights for each of the years in the five-year period then ended, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
February 11, 2000
- --------------------------------------------------------------------------------
22 1999 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>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
December 31, 1999:
. A corporate dividends received deduction of 100%.
. Total long-term capital gain distributions paid of $63,921,087.
- --------------------------------------------------------------------------------
24 1999 Annual Report to Shareholders
<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
SSB Citi Fund Management LLC
Distributor
CFBDS, Inc.
Custodian
PNC Bank, N.A.
Transfer Agent
Smith Barney Private Trust Company
388 Greenwich Street, 22nd Floor
New York, New York 10013
Sub-Transfer Agent
PFPC Global Fund Services
P.O. Box 9134
Boston, Massachusetts 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. If used as sales materials
after March 31, 2000, this report must be accompanied by performance information
for the most recently completed calendar quarter.
[LOGO OF SALOMON SMITH BARNEY]
Smith Barney Funds, Inc.
Smith Barney Mutual Funds
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com/mutualfunds
FD0853 2/00
<PAGE>
[LOGO OF SMITH BARNEY]
Smith Barney Funds, Inc.
Short-Term
High Grade Bond Fund
ANNUAL REPORT
DECEMBER 31, 1999
[LOGO OF SMITH BARNEY]
NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE
<PAGE>
Smith Barney Funds, Inc.
[PHOTO] [PHOTO]
HEATH B. JAMES E.
MCLENDON CONROY
Chairman Vice President
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Funds, Inc. -
Short-Term High Grade Bond Fund ("Portfolio") for the year ended December 31,
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. We hope you
find this report to be useful and informative.
Performance Update
For the year ended December 31, 1999, the Portfolio returned 0.76% for Class A
shares, without sales charges. In comparison, the Salomon Smith Barney
Treasury/Government Sponsored/Corporate 1-5 Year Index returned 2.15% for the
year ended December 31, 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 2.81% return for the same period. (Lipper, Inc. is an
independent fund-tracking organization.) During the past year, the Portfolio
distributed income dividends totaling $0.19 per Class A share. For performance
information on the Portfolio's other share class, please refer to page 4.
Market Update
1999 turned out to be one of the two worst years for the bond market in the
1990's (1994 being the other) and we believe this has been one of the most
difficult markets since bond markets first were recorded back in 1973.
In 1999 the bond market was negatively impacted by diminishing liquidity -- a
direct result of the global financial crisis that reached its climax in October
of 1998, as well as the Federal Reserve Board's ("Fed") three 25-basis-point
increases (100 basis points are equal to one percent) on June 30, August 24 and
November 16, 1999, respectively.1
- --------------
1 On Wednesday, February 2, 2000, the Fed raised interest rates by 0.25% to
5.75% after this letter was written.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 1
<PAGE>
It is our belief that the worst may be over. With the likelihood of more
moderate growth going forward, inflation fears could abate. Many bond experts
expect that yields on 30-year U.S. Treasuries will trade between 6% and 6.7%
over the next 12 months. If correct, these yields may provide investors with
some offset against declines in bond prices.
Investment Strategy
The Portfolio seeks current income, preservation of capital and liquidity by
investing primarily in "high grade"2 fixed income securities. 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's investment strategy has included slowly buying U.S. Treasuries
and extending maturities as interest rates rose during this period. In our view,
we have probably seen the highs in yields over the near-term, and our investment
strategy in the coming months will be to increase our U.S. Treasury exposure and
reduce our mortgage-backed securities holdings.
During this period, we attempted to mirror the 1-5 year corporate benchmark. In
addition, we have maintained a duration of 2.25 to 2.37 years in the Portfolio.
The chart below shows the yields for U.S. Treasuries during the reporting
period.
Yields from U.S. Treasuries
12/31/99
--------------
Interest Rates 12/31/98 12/31/99 High Low
- -------------- -------- -------- ---- ----
2-year U.S. Treasury Notes 4.53% 6.23% 6.23% 4.44%
5-year U.S. Treasury Notes 4.54 6.34 6.34 4.46
10-year U.S. Treasury Bonds 4.65 6.43 6.43 4.61
30-year U.S. Treasury Bonds 5.09 6.48 6.49 5.06
- --------------
2 The "high grade" fixed income securities the Fund invests in are rated by a
national rating 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.
- --------------------------------------------------------------------------------
2 1999 Annual Report to Shareholders
<PAGE>
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
in the new century.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman Vice President
January 19, 2000
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 3
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns
===============================================================================
12/31/99 $4.13 $3.97 $0.19 $0.00 0.76%
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
12/31/92 4.09 4.12 0.19 0.01 5.92
- -------------------------------------------------------------------------------
Inception* - 12/31/91 4.01 4.09 0.03 0.01 2.85+
===============================================================================
Total $1.64 $0.04
===============================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns
================================================================================
12/31/99 $4.13 $3.97 $0.21 $0.00 1.26%
- --------------------------------------------------------------------------------
12/31/98 4.09 4.13 0.22 0.00 6.56
- --------------------------------------------------------------------------------
12/31/97 4.05 4.09 0.24 0.00 7.20
- --------------------------------------------------------------------------------
Inception* - 12/31/96 4.19 4.05 0.22 0.00 2.08+
================================================================================
Total $0.89 $0.00
================================================================================
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges
-------------------------------------
Class A Class Y
================================================================================
Year Ended 12/31/99 0.76% 1.26%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/99 5.71 N/A
- --------------------------------------------------------------------------------
Inception* through 12/31/99 5.11 4.36
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges
================================================================================
Class A (Inception* through 12/31/99) 50.00%
- --------------------------------------------------------------------------------
Class Y (Inception* through 12/31/99) 18.09
================================================================================
* The inception dates for Class A and Y shares are November 11, 1991 and
February 7, 1996, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
4 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
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+
- --------------------------------------------------------------------------------
November 1991 -- December 1999
[GRAPH]
<TABLE>
<CAPTION>
Short-Term\High Lehman Brothers 1-3 Salomon Brothers Government
Grade Bond Fund Years Treasury Index Corporate 1-5 Year Index
<S> <C> <C> <C>
11/11/91 10,000 10,000 10,000
Dec-91 10,283 10,230 10,189
Dec-92 10,892 10,902 10,890
Dec-93 11,547 11,653 11,673
Dec-94 11,361 11,770 11,594
Dec-95 12,874 13,265 13,086
Dec-96 13,150 13,905 13,696
Dec-97 14,034 14,808 14,672
Dec-98 14,886 15,848 15,796
12/31/99 14,999 16,307 16,136
</TABLE>
+ Hypothetical illustration of $10,000 invested in shares at inception on
November 11, 1991, assuming reinvestment of dividends and capital gains, if
any, at net asset value through December 31, 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.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 5
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1999
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 51.6%
U.S. Treasury Notes:
$ 8,000,000 6.000% due 8/15/00 $ 8,006,000
3,000,000 5.125% due 8/31/00 2,984,610
3,000,000 5.625% due 11/30/00 2,988,690
13,000,000 5.500% due 7/31/01 12,864,540
3,000,000 5.500% due 8/31/01 2,965,740
2,000,000 5.250% due 5/15/04 1,916,360
8,500,000 6.000% due 8/15/04 8,368,505
7,000,000 Fannie Mae, Notes, 6.500% due 8/15/04 6,914,530
Freddie Mac, Notes:
2,000,000 6.250% due 10/15/02 1,981,200
4,000,000 6.250% due 7/15/04 3,910,000
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost-- $57,425,675) 52,900,175
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
================================================================================
CORPORATE BONDS AND NOTES -- 48.0%
Aerospace and Defense -- 1.4%
1,500,000 Baa2* Raytheon Co., Notes, 5.700% due 11/1/03 1,400,625
- --------------------------------------------------------------------------------
Banks/Savings and Loans -- 3.4%
2,000,000 Aa3* BankAmerica Corp., Sub. Notes, 7.875%
due 12/1/02 2,040,000
1,500,000 A+ Toronto-Dominion Bank, Sub. Notes, 6.500%
due 1/15/07 1,450,350
- --------------------------------------------------------------------------------
3,490,350
- --------------------------------------------------------------------------------
Broadcasting - TV Cable and Radio -- 8.2%
1,000,000 BBB- CBS Corp., Notes, 8.375% due 6/15/02 1,016,250
2,000,000 BBB Continental Cablevision, Sr. Notes, 8.500%
due 9/15/01 2,042,500
2,000,000 AA- TCI Communications, Inc., Sr. Notes, 6.375%
due 5/1/03 1,955,000
Time Warner Inc., Notes:
2,000,000 BBB 7.950% due 2/1/00 2,002,500
1,355,000 BBB 9.625% due 5/1/02 1,422,750
- --------------------------------------------------------------------------------
8,439,000
- --------------------------------------------------------------------------------
Consumer Durables -- 3.4%
3,500,000 Baa2* Black & Decker Corp., Notes, 6.625%
due 11/15/00 3,495,625
- --------------------------------------------------------------------------------
Consumer Products -- 1.9%
2,000,000 AA Procter & Gamble Co., Unsubordinated Notes,
6.600% due 12/15/04 1,975,000
- --------------------------------------------------------------------------------
Diversified/Conglomerate Manufacturing -- 2.0%
2,000,000 A+ IBM Corp., Notes, 7.250% due 11/1/02 2,015,000
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
6 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1999
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING(a) SECURITY VALUE
================================================================================
Financial Services -- 17.8%
1,000,000 A+ American General Finance, Sr. Notes, 5.875%
due 7/15/01 $ 983,750
1,500,000 AA- Associates Corp., Sr. Notes, 7.500%
due 4/15/02 1,515,000
2,000,000 A+ Chrysler Financial Co., LLC, Notes, 5.875%
due 2/7/01 1,980,000
2,000,000 A- Donaldson, Lufkin & Jenrette Securities
Corp., Notes, 6.375% due 5/26/00 1,998,760
2,000,000 A1* Ford Motor Credit Co., Notes, 8.000%
due 6/15/02 2,042,500
2,000,000 A General Motors Acceptance Corp., Bonds,
5.500% due 1/14/02 1,940,000
2,500,000 A+ Goldman Sachs Group, LP, Notes, 6.250%
due 2/1/03 2,421,875
1,545,000 A+ International Lease Finance Corp., Bonds,
5.900% due 4/15/02 1,502,513
2,000,000 AA- Merrill Lynch & Co., Notes, 6.060%
due 10/15/01 1,970,000
2,000,000 A+ Morgan Stanley Dean Witter & Co.,
Sr. Unsubordinated Notes, 5.625% due 1/20/04 1,890,000
- --------------------------------------------------------------------------------
18,244,398
- --------------------------------------------------------------------------------
Pollution Control/Waste Management -- 2.4%
2,500,000 BBB- Waste Management, Inc., Notes, 6.250% due
10/15/00 2,450,000
- --------------------------------------------------------------------------------
Rail/Trucking/Overnight Delivery -- 2.8%
3,000,000 BBB- Union Pacific Resources, Debentures,
6.340% due 11/25/03 2,880,000
- --------------------------------------------------------------------------------
Retail -- 1.9%
2,000,000 A- Dayton Hudson Corp., Notes, 6.800%
due 10/1/01 1,990,000
- --------------------------------------------------------------------------------
Telecommunications -- 2.8%
3,000,000 BBB+ Sprint Capital Corp., Company Guaranteed,
5.700% due 11/15/03 2,850,000
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $46,561,238) 49,229,998
================================================================================
REPURCHASE AGREEMENT -- 0.4%
424,000 Morgan Stanley Dean Witter & Co., 2.500% due 1/3/99;
Proceeds at maturity -- $424,265; (Fully collateralized by
U.S. Treasury Notes, 6.000% to 7.250% due 8/15/22 to
2/15/26; Market value -- $436,546) (Cost -- 424,000)
$ 424,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $104,410,913**) $102,554,173
================================================================================
(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 8 for definitions of ratings.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 7
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
8 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $104,410,913) $102,554,173
Receivable for Fund shares sold 63,173
Cash 298
Interest receivable 1,913,187
- --------------------------------------------------------------------------------
Total Assets 104,530,831
- --------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 166,150
Management fees payable 43,892
Payable for Fund shares purchased 21,311
Distribution fees payable 6,365
Accrued expenses 33,477
- --------------------------------------------------------------------------------
Total Liabilities 271,195
- --------------------------------------------------------------------------------
Total Net Assets $104,259,636
================================================================================
NET ASSETS:
Par value of capital shares $ 262,557
Capital paid in excess of par value 113,599,235
Undistributed net investment income 11,939
Accumulated net realized loss from security transactions (7,757,355)
Net unrealized depreciation of investments (1,856,740)
- --------------------------------------------------------------------------------
Total Net Assets $104,259,636
================================================================================
Shares Outstanding:
Class A 13,451,827
---------------------------------------------------------------------------
Class Y 12,803,869
---------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $3.97
---------------------------------------------------------------------------
Class Y (and redemption price) $3.97
---------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 9
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended December 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 6,313,045
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 495,532
Distribution fees (Note 2) 213,085
Shareholder and system servicing fees 55,032
Shareholder communications 46,681
Audit and legal 31,269
Registration fees 20,608
Custody 4,787
Directors' fees 3,289
Other 8,108
- --------------------------------------------------------------------------------
Total Expenses 878,391
- --------------------------------------------------------------------------------
Net Investment Income 5,434,654
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales 91,421,019
Cost of securities sold 93,222,438
- --------------------------------------------------------------------------------
Net Realized Loss (1,801,419)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
(Depreciation) of Investments:
Beginning of year 763,604
End of year (1,856,740)
- --------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (2,620,344)
- --------------------------------------------------------------------------------
Net Loss on Investments (4,421,763)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 1,012,891
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Years Ended December 31,
1999 1998
================================================================================
OPERATIONS:
Net investment income $ 5,434,654 $ 5,307,489
Net realized gain (loss) (1,801,419) 957,511
Increase in net unrealized
appreciation (depreciation) (2,620,344) 17,286
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 1,012,891 6,282,286
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (5,434,096) (5,307,489)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (5,434,096) (5,307,489)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 73,188,210 75,308,121
Net asset value of shares issued for
reinvestment of dividends 2,497,476 2,853,464
Cost of shares reacquired (81,090,728) (66,197,339)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions (5,405,042) 11,964,246
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (9,826,247) 12,939,043
NET ASSETS:
Beginning of year 114,085,883 101,146,840
- --------------------------------------------------------------------------------
End of year* $104,259,636 $114,085,883
================================================================================
* Includes undistributed net investment income of: $11,939 $8,437
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 11
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
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, adjusted for amortization of premium
and accretion of discount, 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, 1999, 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.
- --------------------------------------------------------------------------------
12 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
2. Management Agreements and Transactions with Affiliated Persons
SSB Citi Fund Management LLC ("SSBC"), formerly known as SSBC Fund Management
Inc., 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.
Effective October 1999, Smith Barney Private Trust Company ("Private Trust"),
another subsidiary of Citigroup Inc., became the Fund's transfer agent and PFPC
Global Fund Services ("PFPC") became the Fund's sub-transfer agent. Private
Trust receives account fees and asset-based fees that vary according to the
account size and type of account. PFPC is responsible for shareholder
recordkeeping and financial processing for all shareholder accounts. During the
period October 1, 1999 through December 31, 1999, the Fund paid transfer agent
fees of $8,210 to Private Trust.
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 a member 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 year ended December 31, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $98,683,310
- --------------------------------------------------------------------------------
Sales 91,421,019
================================================================================
At December 31, 1999, aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ --
Gross unrealized depreciation (1,856,740)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(1,856,740)
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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 Agreements
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 year ended December 31, 1999, the Portfolio had no open reverse
repurchase agreements.
6. Capital Loss Carryforward
At December 31, 1999, the Portfolio had for Federal income tax purposes
approximately $7,757,000 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 2007
================================================================================
Carryforward Amounts $3,858,000 $1,124,000 $971,000 $1,804,000
================================================================================
- --------------------------------------------------------------------------------
14 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
7. Capital Shares
At December 31, 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 December 31, 1999, total paid-in capital amounted to the following for each
class:
Class A Class Y
================================================================================
Total Paid-in Capital $62,172,635 $51,689,157
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
--------------------------- --------------------------
Shares Amount Shares Amount
=======================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 15,781,549 $ 64,318,447 14,613,133 $ 60,380,053
Shares issued on reinvestment 616,825 2,497,420 692,314 2,853,464
Shares reacquired (19,644,379) (79,985,537) (16,035,928) (66,197,339)
- ---------------------------------------------------------------------------------------
Net Decrease (3,246,005) $(13,169,670) (730,481) $ (2,963,822)
=======================================================================================
Class Y
Shares sold 2,176,262 $ 8,869,763 3,626,421 $ 14,928,068
Shares issued on reinvestment 14 56 -- --
Shares reacquired (275,123) (1,105,191) -- --
- ---------------------------------------------------------------------------------------
Net Increase 1,901,153 $ 7,764,628 3,626,421 $ 14,928,068
=======================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 15
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class A Shares 1999(1) 1998(1) 1997 1996 1995
====================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $4.13 $4.09 $4.05 $4.19 $3.91
- ------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.19 0.20 0.22 0.23 0.22
Net realized and unrealized gain (loss) (0.16) 0.04 0.04 (0.14) 0.28
- ------------------------------------------------------------------------------------
Total Income From Operations 0.03 0.24 0.26 0.09 0.50
- ------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.19) (0.20) (0.22) (0.23) (0.22)
- ------------------------------------------------------------------------------------
Total Distributions (0.19) (0.20) (0.22) (0.23) (0.22)
- ------------------------------------------------------------------------------------
Net Asset Value, End of Year $3.97 $4.13 $4.09 $4.05 $4.19
- ------------------------------------------------------------------------------------
Total Return 0.76% 6.07% 6.73% 2.17% 13.16%
- ------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $53 $69 $71 $83 $107
- ------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.01% 1.04% 0.95% 0.98% 0.98%
Net investment income 4.70 4.94 5.53 5.62 5.29
- ------------------------------------------------------------------------------------
Portfolio Turnover Rate 88% 150% 145% 130% 29%
====================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
- --------------------------------------------------------------------------------
16 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
Class Y Shares 1999(1) 1998(1) 1997 1996(2)
================================================================================
Net Asset Value, Beginning of Year $4.13 $4.09 $4.05 $4.19
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.21 0.22 0.24 0.22
Net realized and unrealized gain (loss) (0.16) 0.04 0.04 (0.14)
- --------------------------------------------------------------------------------
Total Income From Operations 0.05 0.26 0.28 0.08
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.21) (0.22) (0.24) (0.22)
- --------------------------------------------------------------------------------
Total Distributions (0.21) (0.22) (0.24) (0.22)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $3.97 $4.13 $4.09 $4.05
- --------------------------------------------------------------------------------
Total Return 1.26% 6.56% 7.20% 2.08%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (millions) $51 $45 $30 $32
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.53% 0.56% 0.50% 0.58%+
Net investment income 5.19 5.42 6.00 5.99+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 88% 150% 145% 130%
================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) For the period from February 7, 1996 (inception date) through December 31,
1996.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 17
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
Smith Barney Funds, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Short-Term High Grade Bond Fund of Smith Barney
Funds, Inc. as of December 31, 1999, the related statement of operations for the
year then ended, the statements of changes in net assets for each of the years
in the two-year period then ended and financial highlights for each of the years
in the five-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Short-Term High Grade Bond Fund of Smith Barney Funds, Inc. as of December 31,
1999, the results of its operations for the year then ended, the changes in its
net assets for each of the years in the two-year period then ended and financial
highlights for each of the years in the five-year period then ended, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
February 11, 2000
- --------------------------------------------------------------------------------
18 1999 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:
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
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 19
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Portfolio hereby designates for the fiscal year
ended December 31, 1999:
. A total of 22.27% of the ordinary dividends paid by the Portfolio from net
investment income are derived from Federal obligations and may be exempt
from taxation at the state level.
- --------------------------------------------------------------------------------
20 1999 Annual Report to Shareholders
<PAGE>
[LOGO OF SALOMON SMITH BARNEY]
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
SSB Citi Fund Management LLC
Distributor
CFBDS, Inc.
Custodian
PNC Bank, N.A.
Transfer Agent
Smith Barney Private Trust Company
388 Greenwich Street, 22nd Floor
New York, New York 10013
Sub-Transfer Agent
PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island 02940-9699
This report is submitted for the general information of the shareholders of
Smith Barney Funds, Inc. -- Short-Term High Grade Bond 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/mutualfunds
FD0854 2/00
<PAGE>
[LOGO OF SMITH BARNEY]
SMITH BARNEY FUNDS, INC.
U.S. GOVERNMENT
SECURITIES Fund
STYLE PURE SERIES
ANNUAL REPORT
DECEMBER 31, 1999
[LOGO OF SMITH BARNEY]
NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE
<PAGE>
Smith Barney Funds, Inc.
[PHOTO] [PHOTO]
HEATH B. MCLENDON JAMES E. CONROY
Chairman Vice President
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Funds Inc. -
U.S. Government Securities Fund ("Fund") for the year ended December 31, 1999.
We hope you find this report to be useful and informative. In this report, we
summarize the period's prevailing economic and market conditions and outline our
portfolio strategy. A more detailed summary of performance can be found in the
appropriate sections that follow.
Performance Update
For the year ended December 31, 1999, the Fund returned a negative 0.24% for
Class A shares, excluding the effects of sales charges. In comparison, the
Lehman Brothers Mortgage-Backed Securities ("MBS") Index returned 1.86% for the
year ended December 31, 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 the general U.S. government
funds according to Lipper Inc., an independent fund-tracking organization, was
0.65%. During the past year, the Fund distributed income dividends totaling
$0.71 per Class A share. For performance information on the Fund's other share
classes, please refer to page five.
Market Update and Outlook
We believe 1999 turned out to be one of the two worst years for the bond market
in the 1990's, 1994 being the other. In 1999 the bond market was negatively
impacted by the diminishing liquidity--a direct result of the global financial
crisis that reached its climax in October of 1998, and by the Federal Reserve
Board ("Fed") three 25-basis-point increases (100 basis points are equal to one
percent) on June 30, August 24 and November 16, 1999, respectively.1
- -----------
1 On Wednesday, February 2, 2000 after this letter was written, the Fed raised
interest rates by 0.25% to 5.75%.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 1
<PAGE>
It is our belief that the worst may be over. With the likelihood of more
moderate growth going forward, inflation fears could abate. Many bond experts
expect that yields on 30-year U.S. Treasuries will trade between 6.0% and 6.7%
over the next 12 months. If correct, these yields may provide investors with an
offset against declines in bond prices.
Investment Strategy
The Fund seeks high current income, liquidity and security 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.
The U.S. government securities in which the Fund invests consists primarily of
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.
During the period, the Fund's income orientation helped returns due to our
emphasis on mortgage-backed securities and U.S. Treasury strips throughout the
year. We employed this strategy in an attempt to mirror the Government National
Mortgage Association ("GNMA") Master Mortgage Index./2/ In addition, we have
maintained an average duration of roughly 4.75 years.
Our strategy has included slowly buying U.S. Treasuries and extending maturities
as interest rates have risen during this period. In our view, we have probably
seen the highs in yields over the near-term. Our investment strategy in the
coming months will be to increase our U.S. Treasury exposure and reduce our
mortgage-backed securities holdings. The chart below shows the yields for
various U.S. Treasuries during the reporting period.
Yields from U.S. Treasuries
Interest Rates: 12/31/98 12/31/99 High Low
-------- -------- ---- ---
2-year U.S. Treasury Notes 4.53% 6.23% 6.23% 4.44%
5-year U.S. Treasury Notes 4.54 6.34 6.34 4.46
10-year U.S. Treasury Bonds 4.65 6.43 6.43 4.61
30-year U.S. Treasury Bonds 5.09 6.48 6.49 5.06
- -----------
2 The GNMA Master Mortgage Index includes various weightings of all outstanding
coupons issued in 15- and 30-year GNMA mortgage pass-throughs.
- --------------------------------------------------------------------------------
2 1999 Annual Report to Shareholders
<PAGE>
Thank you for investing in the Smith Barney Funds, Inc. - U.S. Government
Securities Fund. We look forward to continuing to help you pursue your financial
goals in the new century.
Sincerely,
/S/ Heath B. McLendon /a/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman Vice President
January 19, 2000
- --------------------------------------------------------------------------------
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 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/99 $13.41 $12.67 $0.71 $0.00 (0.24)%
- --------------------------------------------------------------------------------
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
================================================================================
Total $9.35 $0.56
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/99 $13.42 $12.69 $0.64 $0.00 (0.66)%
- --------------------------------------------------------------------------------
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 $3.96 $0.27
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/99 $13.40 $12.67 $0.64 $0.00 (0.67)%
- --------------------------------------------------------------------------------
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 $5.78 $0.42
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 5
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/99 $13.42 $12.68 $0.75 $0.00 0.08%
- --------------------------------------------------------------------------------
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 $6.14 $0.42
================================================================================
It is the Fund's policy to distribute dividends monthly and capital gains,if
any,annually.
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
----------------------------------------
Class A Class B Class L Class Y
================================================================================
Year Ended 12/31/99 (0.24)% (0.66)% (0.67)% 0.08%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/99 7.05 6.53 6.55 7.37
- --------------------------------------------------------------------------------
Ten Years Ended 12/31/99 7.25 N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* through 12/31/99 8.67 6.75 5.25 5.82
================================================================================
With Sales Charges(2)
----------------------------------------
Class A Class B Class L Class Y
================================================================================
Year Ended 12/31/99 (4.71)% (4.92)% (2.63)% 0.08%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/99 6.06 6.38 6.33 7.37
- --------------------------------------------------------------------------------
Ten Years Ended 12/31/99 6.75 N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* through 12/31/99 8.34 6.75 5.10 5.82
================================================================================
- --------------------------------------------------------------------------------
6 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Cumulative Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
================================================================================
Class A (12/31/89 through 12/31/99) 101.29%
- --------------------------------------------------------------------------------
Class B (Inception* through 12/31/99) 40.02
- --------------------------------------------------------------------------------
Class L (Inception* through 12/31/99) 43.66
- --------------------------------------------------------------------------------
Class Y (Inception* through 12/31/99) 48.29
================================================================================
(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 Mortgage-Backed Securities Index+
- --------------------------------------------------------------------------------
December 1989 -- December 1999
[GRAPH]
U.S. Government Lehman Brothers
Securities Fund MBS Index
Dec-89 9,599 10,000
Dec-90 10,516 11,073
Dec-91 12,188 12,814
Dec-92 12,980 13,705
Dec-93 13,768 14,642
Dec-94 13,534 14,407
Dec-95 15,770 16,829
Dec-96 16,396 17,729
Dec-97 17,982 19,411
Dec-98 19,068 20,752
Dec-99 19,022 21,137
+ Hypothetical illustration of $10,000 invested in Class A shares on December
31, 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 December
31, 1999. The Lehman Brothers Mortgage-Backed Securities ("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. An
investor may not invest directly in an index. 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 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1999
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. TREASURY OBLIGATIONS -- 2.1%
$ 5,000,000 U.S. Treasury Notes, 5.875% due 11/15/04
(Cost -- $4,945,313) $ 4,903,500
================================================================================
U.S. GOVERNMENT AGENCIES -- 97.9%
Federal National Mortgage Association:
32,745,913 7.00% due 8/1/29+ 31,671,192
169 Dwarf 6.50% due 6/1/13 164
54,000,000 Zero coupon due 6/1/17 15,522,300
Government National Mortgage Association:
32,900,604 6.50% due 10/15/28+ 30,905,841
33,209,627 7.00% due 5/15/29+ 32,088,802
41,199,419 7.50% due 7/15/29+ 40,761,469
63,772,729 8.00% due 12/15/29+ 64,449,996
11,448,469 Platinum 9.00% due 11/15/17 11,995,820
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES
(Cost -- $234,597,798) 227,395,584
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $239,543,111*) $ 232,299,084
================================================================================
+ Maturity date shown represents the last in the range of maturity dates of
mortgage certificates owned.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 9
<PAGE>
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities December 31, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $239,543,111) $ 232,299,084
Receivable for Fund shares sold 145,356
Interest receivable 1,318,076
- --------------------------------------------------------------------------------
Total Assets 233,762,516
- --------------------------------------------------------------------------------
LIABILITIES:
Payable to bank 206,801
Payable for Fund shares purchased 188,575
Management fee payable 138,204
Distribution fee payable 1,578
Accrued expenses 47,276
- --------------------------------------------------------------------------------
Total Liabilities 582,434
- --------------------------------------------------------------------------------
Total Net Assets $233,180,082
================================================================================
NET ASSETS:
Par value of capital shares $ 183,995
Capital paid in excess of par value 247,405,406
Undistributed net investment income 1,652,496
Accumulated net realized loss on security transactions
and futures contracts (8,817,788)
Net unrealized depreciation of investments (7,244,027)
- --------------------------------------------------------------------------------
Total Net Assets $233,180,082
================================================================================
Shares Outstanding:
Class A 16,006,455
------------------------------------------------------------------------------
Class B 1,068,747
------------------------------------------------------------------------------
Class L 1,129,322
------------------------------------------------------------------------------
Class Y 194,943
------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $12.67
------------------------------------------------------------------------------
Class B* $12.69
------------------------------------------------------------------------------
Class L** $12.67
------------------------------------------------------------------------------
Class Y (and redemption price) $12.68
------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.71% of net asset value per
share) $13.27
------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per
share) $12.80
================================================================================
* 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 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended December 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 17,617,813
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 1,260,250
Distribution fees (Note 2) 792,899
Shareholder and system servicing fees 120,592
Registration fees 70,000
Shareholder communications 39,480
Audit and legal 16,801
Custody 16,002
Directors' fees 5,001
Other 10,000
- --------------------------------------------------------------------------------
Total Expenses 2,331,025
- --------------------------------------------------------------------------------
Net Investment Income 15,286,788
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 3 AND 7):
Realized Loss From:
Security transactions (excluding short-term securities) (7,266,916)
Futures contracts (915,000)
- --------------------------------------------------------------------------------
Net Realized Loss (8,181,916)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments:
Beginning of year 1,076,235
End of year (7,244,027)
- --------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (8,320,262)
- --------------------------------------------------------------------------------
Net Loss on Investments and Futures Contracts (16,502,178)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (1,215,390)
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 11
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended December 31, 1999
- --------------------------------------------------------------------------------
1999 1998
================================================================================
OPERATIONS:
Net investment income $ 15,286,788 $ 16,571,257
Net realized gain (loss) (8,181,916) 6,619,679
Increase in net unrealized depreciation (8,320,262) (4,713,699)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Operations (1,215,390) 18,477,237
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (14,264,175) (17,009,666)
Net realized gains -- (6,181,782)
Capital -- (25,989)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (14,264,175) (23,217,437)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 906,652,727 110,832,636
Net asset value of shares issued for
reinvestment of dividends 8,719,918 14,619,029
Cost of shares reacquired (951,026,813) (162,864,040)
- --------------------------------------------------------------------------------
Decrease in Net Assets
From Fund Share Transactions (35,654,168) (37,412,375)
- --------------------------------------------------------------------------------
Decrease in Net Assets (51,133,733) (42,152,575)
NET ASSETS:
Beginning of year 284,313,815 326,466,390
- --------------------------------------------------------------------------------
End of year* $ 233,180,082 $ 284,313,815
================================================================================
* Includes undistributed (overdistributed)
net investment income of: $ 1,652,496 $ (5,989)
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 Directors; (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, 1999,
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. 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.
2. Management Agreement and Transactions with Affiliated Persons
SSB Citi Fund Management LLC ("SSBC"), formerly known as SSBC Fund Management
Inc.,a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), which, in
turn, is a subsidiary of Citigroup Inc. ("Citigroup"), acts as investment
manager for the Fund. The Portfolio pays SSBC a management fee calculated at an
annual rate of 0.50% of the first $200 million of the average daily net assets,
and
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
0.40% of the average daily net assets of the Portfolio in excess of $200
million. This fee is calculated daily and paid monthly.
Effective October 1999, Smith Barney Private Trust Company ("Private Trust"),
another subsidiary of Citigroup, became the Fund's transfer agent and PFPC
Global Fund Services ("PFPC") became the Fund's sub-transfer agent. Private
Trust receives account fees and asset-based fees that vary according to the
account size and type of account. PFPC is responsible for shareholder
recordkeeping and financial processing for all shareholder accounts. During the
period October 1, 1999 through December 31, 1999, the Fund paid transfer agent
fees of $23,500 to Private Trust.
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 year ended December 31, 1999, CFBDS received sales charges of
approximately $113,000 and $20,000 on sales of the Fund's Class A and Class L
shares, respectively. In addition, CDSCs paid to CFBDS were approximately
$2,000, $26,000 and $3,000 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 year ended December 31,1999,total Distribution Plan
fees were as follows:
Class A Class B Class L
================================================================================
Distribution Plan Fees $582,092 $106,934 $103,873
================================================================================
All officers and one Director of the Fund are employees of SSB.
- --------------------------------------------------------------------------------
14 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
3. Investments
During the year ended December 31, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $524,300,160
- --------------------------------------------------------------------------------
Sales 544,196,083
================================================================================
At December 31, 1999, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 109,201
Gross unrealized depreciation (7,353,228)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(7,244,027)
================================================================================
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 December 31,1999,the Portfolio had no open reverse repurchase agreements.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (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 December 31, 1999, the Portfolio had no TBA securities.
7. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized
as assets. Securities equal to the initial margin amount are segregated by the
custodian in the name of the broker. Additional securities are also segregated
up to the current market value of the futures contracts. During the period the
futures contract is open, changes in the value of the contract are recognized as
unrealized gains or losses by "marking to market" on a daily basis to reflect
the market value of the contract at the end of each day's trading. Variation
margin payments are made or received and recognized as assets due from or
liabilities due to broker, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Portfolio records a realized gain or
loss equal to the difference between the proceeds from (or cost of) the closing
transactions and the Portfolio's basis in the contract.
The Portfolio enters into such contracts to hedge a portion of its portfolio.
The Portfolio bears the market risk that arises from changes in the value of the
financial instruments and securities indices (futures contracts).
At December 31,1999,the Portfolio had no open futures contracts.
8. Capital Shares
At December 31,1999,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.
- --------------------------------------------------------------------------------
16 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At December 31, 1999, total paid-in capital amounted to the following for each
class:
Class A Class B Class L Class Y
================================================================================
Total Paid-in Capital $214,697,983 $13,980,270 $15,627,004 $3,284,144
================================================================================
<TABLE>
<CAPTION>
Transactions in shares of each class were as follows:
Year Ended Year Ended
December 31, 1999 December 31, 1998
-------------------------------- -------------------------------
Shares Amount Shares Amount
=============================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 69,198,296 $ 899,315,105 7,074,244 $ 96,446,096
Shares issued on reinvestment 591,604 7,682,394 835,229 11,318,097
Shares reacquired (72,472,777) (941,068,231) (9,182,077) $(125,116,110)
- -------------------------------------------------------------------------------------------------------------
Net Decrease (2,682,877) $ (34,070,732) (1,272,604) $ (17,351,917)
=============================================================================================================
Class B
Shares sold 307,144 $ 4,010,617 461,439 $ 6,299,469
Shares issued on reinvestment 39,047 507,217 48,009 650,837
Shares reacquired (384,807) (5,022,756) (299,904) (4,090,139)
- -------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (38,616) $ (504,922) 209,544 $ 2,860,167
=============================================================================================================
Class L*
Shares sold 254,539 $ 3,322,005 235,526 $ 3,207,791
Shares issued on reinvestment 36,919 478,902 46,788 632,968
Shares reacquired (312,047) (4,068,787) (195,860) (2,665,220)
- -------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (20,589) $ (267,880) 86,454 $ 1,175,539
=============================================================================================================
Class Y
Shares sold 373 $ 5,000 -- --
Shares issued on reinvestment 3,958 51,405 5,292 $ 71,810
Shares reacquired (66,261) (867,039) (128,378) (1,760,135)
- -------------------------------------------------------------------------------------------------------------
Net Decrease (61,930) $ (810,634) (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.
9. Capital Loss Carryforward
At December 31, 1999, the Fund had, for Federal income tax purposes,
approximately $8,818,000 of unused capital loss carryforwards available to
offset future capital gains expiring in 2007. To the extent that these
carryforward losses are used to offset capital gains, it is probable that the
gains so offset will not be distributed.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class A Shares 1999(1) 1998(1) 1997 1996 1995
============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.41 $13.61 $13.24 $13.59 $12.50
- ------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.75 0.71 0.85 0.84 0.92
Net realized and unrealized gain (loss) (0.78) 0.08 0.38 (0.33) 1.09
- ------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.03) 0.79 1.23 0.51 2.01
- ------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.71) (0.72) (0.86) (0.86) (0.92)
Net realized gains -- (0.27) (0.00)* -- --
Capital -- (0.00)* -- -- --
- ------------------------------------------------------------------------------------------------------------
Total Distributions (0.71) (0.99) (0.86) (0.86) (0.92)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.67 $13.41 $13.61 $13.24 $13.59
- ------------------------------------------------------------------------------------------------------------
Total Return (0.24)% 6.04% 9.67% 3.97% 16.52%
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $203 $251 $272 $312 $385
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.82% 5.22% 6.37% 6.34% 6.82%
Interest expense -- 0.05 0.16 0.30 --
Other expenses 0.83 0.81 0.80 0.79** 0.79
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 193% 268% 130% 265% 57%
============================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
* Amount represents less than $0.01.
** Amount has been restated from the December 31, 1996 annual report.
- --------------------------------------------------------------------------------
18 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class B Shares 1999(1) 1998(1) 1997 1996 1995
==================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.42 $13.63 $13.26 $13.61 $12.51
- ------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.70 0.64 0.79 0.77 0.80
Net realized and unrealized gain (loss) (0.79) 0.08 0.38 (0.33) 1.16
- ------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.09) 0.72 1.17 0.44 1.96
- ------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.64) (0.66) (0.80) (0.79) (0.86)
Net realized gains -- (0.27) (0.00)* -- --
Capital -- (0.00)* -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (0.64) (0.93) (0.80) (0.79) (0.86)
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.69 $13.42 $13.63 $13.26 $13.61
- ------------------------------------------------------------------------------------------------------------------
Total Return (0.66)% 5.47% 9.12% 3.44% 16.03%
- ------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $13,558 $14,861 $12,238 $11,212 $11,116
- ------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.34% 4.69% 5.85% 5.85% 6.16%
Interest expense -- 0.05 0.16 0.30 --
Other expenses 1.33 1.31 1.31 1.28** 1.28
- ------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 193% 268% 130% 265% 57%
==================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
* Amount represents less than $0.01.
** Amount has been restated from the December 31, 1996 annual report.
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Class L Shares 1999(1) 1998(1)(2) 1997 1996 1995
=====================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.40 $13.60 $13.23 $13.58 $12.50
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.70 0.65 0.77 0.78 0.86
Net realized and unrealized gain (loss) (0.79) 0.08 0.40 (0.33) 1.09
- ---------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.09) 0.73 1.17 0.45 1.95
- ---------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.64) (0.66) (0.80) (0.80) (0.87)
Net realized gains -- (0.27) (0.00)* -- --
Capital -- (0.00)* -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (0.64) (0.93) (0.80) (0.80) (0.87)
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.67 $13.40 $13.60 $13.23 $13.58
- ---------------------------------------------------------------------------------------------------------------------
Total Return (0.67)% 5.53% 9.18% 3.49% 15.93%
- ---------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $14,308 $15,407 $14,464 $17,249 $21,559
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.38% 4.74% 5.91% 5.87% 6.36%
Interest expense -- 0.05 0.16 0.30 --
Other expenses 1.29 1.27 1.27 1.26** 1.25
- ---------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 193% 268% 130% 265% 57%
=====================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) On June 12, 1998, Class C shares were renamed Class L shares.
* Amount represents less than $0.01.
** Amount has been restated from the December 31, 1996 annual report.
- --------------------------------------------------------------------------------
20 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class Y Shares 1999(1) 1998(1) 1997 1996 1995
===============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.42 $13.64 $13.27 $13.61 $12.51
- ---------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.79 0.75 0.88 0.88 1.00
Net realized and unrealized gain (loss) (0.78) 0.08 0.39 (0.33) 1.06
- ---------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.01 0.83 1.27 0.55 2.06
- ---------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.75) (0.78) (0.90) (0.89) (0.96)
Net realized gains -- (0.27) (0.00)* -- --
Capital -- (0.00)* -- -- --
- ---------------------------------------------------------------------------------------------------------------
Total Distributions (0.75) (1.05) (0.90) (0.89) (0.96)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.68 $13.42 $13.64 $13.27 $13.61
- ---------------------------------------------------------------------------------------------------------------
Total Return 0.08% 6.29% 10.00% 4.30% 16.88%
- ---------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $2,472 $3,447 $5,182 $5,589 $6,992
- ---------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 6.10% 5.52% 6.65% 6.64% 7.22%
Interest expense -- 0.05 0.16 0.30 --
Other expenses 0.54 0.52 0.51 0.50** 0.49
- ---------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 193% 268% 130% 265% 57%
===============================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
* Amount represents less than $0.01.
** Amount has been restated from the December 31, 1996 annual report.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 21
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of Smith Barney Funds,Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the U.S. Government Securities
Portfolio of Smith Barney Funds, Inc. as of December 31, 1999, the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
U.S. Government Securities Portfolio of Smith Barney Funds, Inc. as of December
31, 1999, the results of its operations for the year then ended, the changes in
its net assets for each of the years in the two-year period then ended and the
financial highlights for each of the years in the five-year period then ended,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
February 11, 2000
- --------------------------------------------------------------------------------
22 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
December 31,1999:
. A total of 1.60% of the ordinary dividends paid by the Portfolio from net
investment income are derived from Federal obligations and may be exempt
from taxation at the state level.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. 23
<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>
- --------------------------------------------------------------------------------
24 1999 Annual Report to Shareholders
<PAGE>
[LOGO OF SALOMON SMITH BARNEY]
------------------------------
A member of citigroup
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
SSB Citi Fund Management LLC
Distributor
CFBDS, Inc.
Custodian
PNC Bank, N.A.
Transfer Agent
Smith Barney Private Trust Company
388 Greenwich Street, 22nd Floor
New York, New York 10013
Sub-Transfer Agent
PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island 02940-9699
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. If used as sales material after March 31, 2000, this
report must be accompanied by performance information for the most recently
completed calendar quarter.
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/mutualfunds
