<PAGE>
[GRAPHIC]
Small box above fund name showing
the American flag with a gold eagle
positioned in the center.
Smith Barney Shearson
1993 Government
ANNUAL Securities
REPORT Fund
........................................
DECEMBER 31, 1993
[LOGO]
<PAGE>
Government Securities Fund
DEAR SHAREHOLDER:
We are pleased to provide the Annual Report for Smith Barney
Shearson Government Securities Fund for the fiscal year ended
December 31, 1993. In this report, we will provide you with a
review of the Fund's performance, the market environment and portfolio
activities during the past twelve months In addition, we have taken
this opportunity to simplify the report by separating the historical
performance information for Class A and B shares into two distinct
sections. Our goal is to give you clear, concise information that
makes it easier for you to follow your investment. We are doing this
because Smith Barney Shearson believes that an informed investor and
an experienced Financial Consultant form the most productive
partnerships.
INTEREST RATES AND ECONOMIC ENVIRONMENT
The election in November of 1992 of a new President, especially a
Democratic President for the first time in 12 years, created
confusion and speculation in the financial markets. Much of the speculation was
centered on the question of whether this party's stereotypical label of
"government knows best" would continue, or would a "new Presidency" emerge? From
our vantage point, there is enough evidence to suggest that both labels are
appropriate. We're going to use the graph on the next page to show the effect of
the economic and political environment on the interest rate of a 30-year
Treasury bond during 1993.
In expectation of a promised budget compromise and continued economic growth
that was slow by historical standards, interest rates resumed their downward
movement in mid-January (Phase A). Once long-term interest rates dropped below
7%, the market basically treaded water (Phase B), while waiting for the close
margin of approval for the budget package. Although economic statistics
indicated a reluctantly-improving economy, it was also apparent that renewed
inflation was unlikely. Ongoing reports of layoffs and low levels of consumer
confidence prompted the Federal Reserve Board to maintain its neutral
wait-and-see policy.
1
<PAGE>
YIELD ON 30-YEAR U.S. TREASURY BOND
12/31/92 - 12/31/93
[GRAPHIC]
(Phase C) of the interest rate cycle reflects the market's reaction to higher
tax rates and concern over the cost of health care reform. As consumers
attempted to pare down their debt levels and bolster savings, a vicious downward
spiral in interest rates began in mid-May. The combination of mortgage
refinancings and thirst for yield caused long-term rates to fall to levels not
seen since the early 1970's.
As economic growth gained momentum and attention turned toward the North
American Free Trade Agreement (NAFTA) and its implications, fear of a tightening
in the Federal Reserve's monetary policy infiltrated the minds of many
investors. Many investors subsequently took their profits, and a slowdown in new
money entering the financial markets caused rates to rise by 50 basis points
(one-half of a percentage point) to the market rate of approximately 6.30%
(Phase D).
The key issue confronting the financial markets today is whether the economy
truly is finally on the road to a healthy recovery or whether this is yet
another example of short-lived growth. By early in the second quarter of 1994,
when the effect of the retroactive tax increase becomes more fully felt and the
costs of health care reform are clearer, we should have a good idea of the
sustainability of the recovery. If the combined costs prove to be surprisingly
high and consumer confidence becomes negative, we would anticipate lower
interest rates than we saw in 1993. Stay tuned!
2
<PAGE>
- --------------------------------------------------------------------
D I V I D E N D P O L I C Y
ALTHOUGH NOT EXPLICITLY STATED IN THE PROSPECTUS, THE FUND'S POLICY IS TO
PAY A LEVEL MONTHLY DIVIDEND BASED ON OUR PROJECTIONS FOR THE GOVERNMENT
SECURITIES MARKET AND THE GENERAL DIRECTION OF INTEREST RATES. THIS POLICY
HAS NO APPRECIABLE AFFECT ON THE FUND'S INVESTMENT STRATEGIES OR NET ASSET
VALUE PER SHARE SINCE IT IS GUIDED BY MARKET CONDITIONS. IT MEANS THAT WE DO
NOT INVEST IN MORE SPECULATIVE SECURITIES THAT MAY UNDERMINE THE FUND'S NET
ASSET VALUE PER SHARE IN ORDER TO MAINTAIN AN UNREALISTICALLY HIGH DIVIDEND
POLICY. WE CONTINUALLY MONITOR BOTH THE MARKET AND THE FUND'S INCOME STREAM
TO SEE THAT OUR DIVIDEND PROJECTIONS ARE REALISTIC.
INVESTMENT STRATEGY
The nursery rhyme "Jack be nimble, Jack be quick" epitomized what portfolio
managers were up against in 1993. More than ever, the decision to invest in
mortgage-backed securities versus Treasury securities was a crucial timing
issue. In the final analysis, however, our expectations that mortgage
prepayments would continue because of the historically low interest rate
environment led us to avoid mortgage securities. We believe that this decision
helped the Fund to perform better than many of its peers.
We anticipate that the mortgage market will offer some attractive opportunities
in 1994 as the preponderance of mortgage refinancings already have occurred.
When mortgage issues offer better relative value than Treasuries, we will take
advantage of it. As we wait for those opportunities, the majority of the Fund's
assets will be invested in intermediate-term Treasuries.
PERFORMANCE
The Fund produced a compounded total return of 10.87% for shareholders of Class
A shares and 10.45% for shareholders of Class B shares for the fiscal year ended
December 31, 1993. Based on an analysis of its peer group of similarly-managed
funds as measured by Lipper Analytical Services, Inc., a nationally recognized
mutual fund ranking organization, the Fund was ranked in the first quartile for
this twelve-month period. More specific information about the performance of
each share class is given in the historical performance and average annual
return sections of this report.
3
<PAGE>
As the vagaries of the new world order influence fiscal policy and international
treaties, we will attempt to give you a timely interpretation of the impact on
the financial markets. Once again, we appreciate your continued support of the
Fund and look forward to hearing from you.
Sincerely,
Heath B. McLendon James E. Conroy
Chairman of the Board Vice President and
Investment Officer
FEBRUARY 1, 1994
4
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) DECEMBER 31, 1993
PORTFOLIO BREAKDOWN
Pie chart depicting the allocation of the Investment Funds Government Securities
Fund's investment securities held at December 31, 1993 by security types. The
pie is broken in pieces representing security types in the following
percentages:
<TABLE>
<CAPTION>
SECURITY TYPES PERCENTAGE
<S> <C>
U.S. Treasury Securities 75.5%
Mortgage-Backed Securities 22.1%
Repurchase Agreements and Net Other
Assets and Liabilities 2.4%
</TABLE>
U.S. TREASURY SECURITIES are debt obligations of the U.S. government. They are
secured by the full faith and credit of the federal government, and include such
instruments as Treasury notes, bills and bonds.
U.S. GOVERNMENT AGENCY SECURITIES are securities issued by government sponsored
corporations like the Federal Land Banks or the Student Loan Marketing
Association (SLMA). Mortgage-Backed Securities are also agency securities, but
are shown separately in this chart and described below.
MORTGAGE-BACKED SECURITIES are debt securities issued by U.S. government
agencies such as the Federal Home Loan Mortgage Corporation (FHLMC), Federal
National Mortgage Association (FNMA) and Government National Mortgage
Association (GNMA). They represent thousands of individual home mortgages that
are pooled to form securities. As homeowners pay interest and principal each
month, these payments are passed on to investors. Mortgage-Backed Securities are
backed by the full faith and credit of the issuing agency.
AVERAGE MATURITY 6.86 years
5
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ---------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended
December Net Asset Value Capital Gains Dividends Total
31, Beginning Ending Distributed Paid Return*
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------
11/6/92-
12/31/92 $9.56 $ 9.69 -- $0.10 2.41%
- ------------------------------------------------------------------------
1993 9.69 10.01 -- 0.72 10.87
- ------------------------------------------------------------------------
Total -- 0.82
- ------------------------------------------------------------------------
Cumulative Total Return from 11/06/92 through 12/31/93 13.54%
- ------------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends and capital gains distributions at
net asset value and do not assume deduction of the sales charge (maximum 4.5%).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN -- CLASS A SHARES**
<TABLE>
<CAPTION>
Without Sales Charge With Sales Charge***
Without Without
Actual Fee Waiver Actual Fee Waiver
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
Year Ended 12/31/93 10.87% 10.81% 5.88% 5.83%
- ---------------------------------------------------------------------------
Inception 11/6/92 through 12/31/93 11.67% 11.63% 7.29% 7.25%
- ---------------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment of
dividends and capital gains at net asset value. The Fund waived fees during
fiscal year 1993. A shareholder's actual return for the period during which
waivers were in effect would be the higher of the two numbers shown.
***Average annual total return figures shown assume the deduction of the maximum
4.5% sales charge.
NOTE: The Fund began offering Class A shares on November 6, 1992. Class A shares
are subject to a maximum 4.5% front-end sales charge and an annual service fee
of 0.25% of the value of the average daily net assets attributable to that
class.
</TABLE>
6
<PAGE>
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in Government Securities
Fund's Class A shares on November 6, 1992 through December 31, 1993 as compared
with the growth of a $10,000 investment in Lehman Brothers Government Bond Index
and Lipper General U.S. Government Peer Group Average. The plot points used to
draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
GROWTH OF $10,000 GROWTH OF $10,000 INVESTMENT IN THE LIPPER GENERAL
MONTH INVESTED IN CLASS A SHARES INVESTMENT IN THE LEHMAN BROTHERS U.S.GOVERNMENT
ENDED OF THE PORTFOLIO GOVERNMENT BOND INDEX PEER GROUP AVERAGE INDEX
<S> <C> <C> <C>
10/31/92 -- $10,000 $10,000
11/06/92 $ 9,550 -- --
11/92 9,588 9,985 9,859
12/92 9,780 10,150 9,865
03/93 10,254 10,609 10,387
06/93 10,530 10,916 10,490
09/93 10,914 11,270 10,968
12/93 10,843 11,232 10,900
</TABLE>
+ Illustration of $10,000 invested in Class A shares on November 6, 1992,
assuming deduction of the maximum 4.5% sales charge at the time of investment
and reinvestment of dividends and capital gains at net asset value through
December 31, 1993.
The Lehman Brothers Government Bond Index is an unmanaged, broad-based index
of all public debt obligations of the U.S. government and its agencies and has
an average maturity of approximately nine years. The Index is useful in
depicting the general movement of the government securities market, but
because it is unmanaged the Index is not subject to the same management and
trading expenses as a mutual fund.
The Lipper Peer Group Average is composed of the Fund's peer group of 110
mutual funds investing in U.S. government securities as of December 31, 1993.
NOTE: All figures cited here and on the other pages represent past performance
of the Fund and do not guarantee future results of Class A shares.
7
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------
HISTORICAL PERFORMANCE -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended
December Net Asset Value Capital Gains Dividends Total
31, Beginning Ending Distributed Paid Return*
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------
3/20/84 -
12/31/84 $10.00 $10.01 $0.10 $0.50 6.50%
- --------------------------------------------------------------------------
1985 10.01 10.20 0.30 1.18 18.30
- --------------------------------------------------------------------------
1986 10.20 10.41 0.29 0.84 13.62
- --------------------------------------------------------------------------
1987 10.41 8.90 0.45 0.51 -5.27
- --------------------------------------------------------------------------
1988 8.90 8.75 -- 0.74 6.75
- --------------------------------------------------------------------------
1989 8.75 9.25 -- 0.73 14.58
- --------------------------------------------------------------------------
1990 9.25 9.11 -- 0.74 6.99
- --------------------------------------------------------------------------
1991 9.11 9.81 -- 0.71 16.28
- --------------------------------------------------------------------------
1992 9.81 9.68 -- 0.64 5.45
- --------------------------------------------------------------------------
1993 9.68 10.01 -- 0.67 10.45
- --------------------------------------------------------------------------
Total $1.14 $7.26
- --------------------------------------------------------------------------
Cumulative Total Return from 3/20/84 through 12/31/93 140.36%
- --------------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends and capital gains distributions at
net asset value and do not assume deduction of the contingent deferred sales
charge (CDSC).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN -- CLASS B SHARES**
<TABLE>
<CAPTION>
Without CDSC With CDSC***
Without Without
Actual Fee Waiver Actual Fee Waiver
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------
Year Ended 12/31/93 10.45% 10.39% 5.95% 5.89%
- ----------------------------------------------------------------------------
Five Years Ended 12/31/93 10.67% 10.64% 10.54% 10.50%
- ----------------------------------------------------------------------------
Inception 3/20/84 through 12/31/93 9.38% 9.35% 9.38% 9.35%
- ----------------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment of
dividends and capital gains at net asset value. The Fund's investment adviser
waived fees from January 1988 to December 1989 and during fiscal year 1993. A
shareholder's actual return for the period during which waivers were in effect
would be the higher of the two numbers shown.
***Average annual total return figures shown assume the deduction of the
applicable CDSC. The Fund commenced operations on March 20, 1984.
NOTE: On November 6, 1992, outstanding shares of the Fund were designated Class
B shares. Class B shares are subject to a maximum 4.5% CDSC and annual service
and distribution fees of 0.25% and 0.50%, respectively, of the value of the
average daily net assets attributable to that class.
</TABLE>
8
<PAGE>
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in Government Securities
Fund's Class B shares on March 20, 1984 through December 31, 1993 as compared
with the growth of a $10,000 investment in Lehman Brothers Government Bond Index
and Lipper General U.S. Government Peer Group Average. The plot points used to
draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
GROWTH OF $10,000 GROWTH OF $10,000 INVESTMENT IN THE LIPPER GENERAL
MONTH INVESTED IN CLASS A SHARES INVESTMENT IN THE LEHMAN BROTHERS U.S. GOVERNMENT
ENDED OF THE PORTFOLIO GOVERNMENT BOND INDEX PEER GROUP AVERAGE
<S> <C> <C> <C>
03/20/84 $10,000 -- --
03/84 10,010 10,000 10,000
04/84 9,910 10,005 9,927
06/84 9,580 9,883 9,674
09/84 10,202 10,621 10,254
12/84 10,650 11,382 10,896
03/85 10,847 11,623 11,047
06/85 11,498 12,529 11,910
09/85 11,684 12,778 12,219
03/86 13,529 14,894 13,549
06/86 13,933 15,091 13,658
09/86 14,079 15,386 14,331
12/86 14,315 15,806 14,649
03/87 14,243 15,992 14,967
06/87 13,668 15,713 14,357
09/87 12,864 15,290 14,411
12/87 13,561 16,154 14,648
03/88 14,075 16,686 15,476
06/88 14,253 16,843 15,149
09/88 14,624 17,128 15,421
12/88 14,476 17,289 15,838
03/89 14,633 17,473 15,898
06/89 15,870 18,878 16,593
09/89 15,950 19,034 17,112
12/89 16,588 19,749 17,718
03/90 16,307 19,504 17,586
06/90 16,873 20,186 17,888
09/90 16,772 20,353 18,133
12/90 17,747 21,470 18,952
03/91 18,073 21,936 19,567
06/91 18,261 22,232 19,921
09/91 19,423 23,500 20,601
12/91 20,636 24,759 21,371
03/92 19,890 24,326 21,808
06/92 20,747 25,288 22,190
09/92 21,776 26,537 23,176
12/92 21,761 26,548 23,110
03/93 22,785 27,748 24,332
06/93 23,372 28,550 24,574
09/93 24,220 29,478 25,692
12/93 24,036 29,378 25,534
</TABLE>
+ Illustration of $10,000 invested in Class B shares on March 20, 1984, assuming
reinvestment of dividends and capital gains at net asset value through
December 31, 1993.
The Lehman Brothers Government Bond Index is an unmanaged, broad-based index
of all public debt obligations of the U.S. government and its agencies and has
an average maturity of approximately nine years. The Index is useful in
depicting the general movement of the government securities market, but
because it is unmanaged the Index is not subject to the same management and
trading expenses as a mutual fund.
The Lipper Peer Group Average is composed of the Fund's peer group of 110
mutual funds investing in U.S. government securities as of December 31, 1993.
NOTE: All figures cited here and on the other pages represent past performance
of the Fund and do not guarantee future results of Class B shares.
9
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ---------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1993
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------
KEY TO SECURITY DESCRIPTIONS
DWARF -- FNMA Mortgage-Backed Security that matures in 15 years
or less
STRIPS -- Separate Trading of Registered Interest and Principal
of Securities
</TABLE>
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
<C> <S> <C>
----------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 75.5%
U.S. TREASURY NOTES -- 65.7%
$ 17,500,000 5.250% due 7/31/98** $ 17,587,150
39,500,000 4.750% due 8/31/98 38,873,530
50,000,000 4.750% due 9/30/98*** 49,195,000
340,000,000 4.750% due 10/31/98*** 333,866,400
125,000,000 5.750% due 8/15/03 124,547,500
----------------------------------------------------------------------
564,069,580
----------------------------------------------------------------------
ZERO COUPON TREASURY SECURITIES -- 9.8%
34,000,000 U.S. Treasury Strips, due
8/15/98 26,801,180
255,000,000 U.S. Treasury Strips, due
11/15/15 57,484,650
----------------------------------------------------------------------
84,285,830
----------------------------------------------------------------------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $656,960,821) 648,355,410
----------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES -- 22.1%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(GNMA) CERTIFICATES -- 19.7%
149,749,128 GNMA 9.000%, 30 Year 160,137,225
8,106,766 GNMA 9.500%, 30 Year 8,770,548
49,327 GNMA 10.000%, 30 Year 54,353
140,288 GNMA 10.500%, 30 Year 157,824
275,513 GNMA 11.000%, 30 Year 314,686
----------------------------------------------------------------------
169,434,636
----------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1993
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
----------------------------------------------------------------------
<C> <S> <C>
MORTGAGE-BACKED SECURITIES -- (CONTINUED)
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FHLMC) CERTIFICATES -- 2.4%
$ 19,138,206 FHLMC 9.000%, 30 Year $ 20,106,981
32,248 FHLMC 10.000%, 30 Year 35,191
----------------------------------------------------------------------
20,142,172
----------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(FNMA) CERTIFICATES -- 0.0%
1,180 FNMA Dwarf 8.000% due 7/2/95 1,231
----------------------------------------------------------------------
TOTAL MORTGAGE-BACKED
SECURITIES
(Cost $187,950,496) 189,578,039
----------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 29.7%
132,250,000 Agreement with Barclays de
Zuote Wedd, 3.050% dated
12/31/93 to be repurchased
at $132,283,614 on 1/3/94,
collateralized by:
$44,000,000 U.S. Treasury
Bonds, 7.500% due 11/15/16
$26,000,000 U.S. Treasury
Notes, 5.125% due 3/31/98
$28,000,000 U.S. Treasury
Notes, 5.375% due 5/31/98
$27,935,000 U.S. Treasury
Notes, 12.625% due 8/15/94 132,250,000
7,449,000 Agreement with Kidder Peabody,
3.150% dated 12/31/93 to be
repurchased at $7,450,955 on
1/3/94, collateralized by
$7,270,000 U.S. Treasury
Note, 6.000% due 10/15/99 7,449,000
115,000,000 Agreement with Union Bank of
Switzerland, 3.100% dated
12/31/93 to be repurchased
at $115,029,708 on 1/3/94,
collateralized by:
$6,155,000 U.S. Treasury
Bonds, 11.750% due 11/15/14
$20,785,000 U.S. Treasury
Bonds, 9.250% due 2/15/16
$55,345,000 U.S. Treasury
Bonds, 7.875% due 2/15/21
$11,450,000 U.S. Treasury
Notes, 8.500% due 2/15/00 115,000,000
----------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost $254,699,000) 254,699,000
----------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $1,099,610,317*) 127.3% 1,092,632,449
----------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1993
<TABLE>
<CAPTION>
NUMBER MARKET VALUE
OF CONTRACTS (NOTE 1)
----------------------------------------------------------------------
<C> <S> <C>
FUTURES CONTRACTS -- LONG POSITION -- 40.0% (Cost $344,484,375)
3,000 March 1994 U.S. Treasury Bonds $ 343,500,000
----------------------------------------------------------------------
FUTURES CONTRACTS -- SHORT POSITION -- (40.0)% (Contract Amount
$344,435,906)
3,000 March 1994 U.S. Treasury Bonds (343,500,000)
----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) (27.3) (234,002,289)
----------------------------------------------------------------------
NET ASSETS 100.0% $ 858,630,160
----------------------------------------------------------------------
<FN>
*Aggregate cost for Federal tax purposes.
**Securities pledged as collateral for futures contracts.
***A portion of the securites are held as collateral for reverse repurchase
agreements.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1993
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $1,099,610,317) (Note 1)
See accompanying schedule:
Investment securities $837,933,449
Repurchase Agreements 254,699,000 $1,092,632,449
------------
Cash 5,772,885
Aggregate exercise cost of futures -- short position 344,435,906
Futures contracts -- long position, at value (Cost $344,484,375)
(Note 1) See accompanying schedule 343,500,000
Receivable for investment securities sold 298,064,062
Dividends and interest receivable 18,256,381
Receivable for Fund shares sold 784,698
Receivable from investment adviser (Note 2) 63,840
- -------------------------------------------------------------------------------------
TOTAL ASSETS 2,103,510,221
- -------------------------------------------------------------------------------------
LIABILITIES:
Aggregate exercise cost of futures -- long position 344,484,375
Futures contracts -- short position, at value
(Cost $344,435,906) (Note 1)
See accompanying schedule 343,500,000
Payable for investment securities purchased 303,220,500
Reverse Repurchase Agreement (Note 5) 247,796,875
Dividends payable 4,652,254
Distribution fee payable (Note 3) 366,231
Payable for Fund shares redeemed 288,472
Service fees payable (Note 3) 184,611
Administration fee payable (Note 2) 147,520
Custodian fees payable (Note 2) 77,675
Transfer agent fees payable (Note 2) 67,692
Accrued expenses and other payables 93,856
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,244,880,061
- -------------------------------------------------------------------------------------
NET ASSETS $ 858,630,160
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1993
<TABLE>
<S> <C> <C>
NET ASSETS consist of:
Undistributed net investment income $ 92,682
Accumulated net realized loss on security transactions and
futures contracts (556,625,868)
Unrealized depreciation of investments and futures contracts (7,026,337)
Par value 85,739
Paid-in capital in excess of par value 1,422,103,944
- -------------------------------------------------------------------------------------
TOTAL NET ASSETS $ 858,630,160
- -------------------------------------------------------------------------------------
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($7,067,380 DIVIDED BY 705,750 shares of common stock outstanding) $10.01
- -------------------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE ($10.01 DIVIDED BY 0.955)
(based on maximum sales charge of 4.5% of the offering price on
December 31, 1993) $10.48
- -------------------------------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($851,349,599 DIVIDED BY 85,011,511 shares of common stock outstanding) $10.01
- -------------------------------------------------------------------------------------
CLASS D SHARES:
NET ASSET VALUE, offering and redemption price per share
($213,181 DIVIDED BY 21,288 shares of common stock outstanding) $10.01
- -------------------------------------------------------------------------------------
<FN>
+Redemption price per share for Class B is equal to net asset value less any
applicable contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 61,293,780
Dividends 23,390,500
- ------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 84,684,280
- ------------------------------------------------------------------------------------
EXPENSES:
Distribution fee (Note 3) $4,768,632
Investment advisory fee (Note 2) 3,357,123
Service fee (Note 3) 2,397,944
Sub-investment advisory and administration fee
(Note 2) 1,918,367
Transfer agent fees (Notes 2 and 4) 823,336
Custodian fees (Note 2) 298,069
Legal and audit fees 49,330
Directors' fees and expenses (Note 2) 29,356
Other 303,113
Fees waived by investment adviser (Note 2) (522,000)
- ------------------------------------------------------------------------------------
Total operating expenses before interest 13,423,270
Interest expense (Notes 5 and 8) 1,450,679
- ------------------------------------------------------------------------------------
TOTAL EXPENSES 14,873,949
- ------------------------------------------------------------------------------------
NET INVESTMENT INCOME 69,810,331
- ------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 5):
Net realized gain on:
Securities transactions 53,764,705
Futures contracts 328,751
- ------------------------------------------------------------------------------------
Net realized gain on investments during the year 54,093,456
Net change in unrealized depreciation of:
Securities (24,575,204)
Futures contracts (48,469)
- ------------------------------------------------------------------------------------
Net unrealized depreciation of investments
during the year (24,623,673)
- ------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 29,469,783
- ------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 99,280,114
- ------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
12/31/93 12/31/92
<S> <C> <C>
Net investment income $ 69,810,331 $ 61,385,758
Net realized gain on security transactions and futures
contracts during the year 54,093,456 39,937,028
Net unrealized depreciation of investments and futures
contracts during the year (24,623,673) (45,668,262)
- -------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 99,280,114 55,654,524
Distributions to shareholders from net investment
income:
Class A (411,654) (1,235)
Class B (61,210,432) (61,384,523)
Class D (7,883) --
Distributions to shareholders from capital:
Class A -- (263)
Class B -- (13,099,590)
Net increase/(decrease) in net assets from:
Class A share transactions (Note 6) 6,782,595 272,373
Class B share transactions (Note 6) (233,212,716) (220,182,501)
Class D share transactions (Note 6) 214,302 --
- -------------------------------------------------------------------------------------
Net decrease in net assets (188,565,674) (238,741,215)
NET ASSETS:
Beginning of year 1,047,195,834 1,285,937,049
- -------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $92,682 at December 31, 1993) $ 858,630,160 $1,047,195,834
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
12/31/93+++ 12/31/92*
<S> <C> <C>
Net Asset Value, beginning of period $ 9.69 $ 9.56
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income# 0.81 0.10
Net realized and unrealized gain on investments 0.23 0.13
- -------------------------------------------------------------------------------------
Total from investment operations 1.04 0.23
Distributions to shareholders:
Distributions from net investment income (0.72) (0.08)
Distributions from capital -- (0.02)
- -------------------------------------------------------------------------------------
Total distributions (0.72) (0.10)
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $10.01 $ 9.69
- -------------------------------------------------------------------------------------
Total return+ 10.87% 2.41%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $7,067 $ 275
Ratio of operating expenses to average net assets++ 0.92% 0.68%**
Ratio of net investment income to average net assets 7.76% 6.24%**
Portfolio turnover rate 540% 426%
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class A shares on November 6, 1992.
**Annualized.
+Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charges.
++The annualized operating expense ratios exclude interest expense. The ratios
including interest expense for the year ended December 31, 1993 and the
period ended December 31, 1992 were 1.07% and 1.01%, respectively. Annualized
expense ratio before voluntary waiver of fees by investment adviser
(including interest expense) for the year ended December 31, 1993 was 1.12%.
+++Per share amounts have been calculated using the monthly average share
method.
#Net investment income before voluntary waiver of fees by investment adviser
for the year ended December 31, 1993 was $0.71.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney Shearson
Government Securities Fund
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.**
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
12/31/93+++ 12/31/92 12/31/91
<S> <C> <C> <C>
Net Asset Value, beginning of year $ 9.68 $ 9.81 $ 9.11
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income# 0.73 0.53 0.70
Net realized and unrealized gain/(loss) on
investments 0.27 (0.02) 0.71
- -------------------------------------------------------------------------------------
Total from investment operations 1.00 0.51 1.41
Distributions to shareholders:
Distributions from net investment income (0.67) (0.53) (0.63)
Distributions in excess of net investment income and
net realized gain -- -- --
Distributions from net realized gains -- -- --
Distributions from capital -- (0.11) (0.08)
- -------------------------------------------------------------------------------------
Total distributions (0.67) (0.64) (0.71)
- -------------------------------------------------------------------------------------
Net Asset Value, end of year $ 10.01 $ 9.68 $ 9.81
- -------------------------------------------------------------------------------------
Total return+ 10.45% 5.45% 16.28%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $851,350 $1,046,921 $1,285,937
Ratio of operating expenses to average net assets++ 1.40% 1.45% 1.40%
Ratio of net investment income to average net assets 7.28% 5.47% 6.80%
Portfolio turnover rate 540% 426% 326%
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced operations on March 20, 1984.
**Shares in existence prior to November 6, 1992 have been designated Class B
shares.
***Annualized.
+Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charges.
++The operating expense ratios exclude interest expense. The ratios including
interest expense for the years ended December 31, 1993 and 1992 were 1.55%
and 1.71%, respectively. Operating expense ratios before voluntary waiver of
fees by investment adviser and/or distributor (including interest expense)
for the years ended December 31, 1993, 1989 and 1988 were 1.61%, 1.52%, and
1.53%, respectively.
+++Per share amounts have been calculated using the monthly average share
method.
#Net investment income before voluntary waiver of fees by investment adviser
and/or distributor for the years ended December 31, 1993, 1989, and 1988 were
$0.72, $0.69, and $0.74, respectively.
@Not covered by Coopers & Lybrand's report.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ------------------------------------------
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
12/31/90 12/31/89 12/31/88@ 12/31/87@ 12/31/86@ 12/31/85@ 12/31/84*@
<S> <C> <C> <C> <C> <C> <C>
$ 9.25 $ 8.75 $ 8.90 $ 10.41 $ 10.20 $ 10.01 $ 10.00
-------------------------------------------------------------------------------------
0.68 0.70 0.75 0.51 0.84 0.90 0.78
(0.08) 0.53 (0.16) (1.06) 0.50 0.77 (0.17)
-------------------------------------------------------------------------------------
0.60 1.23 0.59 (0.55) 1.34 1.67 0.61
(0.68) (0.70) (0.74) (0.51) (0.84) (1.18) (0.50)
-- -- -- (0.05) -- -- --
-- -- -- (0.40) (0.29) (0.30) (0.10)
(0.06) (0.03) -- -- -- -- --
-------------------------------------------------------------------------------------
(0.74) (0.73) (0.74) (0.96) (1.13) (1.48) (0.60)
-------------------------------------------------------------------------------------
$ 9.11 $ 9.25 $ 8.75 $ 8.90 $ 10.41 $ 10.20 $ 10.01
-------------------------------------------------------------------------------------
6.99% 14.58% 6.75% (5.27)% 13.62% 18.30% 6.50%
-------------------------------------------------------------------------------------
$1,521,016 $2,001,740 $2,735,974 $4,383,816 $6,072,390 $3,053,758 $ 777,176
1.43% 1.40% 1.34%++ 1.64% 1.56% 1.67% 2.21%***
7.60% 7.79% 8.00% 6.44% 6.20% 8.60% 10.55%***
274% 352% 281% 249% 353% 457% --
-------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
12/31/93*+++
<S> <C>
Net Asset Value, beginning of period $ 9.90
- ---------------------------------------------------------------------------------
Income from investment operations:
Net investment income# 0.68
Net realized and unrealized gain on investments 0.04
- ---------------------------------------------------------------------------------
Total from investment operations 0.72
Distributions from net investment income (0.61)
- ---------------------------------------------------------------------------------
Net Asset Value, end of period $ 10.01
- ---------------------------------------------------------------------------------
Total return+ 7.36%
- ---------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 213
Ratio of operating expenses to average net assets++ 1.40%**
Ratio of net investment income to average net assets 7.28%**
Portfolio turnover rate 540%
- ---------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class D shares on February 4, 1993.
**Annualized.
+Total return represents aggregate total return for the period indicated.
++The annualized operating expense ratio excludes interest expense. The ratio
including interest expense for the period ended December 31, 1993 was 1.55%.
Annualized expense ratio before voluntary waiver of fees by investment
adviser (including interest expense) for the period ended December 31, 1993
was 1.61%.
+++Per share amounts have been calculated using the monthly average share
method.
#Net investment income before voluntary waiver of fees by investment adviser
for the period ended December 31, 1993 was $0.55.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Investment Funds Inc. (the "Company") was incorporated in
Maryland on September 29, 1981 and commenced operations on January 4, 1982. The
Company is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified
open-end management investment company. Prior to the close of business on July
30, 1993, the Company's corporate name was "SLH Investment Portfolios Inc." and
it was doing business under the name "Shearson Lehman Brothers Investment
Funds." As of the date of this report, the Company is composed of five managed
investment Funds (the "Funds"): Investment Grade Bond Fund, Government
Securities Fund, Special Equities Fund, Directions Value Fund, and European
Fund. The assets of each Fund are segregated and a shareholder's interest is
limited to the Fund in which he or she owns shares. As of November 6, 1992, each
Fund offered two classes of shares to the general public: Class A shares and
Class B shares. Class A shares are sold with a front-end sales charge. Class B
shares may be subject to a contingent deferred sales charge ("CDSC"). Class B
shares will convert automatically to Class A shares approximately eight years
after the date of original purchase, beginning September 30, 1994. As of January
29, 1993, the Government Securities Fund (the "Fund") offered a third class of
shares, Class D shares and these shares were first purchased by the public on
February 4, 1993. Class D shares are offered to plans participating in the Smith
Barney Shearson Inc. ("Smith Barney Shearson") 401(k) program. Class D shares
are offered without a front-end sales charge or CDSC. All classes of shares have
identical rights and privileges except with respect to the effect of the
respective sales charges to each class, the distribution and/or service fees
borne by each class, expenses allocable exclusively to each class, voting rights
on matters affecting a single class, the exchange privilege of each class and
the conversion feature of Class B shares. The following is a summary of
significant accounting policies consistently followed by the Fund in preparation
of its financial statements.
PORTFOLIO VALUATION: Securities listed on an exchange are valued on the basis of
the last sale prior to the time the valuation is made. If there has been no sale
since the immediately previous valuation, then the current bid price is used.
Over-the-counter securities are valued on the basis of the bid price at
21
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the close of business on each day. Notwithstanding the above, bonds and other
fixed-income securities are valued by using market quotations and may be valued
on the basis of prices provided by a pricing service, when the Board of
Directors believes that such prices reflect the market value of such securities.
In cases where securities are traded on more than one exchange, the securities
are valued on the exchange designated by or under the authority of the Board of
Directors as the primary market. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors. Options are
generally valued at the last sale price or, in the absence of a last sale price,
the last bid price. Money market instruments maturing within 60 days of the
valuation date are valued at amortized cost.
OPTIONS ON FUTURES CONTRACTS: Options on futures generally operate in the same
manner as options purchased or written directly on the underlying debt
securities. The Fund is required to deposit, in a manner similar to futures
contracts as described below, "initial margin" and "variation margin" with
respect to put and call options written on futures contracts. In addition, upon
exercise, net premiums received will decrease the unrealized loss or increase
the unrealized gain on the future. The potential risk to the Fund is that the
change in value of the underlying securities may not correlate to the change in
value of the contracts.
FUTURES CONTRACTS: The Fund may enter into futures contracts in order to hedge
against changes in the value of its portfolio securities due to anticipated
changes in market conditions and interest rates.
Upon entering into a futures contract, the Fund is required to deposit with the
broker an amount of cash or cash equivalents equal to a certain percentage of
the contract amount. This is known as the "initial margin." Subsequent payments
("variation margin") are made or received by the Fund each day, depending on the
daily fluctuation of the value of the contract.
For financial statement purposes, an amount equal to the settlement amount of
the contract is included in its Statement of Assets and Liabilities as an asset
and as an equivalent liability. For long futures positions, the asset is
marked-to-market daily. For short futures positions, the liability is marked-
22
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
to-market daily. The daily changes in the contract are recorded as unrealized
gains or losses. The Fund recognizes a realized gain or loss when the contract
is closed.
There are several risks in connection with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged instruments. In addition, there is the risk the
Fund may not be able to enter into a closing transaction because of an illiquid
secondary market.
REPURCHASE AGREEMENTS: The Fund engages in repurchase agreement transactions.
Under the terms of a typical repurchase agreement, the Fund takes possession of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral is at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the right
to use the collateral to offset losses incurred. There is a potential loss to
the Fund in the event the Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities including the risk of a possible
decline in the value of the underlying securities during the period while the
Fund seeks to assert its rights. The Fund's investment adviser, acting under the
supervision of the Board of Directors, reviews the value of the collateral and
the creditworthiness of those banks and dealers with which the Fund enters into
repurchase agreements to evaluate potential risks.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreement transactions with member banks on the Federal Reserve Bank of New
York's list of reporting dealers for leverage purposes. A reverse repurchase
agreement involves a sale by the Fund of securities that it holds with an
agreement by the Fund 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 Fund may decline below the repurchase price of the
securities. In the event the buyer of
23
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be restricted
pending a determination by the party, or its trustee or receiver, whether to
enforce the Fund's obligation to repurchase the securities. The Fund will
establish a segregated account with its custodian, Boston Safe Deposit and Trust
Company ("Boston Safe"), in which the Fund will maintain cash, U.S. government
securities or other liquid high grade debt obligations equal in value to its
obligations with respect to reverse repurchase agreements.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Dividend income is recorded on the ex-dividend
date. Interest income is recorded on the accrual basis. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Investment income and realized and unrealized gains and losses are allocated
based upon the relative net assets of each class of shares.
FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a regulated
investment company, if such qualification is in the best interest of its
shareholders, by complying with the requirements of the Internal Revenue Code of
1986, as amended (the "Code"), applicable to regulated investment companies and
to distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment
income are determined on a class level and will be declared daily and paid
monthly. Distributions from net realized capital gains, after utilization of
capital loss carryforwards, are determined on a Fund level and will be
distributed at least annually. Net short-term capital gains (including, any
short-term capital gains from options transactions) may be paid more frequently,
with the distribution of dividends from net investment income. Additional
distributions of net investment income and capital gains may be made at the
discretion of the Board of Directors to avoid the application of the excise tax
imposed under the Code for certain undistributed amounts. Income distributions
and capital gain distributions on a Fund level are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due
24
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
to differing treatments of income and gains on various investment securities
held by the Fund, timing differences and differing characterization of
distributions made by the Fund as a whole.
RECLASSIFICATIONS: During the year, the Fund adopted Statement of Position 93-2
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies."
Accordingly, certain reclassifications have been made to the components of
capital in the Statement of Net Assets to conform with the accounting and
reporting guidelines of this statement. Distributions in excess of book basis
accumulated realized gains or undistributed net investment income that were the
result of permanent book and tax accounting differences have been reclassified
to paid-in capital. In addition, amounts distributed in excess of accumulated
net investment income as determined for financial statement purposes which had
previously been reported as distributions from paid-in capital have been
reclassified to accumulated net investment income. Accordingly, amounts as of
December 31, 1992 have been restated to reflect a decrease in paid-in capital of
$26,975,624, a decrease in accumulated net realized losses of $29,083,669 and a
decrease in undistributed net investment income of $2,108,045. The Statement of
Changes in Net Assets and the Financial Highlights have not been restated to
reflect this change in presentation. Net investment income, net realized gains
and net assets were not affected by this change.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER RELATED PARTY
TRANSACTIONS
Up to the close of business on July 30, 1993, the Fund had entered into an
investment advisory agreement with Shearson Lehman Brothers Inc. ("Shearson
Lehman Brothers") on behalf of Shearson Lehman Advisors, a member of the Asset
Management Group of Shearson Lehman Brothers. Under the Advisory Agreement, the
Fund paid a monthly fee at the annual rate of 0.35% of the value of its average
daily net assets, up to $2 billion, 0.30% of the value of its average daily net
assets on the next $2 billion, 0.25% of the value of its average daily net
assets on the next $2 billion, 0.20% of the value of average daily net assets of
the next $2 billion and 0.15% of the value of its average daily net assets
thereafter.
25
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of the close of business on July 30, 1993, The Travelers Inc. (formerly known
as Primerica Corporation) ("Travelers") and Smith Barney, Harris Upham & Co.
Incorporated completed the acquisition of substantially all of the domestic
retail brokerage and asset management businesses of Shearson Lehman Brothers.
Smith Barney, Harris Upham & Co. Incorporated was subsequently renamed Smith
Barney Shearson.
As of the close of business on July 30, 1993, Greenwich Street Advisors, a
division of Mutual Management Corp., which is controlled by Smith Barney
Shearson Holdings Inc. ("Holdings"), succeeded Shearson Lehman Advisors as the
Fund's investment adviser. Holdings is a wholly owned subsidiary of Travelers.
The new investment advisory agreement with Greenwich Street Advisors (the
"Advisory Agreement") contains terms and conditions substantially similar to the
investment advisory agreement with the predecessor investment adviser and
provides for payment of fees at the same rate as was paid to such predecessor
investment adviser. For the year ended December 31, 1993, Greenwich Street
Advisors voluntarily waived fees of $522,000, of this amount $63,840 is
receivable at December 31, 1993.
The Fund has also entered into an administration agreement (the "Administration
Agreement") with the Boston Company Advisors, Inc. ("Boston Advisors"), an
indirect wholly owned subsidiary of Mellon Bank Corporation ("Mellon"). Under
the Administration Agreement, the Fund pays a monthly fee at an annual rate of
0.20% of the value of its average daily net assets. Prior to May 21, 1993,
Boston Advisors served as sub-investment adviser and administrator to the Fund.
For the year ended December 31, 1993, the Fund incurred total brokerage
commissions of $717,340, of which $87,550 were paid to Smith Barney Shearson or
its predecessor.
For the year ended December 31, 1993, Smith Barney Shearson or its predecessor
received from investors $48,964 representing commissions (sales charges) on
sales of Class A shares.
A CDSC is generally payable by a shareholder in connection with the redemption
of Class B shares within five years (eight years in the case of
26
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
certain 401(k) plans) after the date of purchase. In circumstances in which the
charge is imposed, the amount of the charge ranges between 4.5% and 1% of net
asset value depending on the number of years since the date of purchase (except
in the case of purchases by certain 401(k) plans in which case a 3% charge is
imposed for the eight year period after the date of purchase). For the year
ended December 31, 1993, Smith Barney Shearson or its predecessor received from
investors $820,619 representing CDSC fees on the redemption of Class B shares.
No officer, director or employee of Smith Barney Shearson or Boston Advisors or
of any parent or subsidiary of those corporations receives any compensation from
the Company for serving as an officer or director of the Company. The Company
pays each Director who is not an officer, director or employee of Smith Barney
Shearson or Boston Advisors or any of their affiliates $14,000 per annum plus
$3,000 per meeting attended and reimburses each such Director for travel and
out-of-pocket expenses.
Boston Safe, an indirect wholly owned subsidiary of Mellon, serves as the Fund's
custodian. The Shareholder Services Group, Inc., a subsidiary of First Data
Corporation, serves as the Fund's transfer agent.
3. DISTRIBUTION AGREEMENT
Smith Barney Shearson acts as distributor of the Fund's shares pursuant to a
distribution agreement with the Company, and sells shares of all Funds of the
Company through Smith Barney Shearson or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a Services and
Distribution Plan (the "Plan"). Under this Plan, the Company compensates Smith
Barney Shearson for servicing shareholder accounts for Class A, Class B, and
Class D shareholders, and covers expenses incurred in distributing Class B and
Class D shares. Smith Barney Shearson is paid an annual service fee with respect
to Class A, Class B and Class D shares of the Fund at the rate of 0.25% of the
value of the average daily net assets of each respective class of shares. Smith
Barney Shearson is also paid an annual distribution fee with respect to Class B
and Class D shares at the rate of 0.50% of the value of the average daily net
assets of each respective class of shares. For the year ended December 31, 1993,
the service fee for Class A
27
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
and Class B shares was $13,628 and $2,384,061, respectively. For the period from
February 4, 1993 through December 31, 1993, the service fee for Class D shares
was $255. For the year ended December 31, 1993, the distribution fee for Class B
shares was $4,768,122. For the period from February 4, 1993 through December 31,
1993, the distribution fee for Class D shares was $510.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any
class of shares are prorated among the classes based upon the relative net
assets of each class. Operating expenses directly attributable to a class of
shares are charged to that class' operations. In addition to the above service
and distribution fees, class specific operating expenses include the transfer
agent fees. For the year ended December 31, 1993, transfer agent fees for Class
A and Class B shares were $5,431 and $817,821, respectively. For the period from
February 4, 1993 through December 31, 1993 transfer agent fees for Class D
shares were $84.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of U.S. government securities,
excluding short-term investments, aggregated $5,182,442,051 and $5,428,165,914,
respectively, for the year ended December 31, 1993.
At December 31, 1993, aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost was $1,684,566 and aggregate
gross unrealized depreciation for all securities in which there is an excess of
tax cost over value was $8,662,434.
28
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Information regarding borrowing by the Fund under reverse repurchase agreements
is as follows:
<TABLE>
<CAPTION>
Face Value Market Value
<C> <S> <C>
---------------------------------------------------------------------------------
$247,796,875 Reverse Repurchase Agreement with Morgan Stanley, $247,796,875
dated 12/31/93 2.500%, to be repurchased at
borrower's option date, collateralized by:
$197,500,000 U.S. Treasury Notes, 4.750% due
10/31/98 and $49,750,000 U.S. Treasury Notes,
4.750% due 9/30/98
---------------------------------------------------------------------------------
Maximum amount outstanding during the year $337,342,576
Average amount outstanding during the year $ 65,111,351
---------------------------------------------------------------------------------
</TABLE>
Interest rates ranged from 0.25% to 3.10% during the year. The average amount
outstanding during the year was calculated by summing borrowings at the end of
each day and dividing the sum by the number of days in the year ended December
31, 1993.
Interest paid for the year ended December 31, 1993, on borrowings by the Fund
under reverse repurchase agreements aggregated $1,447,588.
6. SHARES OF COMMON STOCK
At December 31, 1993, the Fund had authorized capital of 1 billion shares of
$.001 par value common stock divided into four classes of shares, Class A, Class
B, Class C and Class D. The Fund has not yet commenced offering Class C shares.
29
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Changes in the common stock outstanding were as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
12/31/93 12/31/92*
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 1,054,136 $ 10,586,533 29,255 $ 281,402
Issued as reinvestment of dividends 30,502 308,583 111 1,071
Redeemed (407,209) (4,112,521) (1,045) (10,100)
- -------------------------------------------------------------------------------------
Net increase 677,429 $ 6,782,595 28,321 $ 272,373
- -------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
12/31/93 12/31/92
CLASS B SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 6,495,924 $ 65,355,298 10,504,492 $ 100,811,045
Issued as reinvestment of dividends 3,961,687 39,944,292 4,739,263 45,265,155
Redeemed (33,549,100) (338,512,306) (38,253,401) (366,258,701)
- -------------------------------------------------------------------------------------
Net decrease (23,091,489) $(233,212,716) (23,009,646) $(220,182,501)
- -------------------------------------------------------------------------------------
<CAPTION>
PERIOD ENDED
12/31/93**
CLASS D SHARES: Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 20,640 $ 207,781
Issued as reinvestment of dividends 780 7,883
Redeemed (132) (1,362)
- -------------------------------------------------------------------------------------
Net increase 21,288 $ 214,302
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class A shares on November 6, 1992. Any shares
outstanding prior to November 6, 1992 were designated Class B shares.
**The Fund commenced selling Class D shares to the public on February 4, 1993.
</TABLE>
7. CAPITAL LOSS CARRYFORWARD
At December 31, 1993, the Fund had available for federal tax purposes unused
capital loss carryforwards (in thousands) of $391,564,060 and $148,463,086
expiring in 1995 and 1996, respectively.
30
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Continental Bank N.A. under an Amended and Restated Line of
Credit Agreement (the "Agreement") dated April 30, 1992, primarily for temporary
or emergency purposes, including the meeting of redemption requests that
otherwise might require the untimely disposition of securities. Under this
Agreement, the Fund may borrow up to the lesser of $25 million or 20% of its net
assets. Interest is payable either at the bank's Money Market Rate or the London
Interbank Offered Rate (LIBOR) plus 0.375% on an annualized basis. The Fund and
the other affiliated entities are charged an aggregate commitment fee of
$125,000 which is allocated equally among each of the participants. The
Agreement requires, among other provisions, each participating fund to maintain
a ratio of net assets (not including funds borrowed pursuant to the Agreement)
to aggregate amount of indebtedness pursuant to the Agreement of no less than 5
to 1. During the year ended December 31, 1993, the Fund had an average
outstanding daily balance of $89,589 with interest rates ranging from 3.3125% to
3.5625%. Interest expense totalled $3,091 for the year ended December 31, 1993.
At December 31, 1993 the Fund had no outstanding borrowings under this
Agreement.
31
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ---------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
SMITH BARNEY SHEARSON GOVERNMENT SECURITIES FUND OF
SMITH BARNEY SHEARSON INVESTMENT FUNDS INC.:
We have audited the accompanying statement of assets and liabilities of Smith
Barney Shearson Government Securities Fund of Smith Barney Shearson Investment
Funds Inc., including the schedule of portfolio investments, as of December 31,
1993, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended and the financial highlights for each of the five years in the 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, 1993 by correspondence with the custodian and brokers. 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 Smith
Barney Shearson Government Securities Fund of Smith Barney Shearson Investment
Funds Inc. as of December 31, 1993, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND
Boston, Massachusetts
February 2, 1994
32
<PAGE>
GOVERNMENT
SECURITIES FUND
DIRECTORS
Alger B. Chapman
Dwight B. Crane
Allan R. Johnson
Frank G. Hubbard
Heath B. McLendon
John F. White
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
Stephen J. Treadway
PRESIDENT
Richard P. Roelofs
EXECUTIVE VICE PRESIDENT
James E. Conroy
FIRST VICE PRESIDENT AND
INVESTMENT OFFICER
Kenneth A. Egan
FIRST VICE PRESIDENT
Vincent Nave
TREASURER
Francis J. McNamara, III
SECRETARY
Paul F. Roye
ASSISTANT SECRETARY
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF
SMITH BARNEY SHEARSON GOVERNMENT SECURITIES FUND. IT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS ACCOMPANIED OR PRECEDED BY AN
EFFECTIVE PROSPECTUS FOR THE FUND, WHICH CONTAINS INFORMATION CONCERNING THE
FUND'S INVESTMENT POLICIES AND EXPENSES AS WELL AS OTHER PERTINENT INFORMATION.
[LOGO]
Smith Barney Shearson
Mutual Funds
Two World Trade Center
New York, New York 10048
Fund 105,177,212
FD0316 B4
<PAGE>
[GRAPHIC]
Small box above fund name showing
S&P Stock Guide and a calculator,
pen and desk pad.
Smith Barney Shearson
Investment
1993 Grade
ANNUAL Bond
REPORT Fund
........................................
DECEMBER 31, 1993
[LOGO]
<PAGE>
Investment Grade Bond Fund
DEAR SHAREHOLDER:
We are pleased to provide the Annual Report for Smith Barney
Shearson Investment Grade Bond Fund (the "Fund") for the
fiscal year ended December 31, 1993. In this report we will
provide you with a review of the Fund's performance, the market
environment and portfolio activities during the past twelve months. In
addition, we have taken the opportunity to simplify this report by
separating the historical performance information for Class A and B
shares into two distinct sections. Our goal is to give you clear,
concise information that makes it easier for you to follow your
investment. We are doing this because Smith Barney Shearson believes
that an informed investor and an experienced Financial Consultant form
the most productive partnerships.
THE MARKET AND ECONOMIC ENVIRONMENT
The primary concern amongst all participants in capital markets as we
entered the dawn of a new Democratic Administration in 1993 was the
spectre of unnecessary fiscal stimulus as a panacea
for the fledgling economic recovery. As the year unfolded, President Clinton
proceeded to honor his campaign pledge to reduce the Federal budget deficit. In
August 1993, legislation was enacted which provided for significant deficit
reductions in the years ahead. This helped calm market fears and participants
once again shifted their focus to the level of economic activity and the
improving outlook for inflation.
Economic growth slowed from the rapid pace recorded in the fourth quarter of
1992. The sharp increase in reported inflation statistics in early 1993 gave way
to a series of moderating monthly increases throughout the remainder of the
year. At the long end of the maturity spectrum, the yield on the 30-year
Treasury bond fell from 7.40% in December 1992 to 5.75% in mid-October 1993. As
monthly economic reports strengthened in November and December, 1993, the yield
on the 30-year Treasury bond rose to close the year at 6.30%.
The overall decline in rates during 1993 made it very advantageous for
corporations to issue debt, and as a result the corporate bond market
experienced a record amount of new issuance. Bank and finance, industrial
utility and sovereign issuers were extremely active in refinancing older, higher
1
<PAGE>
- --------------------------------------------------------------------
D I V I D E N D P O L I C Y
ALTHOUGH NOT EXPLICITLY STATED IN THE PROSPECTUS, THE FUND'S POLICY IS TO
PAY A LEVEL MONTHLY DIVIDEND BASED ON OUR PROJECTIONS FOR THE CORPORATE BOND
MARKET AND THE GENERAL DIRECTION OF INTEREST RATES. THIS POLICY HAS NO
APPRECIABLE AFFECT ON THE FUND'S INVESTMENT STRATEGIES OR NET ASSET VALUE
PER SHARE SINCE IT IS GUIDED BY MARKET CONDITIONS. IT MEANS THAT WE DO NOT
INVEST IN MORE SPECULATIVE SECURITIES THAT MAY UNDERMINE THE FUND'S NET
ASSET VALUE PER SHARE IN ORDER TO MAINTAIN AN UNREALISTICALLY HIGH DIVIDEND
POLICY. WE CONTINUALLY MONITOR BOTH THE MARKET AND THE FUND'S INCOME STREAM
TO SEE THAT OUR DIVIDEND PROJECTIONS ARE REALISTIC.
coupon debt with new issues at lower coupon levels. Because the net new issuance
was absorbed readily by insurance companies, mutual funds and pension funds, the
yield differential between corporate and other securities narrowed during the
year.
INVESTMENT STRATEGY
We began 1993 with a constructive outlook for the year as a whole and remained
fully invested in longer-dated maturities. The average maturity of the Fund's
portfolio was 27 years at the end of the Fund's fiscal year. On December 31,
1993, 4.05% of the portfolio was rated AAA, the highest available bond rating by
Standard & Poor's Corporation, which is a nationally-recognized bond rating
organization, 13.21% of the portfolio was rated AA, 36.91% was rated A, and
30.03% was rated BBB. The majority of assets were invested in the food and
beverage, airline, automotive and aerospace sectors.
PERFORMANCE REVIEW
The Fund had yet another good performance year in 1993. Its Class A and Class B
shares were ranked numbers one and two, respectively, among their Lipper
Analytical peer group of 73 funds for the twelve months ended December 31, 1993.
The Fund's oldest class of shares, the Class B shares, was ranked by Lipper in
the first quartile for the three-and five-year periods ended December 31, 1993.
More specific information about the performance of each share class is given in
the historical performance and average annual total return sections of this
report.
2
<PAGE>
THE OUTLOOK FOR 1994
As we look forward to 1994, we envision uneven economic growth accompanied by a
relatively stable, low level of inflation. It remains our belief that favorable
global factors such as emerging markets and worldwide competition continue to
provide a positive backdrop for more improvement in productivity gains. The
acceptance of the North American Free Trade Agreement ("NAFTA") and the General
Agreement on Trade and Tariffs ("GATT") are more symbolic of how the world is
becoming interdependent. This is not an inflationary environment leading to
higher interest rates. Conversely, it should lead to a declining worldwide rate
environment.
The 1993 fiscal year concluded the Fund's eleventh year of operations. In
retrospect, the past years have been filled with an amazing variety of market
and economic conditions and political events. Through it all our investment
focus has remained constant, and despite periodic volatility the Fund and its
shareholders have been handsomely rewarded. As we begin our twelfth year, we
want to thank the shareholders who have been investors since inception and
welcome more recent shareholders to the Fund.
Sincerely,
Heath B. McLendon George E. Mueller, Jr.
Chairman of the Board Investment Officer
FEBRUARY 1, 1994
3
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- ---------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Total
12/31/93 Beginning Ending Distributed Paid Return*
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------
11/6/92 -
12/31/92 $11.67 $11.89 -- $0.15 3.25%
- -------------------------------------------------------------------------
1993 11.89 13.01 $0.14 0.89 18.45
- -------------------------------------------------------------------------
Total $0.14 $1.04
- -------------------------------------------------------------------------
Cumulative Total Return from 11/06/92 through 12/31/93 22.30%
- -------------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends and capital gains distributions at
net asset value and do not assume deduction of the sales charge (maximum 4.5%).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN -- CLASS A SHARES**
<TABLE>
<CAPTION>
Without Sales Charge With Sales Charge***
Without Without
Actual Fee Waiver Actual Fee Waiver
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
Year Ended 12/31/93 18.45% -- 13.12% --
- ---------------------------------------------------------------------------
Inception 11/6/92 through 12/31/93 19.13% -- 14.46% --
- ---------------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment of
dividends and capital gains at net asset value.
***Average annual total return figures shown assume the deduction of the maximum
4.5% sales charge.
NOTE: The Fund began offering Class A shares on November 6, 1992. Class A shares
are subject to a maximum 4.5% front-end sales charge and an annual service fee
of 0.25% of the value of the average daily net assets attributable to that
class.
</TABLE>
4
<PAGE>
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in Investment Grade Bond
Portfolio's Class A shares on November 6, 1992 through December 31, 1993 as
compared with the growth of a $10,000 investment in Lehman Brothers Long-Term
Corporate Bond Index and Lipper Corporate Debt A-Rated Average. The plot points
used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000 GROWTH OF $10,000
INVESTMENT IN THE INVESTMENT IN THE
GROWTH OF $10,000 LEHMAN BROTHERS LIPPER CORPORATE
INVESTED IN CLASS A SHARES LONG-TERM CORPORATE DEBT A-RATED
MONTH ENDED OF THE PORTFOLIO BOND INDEX AVERAGE
<S> <C> <C> <C>
10/31/92 -- $10,000 $10,000
11/06/92 $ 9,550 -- --
11/92 $ 9,603 $10,070 $ 9,995
12/92 $ 9,860 $10,298 $10,168
03/93 $10,478 $10,848 $10,654
06/93 $11,102 $11,278 $10,967
09/93 $11,831 $11,780 $11,341
12/93 $11,680 $11,703 $11,298
</TABLE>
+ Illustration of $10,000 invested in Class A shares on November 6, 1992,
assuming deduction of the maximum 4.5% sales charge at the time of investment
and reinvestment of dividends and capital gains at net asset value through
December 31, 1993.
The Lehman Brothers Long-Term Corporate Bond Index is an unmanaged index
comprised of all publicly issued, fixed rate, nonconvertible,
dollar-denominated investment-grade corporate debt. The average maturity of
the bonds in this index is approximately 23 years and includes bonds from a
diverse range of industries. Because it is unmanaged, the Lehman Brothers
Long-Term Corporate Bond Index is not subject to the same management and
trading expenses as a mutual fund.
The Lipper Corporate Debt A-Rated Average is composed of the Fund's peer group
of 75 mutual funds as of December 31, 1993.
NOTE: All figures cited here and on the other pages represent past performance
of the Fund and do not guarantee future results of Class A shares.
FOR A GLOSSARY OF TERMS, PLEASE TURN TO THE END OF THIS REPORT.
5
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- -------------------------------------------
HISTORICAL PERFORMANCE -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Total
12/31/93 Beginning Ending Distributed Paid Return*
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------
1984 $10.86 $10.88 $0.18 $1.19 14.59%
- -------------------------------------------------------------------------
1985 10.88 12.00 0.11 1.39 26.43
- -------------------------------------------------------------------------
1986 12.00 12.91 0.25 1.10 19.54
- -------------------------------------------------------------------------
1987 12.91 10.55 0.89 1.12 -2.83
- -------------------------------------------------------------------------
1988 10.55 10.33 -- 0.88 6.43
- -------------------------------------------------------------------------
1989 10.33 11.01 -- 0.87 15.57
- -------------------------------------------------------------------------
1990 11.01 10.43 -- 0.87 2.98
- -------------------------------------------------------------------------
1991 10.43 11.80 -- 0.87 22.50
- -------------------------------------------------------------------------
1992 11.80 11.89 -- 0.86 8.36
- -------------------------------------------------------------------------
1993 11.89 13.01 0.14 0.83 18.06
- -------------------------------------------------------------------------
Total $1.57 $9.98
- -------------------------------------------------------------------------
Cumulative Total Return from 1/1/84 through 12/31/93 234.05%
- -------------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends and capital gains distributions at
net asset value and do not assume deduction of the contingent deferred sales
charge (CDSC).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN -- CLASS B SHARES**
<TABLE>
<CAPTION>
Without CDSC With CDSC***
Without Without
Fee Fee
Actual Waiver Actual Waiver
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------
Year Ended 12/31/93 18.06% -- 13.56% --
- ----------------------------------------------------------------------------
Five Years Ended 12/31/93 13.28% 13.26% 13.15% 13.14%
- ----------------------------------------------------------------------------
Ten Years Ended 12/31/93 12.82% 12.78% 12.82% 12.78%
- ----------------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment of
dividends and capital gains at net asset value. The Fund's distributor waived
fees from January 1988 to December 1989. A shareholder's actual return for the
period during which waivers were in effect would be the higher of the two
numbers shown.
***Average annual total return figures shown assume the deduction of the
applicable CDSC.
NOTE: On November 6, 1992, outstanding shares of the Fund were designated Class
B shares. Class B shares are subject to a maximum 4.5% CDSC and annual service
and distribution fees of 0.25% and 0.50%, respectively, of the value of the
average daily net assets attributable to that class.
</TABLE>
6
<PAGE>
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in Investment Grade Bond
Portfolio's Class B shares on December 31, 1983 through December 31, 1993 as
compared with the growth of a $10,000 investment in Lehman Brothers Long-Term
Corporate Bond Index and Lipper Corporate Debt A-Rated Average. The plot points
used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000 GROWTH OF $10,000
INVESTMENT IN THE INVESTMENT IN THE
GROWTH OF $10,000 LEHMAN BROTHERS LIPPER CORPORATE
INVESTED IN CLASS B SHARES LONG-TERM CORPORATE DEBT A-RATED
MONTH ENDED OF THE PORTFOLIO BOND INDEX AVERAGE
<S> <C> <C> <C>
12/83 $10,000 $10,000 $10,000
01/84 $10,241 $10,202 $10,207
03/84 $ 9,982 $ 9,805 $10,011
06/84 $ 9,507 $ 9,315 $ 9,743
09/84 $10,690 $10,562 $10,619
12/84 $11,459 $11,480 $11,340
03/85 $11,696 $11,658 $11,568
06/85 $12,509 $13,086 $12,564
09/85 $12,700 $13,236 $12,798
12/85 $14,488 $15,101 $13,779
03/86 $16,445 $18,115 $14,745
06/86 $16,425 $18,070 $14,886
09/86 $16,653 $18,087 $15,135
12/86 $17,319 $18,737 $15,708
03/87 $17,655 $18,958 $16,021
06/87 $16,670 $18,023 $15,571
09/87 $15,410 $16,646 $14,997
12/87 $16,829 $18,236 $15,828
03/88 $17,478 $18,965 $16,406
06/88 $17,547 $19,116 $16,577
09/88 $17,918 $19,518 $16,904
12/88 $17,911 $19,921 $17,098
03/89 $18,046 $20,141 $17,277
06/89 $19,972 $22,650 $18,527
09/89 $20,057 $22,630 $18,660
12/89 $20,699 $23,711 $19,212
03/90 $19,946 $22,683 $18,981
06/90 $20,821 $23,708 $19,595
09/90 $20,267 $23,172 $19,579
12/90 $21,316 $25,202 $20,553
03/91 $22,275 $25,726 $21,109
06/91 $22,703 $25,836 $21,435
09/91 $24,378 $28,011 $22,694
12/91 $26,111 $29,910 $23,918
03/92 $25,805 $28,833 $23,552
06/92 $26,983 $30,035 $24,498
09/92 $28,514 $31,986 $25,662
12/92 $28,295 $32,330 $25,629
03/93 $30,055 $34,466 $26,876
06/93 $31,813 $36,316 $27,663
09/93 $33,873 $38,568 $28,605
12/93 $33,405 $37,964 $28,499
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class B shares on December
31, 1983, assuming reinvestment of dividends and capital gains at net asset
value through December 31, 1993.
The Lehman Brothers Long-Term Corporate Bond Index is an unmanaged index
comprised of all publicly issued, fixed rate, nonconvertible,
dollar-denominated investment-grade corporate debt. The average maturity of
the bonds in this index is approximately 23 years and includes bonds from a
diverse range of industries. Because it is unmanaged, the Lehman Brothers
Long-Term Corporate Bond Index is not subject to the same management and
trading expenses as a mutual fund.
The Lipper Corporate Debt A-Rated Average is composed of the Fund's peer group
of 75 mutual funds as of December 31, 1993.
NOTE: All figures cited here and on the other pages represent past performance
of the Fund and do not guarantee future results of Class B shares.
FOR A GLOSSARY OF TERMS, PLEASE TURN TO THE END OF THIS REPORT.
7
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) DECEMBER 31, 1993
INDUSTRY BREAKDOWN
Pie chart depicting the allocation of the Investment Portfolios Investment Grade
Bond Portfolio's investment securities held at December 31, 1993 by industry
classification. The pie is broken in pieces representing industries in the
following percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
U.S. Treasury Bonds, U.S. Government
Agency Securities, Repurchase
Agreements and ney Other Assets
and Liabilities 4.8%
Paper Products 6.5%
Aerospace 7.7%
Automotive 8.2%
Retail Stores 5.1%
Yenkee Bonds 12.7%
Other Corporate Bonds 27.0%
Airlines 10.8%
Food and Beverage 17.3%
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
Percentage of
Company Net Assets
<S> <C>
- ------------------------------------------------------------------
FORD MOTOR COMPANY 4.3%
HYDRO-QUEBEC 4.1
BOEING COMPANY 4.0
SEAGRAMS LTD. 3.9
GENERAL MOTORS CORPORATION 3.9
UNITED AIRLINES INC. 3.9
HERSHEY FOODS CORPORATION 3.8
UNITED TECHNOLOGIES CORPORATION 3.7
AMR CORPORATION 3.7
EASTMAN KODAK COMPANY 3.6
</TABLE>
AVERAGE MATURITY: 27 years
8
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- ------------------------------------------
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1993
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
<C> <S> <C>
- -------------------------------------------------------------------------------
U.S. CORPORATE BONDS AND NOTES -- 82.5%
FOOD AND BEVERAGE -- 17.3%
American Brands Inc.:
$10,275,000 Deb., 8.625% due 11/15/2021 $ 11,610,750
3,000,000 Notes, 7.875% due 1/15/2023 3,131,250
4,000,000 Borden Inc., Note,
7.875% due 2/15/2023 3,960,000
12,500,000 Coca-Cola Enterprises Inc., Deb.,
6.750% due 9/15/2023 11,921,875
15,200,000 Hershey Foods Corporation, Deb.,
8.800% due 2/15/2021 18,316,000
16,000,000 Ralston Purina Company, Deb.,
8.125% due 2/1/2023 16,420,000
16,800,000 Seagrams Ltd., Deb.,
8.350% due 1/15/2022 18,921,000
- -------------------------------------------------------------------------------
84,280,875
- -------------------------------------------------------------------------------
AIRLINES -- 10.8%
AMR Corporation, Deb.:
14,000,000 9.000% due 9/15/2016 14,595,000
3,000,000 9.880% due 6/15/2020 3,408,750
Delta Air Lines, Inc., Deb.:
10,890,000 9.000% due 5/15/2016 + 10,631,363
5,000,000 9.750% due 5/15/2021 5,218,750
17,650,000 United Airlines Inc., Deb.,
9.750% due 8/15/2021 18,797,250
- -------------------------------------------------------------------------------
52,651,113
- -------------------------------------------------------------------------------
AUTOMOTIVE -- 8.2%
17,500,000 Ford Motor Company, Deb.,
8.875% due 1/15/2022 21,000,000
16,000,000 General Motors Corporation, Note,
9.400% due 7/15/2021 18,880,000
- -------------------------------------------------------------------------------
39,880,000
- -------------------------------------------------------------------------------
AEROSPACE -- 7.7%
20,500,000 Boeing Company, Deb.,
6.875% due 10/15/2043 19,423,750
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1993
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
U.S. CORPORATE BONDS AND NOTES -- (CONTINUED)
AEROSPACE -- (CONTINUED)
$15,500,000 United Technologies Corporation,
Deb.,
8.750% due 3/1/2021 $ 18,115,625
- -------------------------------------------------------------------------------
37,539,375
- -------------------------------------------------------------------------------
PAPER PRODUCTS -- 6.5%
11,000,000 Boise Cascade Corporation, Deb.,
9.450% due 11/1/2009 11,756,250
Bowater, Inc., Deb.:
8,000,000 9.500% due 10/15/2012 9,030,000
6,000,000 9.375% due 12/15/2021 6,735,000
Georgia-Pacific Corporation, Deb.:
3,000,000 9.500% due 12/1/2011 3,491,250
500,000 9.625% due 3/15/2022 578,125
- -------------------------------------------------------------------------------
31,590,625
- -------------------------------------------------------------------------------
RETAIL STORES -- 5.1%
14,000,000 K Mart Corporation, Deb.,
7.950% due 2/1/2023 15,102,500
5,000,000 Penney (J.C.) Company, Inc., Deb.,
7.125% due 11/15/2023 4,981,250
5,000,000 Wal-Mart Stores Inc., Deb.,
6.750% due 10/15/2023 4,856,250
- -------------------------------------------------------------------------------
24,940,000
- -------------------------------------------------------------------------------
SUPRANATIONAL ENTITY -- 4.5%
International Bank for
Reconstruction and Development:
110,000,000 Zero coupon due 3/1/2026 11,825,000
70,000,000 Zero coupon due 3/1/2028 6,562,500
42,860,000 Zero coupon due 7/15/2029 3,589,525
- -------------------------------------------------------------------------------
21,977,025
- -------------------------------------------------------------------------------
PHOTOGRAPHY -- 3.6%
14,500,000 Eastman Kodak Company, Deb.,
9.200% due 6/1/2021 17,400,000
- -------------------------------------------------------------------------------
PUBLISHING -- 3.4%
15,000,000 Time Warner, Inc., Deb.,
9.150% due 2/1/2023 16,518,750
- -------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1993
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
U.S. CORPORATE BONDS AND NOTES -- (CONTINUED)
ELECTRONICS -- 3.3%
$17,500,000 Loral Corporation, Sr. Deb.,
7.000% due 9/15/2023 $ 16,231,250
- -------------------------------------------------------------------------------
TELEVISION -- 2.9%
14,500,000 CBS Inc., Note,
7.125% due 11/1/2023 14,119,375
- -------------------------------------------------------------------------------
METALS AND MINING -- 2.3%
10,000,000 Inco Ltd., Deb.,
9.600% due 6/15/2022 11,137,500
- -------------------------------------------------------------------------------
ENTERTAINMENT -- 2.3%
12,000,000 Paramount Communications, Inc.,
Sr. Deb.,
7.500% due 7/15/2023 11,040,000
- -------------------------------------------------------------------------------
CONSUMER PRODUCTS -- 2.0%
8,250,000 Corning Glass Works, Deb.,
8.875% due 3/15/2016 9,683,437
- -------------------------------------------------------------------------------
TRANSPORTATION -- 1.8%
7,500,000 Ryder Systems, Inc., Bond, Series
G,
9.000% due 5/15/2016 8,521,875
- -------------------------------------------------------------------------------
FINANCIAL SERVICES -- 0.8%
3,000,000 Penn Central Corporation, Sub.
Deb.,
10.875% due 5/1/2011 3,630,000
- -------------------------------------------------------------------------------
TOTAL U.S. CORPORATE BONDS AND
NOTES
(Cost $374,254,403) 401,141,200
- -------------------------------------------------------------------------------
YANKEE BONDS -- 12.7%
Hydro-Quebec, Deb.:
1,600,000 Series HE, 8.625% due 6/15/2029 1,842,000
15,000,000 Series HH, 8.500% due 12/1/2029 17,043,750
1,000,000 Series HI, 9.375% due 4/15/2030 1,245,000
5,000,000 Newfoundland Province of Canada,
Deb.,
7.320% due 10/13/2023 4,862,500
6,500,000 Nova Scotia Power Corporation,
8.250% due 7/30/2022 7,109,375
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1993
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
YANKEE BONDS -- (CONTINUED)
Nova Scotia Province of Canada,
Deb.:
$ 3,000,000 9.125% due 5/1/2021 $ 3,566,250
8,500,000 8.750% due 4/1/2022 9,796,250
13,500,000 Petro Canada,
9.250% due 10/15/2021 16,149,375
- -------------------------------------------------------------------------------
TOTAL YANKEE BONDS
(Cost $54,028,500) 61,614,500
- -------------------------------------------------------------------------------
U.S. TREASURY BOND -- 2.6% (Cost $13,556,250)
12,000,000 U.S. Treasury Bond,
7.125% due 2/15/2023 13,006,679
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES -- 0.8%
Financing Corporation Strips,
Series 19:
2,400,000 9.000% due 12/6/2018 395,136
21,400,000 9.000% due 6/6/2019 3,406,452
- -------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
SECURITIES
(Cost $2,856,342) 3,801,588
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 1.9% (Cost $9,314,000)
9,314,000 Agreement with Citibank 3.000%
dated 12/31/1993 to be
repurchased at $9,316,328 on
1/3/1994, collateralized by
$9,270,000 U.S. Treasury Note,
5.250% due 7/31/1998** 9,314,000
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $454,009,495*) 100.5% 488,877,967
OTHER ASSETS AND LIABILITIES (NET) (0.5) (2,525,456)
- -------------------------------------------------------------------------------
NET ASSETS 100.0% $486,352,511
- -------------------------------------------------------------------------------
<FN>
*Aggregate cost for Federal tax purposes.
**Collateral for securities on loan at 12/31/93 (Note 7).
+A portion of this security is loaned at 12/31/93. (See Note 7 to Financial
Statements).
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1993
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $454,009,495)
(Note 1)
See accompanying schedule $488,877,967
Cash 64,676
Interest receivable 9,900,757
Receivable for Fund shares sold 1,377,836
- ------------------------------------------------------------------------------
TOTAL ASSETS 500,221,236
- ------------------------------------------------------------------------------
LIABILITIES:
Collateral for securities loaned (Note 7) $9,314,900
Notes payable (Note 8) 1,900,191
Dividends payable 1,772,156
Distribution fee payable (Note 3) 203,997
Investment advisory fee payable (Note 2) 187,293
Payable for Fund shares redeemed 153,173
Service fees payable (Note 3) 104,156
Administration fee payable (Note 2) 83,241
Transfer agent fees payable (Note 2) 36,705
Custodian fees payable (Note 2) 24,000
Accrued expenses and other payables 88,913
- ------------------------------------------------------------------------------
TOTAL LIABILITIES 13,868,725
- ------------------------------------------------------------------------------
NET ASSETS $486,352,511
- ------------------------------------------------------------------------------
NET ASSETS consist of:
Distributions in excess of net investment
income $ (212,081)
Accumulated net realized gain on
investments sold 7,840,829
Unrealized appreciation of investments 34,868,472
Par value 37,383
Paid-in capital in excess of par value 443,817,908
- ------------------------------------------------------------------------------
TOTAL NET ASSETS $486,352,511
- ------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- ------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1993
<TABLE>
<S> <C> <C>
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($10,136,494 DIVIDED BY 779,050 shares of common stock
outstanding) $13.01
- -------------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE ($13.01 DIVIDED BY
0.955)
(based on maximum sales charge of 4.5% of the offering
price on
December 31, 1993) $13.62
- -------------------------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($476,007,897 DIVIDED BY 36,588,263 shares of common
stock outstanding) $13.01
- -------------------------------------------------------------------------------
CLASS D SHARES:
NET ASSET VALUE, offering and redemption price per share
($208,120 DIVIDED BY 15,998 shares of common stock
outstanding) $13.01
- -------------------------------------------------------------------------------
<FN>
+Redemption price per share for Class B shares is equal to net asset value less
any applicable contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $37,258,980
- -----------------------------------------------------------------------------------
EXPENSES:
Distribution fee (Note 3) $2,363,995
Investment advisory fee (Note 2) 2,157,373
Service fee (Note 3) 1,198,727
Sub-investment advisory and administration fee
(Note 2) 958,700
Transfer agent fees (Notes 2 and 4) 451,061
Custodian fees (Note 2) 70,895
Legal and audit fees 54,163
Directors' fees and expenses (Note 2) 29,356
Other 228,313
- -----------------------------------------------------------------------------------
TOTAL EXPENSES 7,512,583
- -----------------------------------------------------------------------------------
NET INVESTMENT INCOME 29,746,397
- -----------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTES 1 AND 5):
Net realized gain on investments during the year 29,001,216
Net unrealized appreciation of investments
during the year 18,943,101
- -----------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 47,944,317
- -----------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $77,690,714
- -----------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
12/31/93 12/31/92
<S> <C> <C>
Net investment income $ 29,746,397 $ 29,202,989
Net realized gain on investment during the year 29,001,216 7,816,610
Net unrealized appreciation/(depreciation) of
investments during the year 18,943,101 (3,973,870)
- -------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 77,690,714 33,045,729
Distributions to shareholders from net investment
income:
Class A (441,259) (5,781)
Class B (30,089,838) (29,243,196)
Class D (3,570) --
Distributions in excess of net investment income:
Class A (3,065) --
Class B (208,991) --
Class D (25) --
Distributions from capital:
Class A -- (207)
Class B -- (1,046,190)
Distributions to shareholders from net realized gain on
investments:
Class A (106,722) --
Class B (5,018,275) --
Class D (2,184) --
Net increase in net assets from:
Class A share transactions (Note 6) 8,940,862 923,865
Class B share transactions (Note 6) 2,664,579 15,163,391
Class D share transactions (Note 6) 214,405 --
- -------------------------------------------------------------------------------------
Net increase in net assets 53,636,631 18,837,611
NET ASSETS:
Beginning of year 432,715,880 413,878,269
- -------------------------------------------------------------------------------------
End of year (including distributions in excess of net
investment income of $212,081 at December 31, 1993) $486,352,511 $432,715,880
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
12/31/93+++ 12/31/92*
<S> <C> <C>
Net Asset Value, beginning of period $ 11.89 $11.67
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.88 0.14
Net realized and unrealized gain on investments 1.27 0.23
- -------------------------------------------------------------------------------------
Total from investment operations 2.15 0.37
Distributions to shareholders:
Distributions from net investment income (0.88) (0.14)
Distributions in excess of net investment income (0.01) --
Distributions from net realized gains (0.14) --
Distributions from capital -- (0.01)
- -------------------------------------------------------------------------------------
Total distributions (1.03) (0.15)
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $ 13.01 $11.89
- -------------------------------------------------------------------------------------
Total return+ 18.45% 3.25%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $10,136 $ 933
Ratio of operating expenses to average net assets 1.11% 1.03%**++
Ratio of net investment income to average net assets 6.67% 7.53%++
Portfolio turnover rate 65% 47%
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class A shares on November 6, 1992.
**The annualized operating expense ratio excludes interest expense. The ratio
including interest expense for the period ended December 31, 1992 was 1.04%.
+Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charges.
++Annualized.
+++Per share amounts have been calculated using the monthly average share
method.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- ------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.*
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
12/31/93+++ 12/31/92 12/31/91
<S> <C> <C> <C>
Net Asset Value, beginning of year $ 11.89 $ 11.80 $ 10.43
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.80 0.83 0.86
Net realized and unrealized gain/(loss) on
investments 1.29 0.12 1.38
- -------------------------------------------------------------------------------------
Total from investment operations 2.09 0.95 2.24
Distributions to shareholders:
Distributions from net investment income (0.82) (0.83) (0.87)
Distributions in excess of net investment income (0.01) -- --
Distributions from net realized gains (0.14) -- --
Distributions from capital -- (0.03) --
- -------------------------------------------------------------------------------------
Total distributions (0.97) (0.86) (0.87)
- -------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.01 $ 11.89 $ 11.80
- -------------------------------------------------------------------------------------
Total return+ 18.06% 8.36% 22.50%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $476,008 $431,783 $413,878
Ratio of operating expenses to average net assets 1.58% 1.57%** 1.53%
Ratio of net investment income to average net assets 6.20% 6.99% 7.90%
Portfolio turnover rate 65% 47% 82%
- -------------------------------------------------------------------------------------
<FN>
*On November 6, 1992 the Fund commenced selling Class A shares. Those shares
in existence prior to November 6, 1992 were designated Class B shares.
**The operating expense ratio excludes interest expense. The ratio including
interest expense for the year ended December 31, 1992 was 1.58%.
***Expense ratios before waiver of fees by the distributor for the years ended
December 31, 1989 and 1988 were 1.66% and 1.57%, respectively.
+Total return represents aggregate total return for the year indicated and
does not reflect any applicable sales charges.
++Not covered by Coopers & Lybrand's report.
+++Per share amounts have been calculated using the monthly average share
method.
#Net investment income before waiver of fees by the distributor for the years
ended December 31, 1989 and 1988 were $0.86 and $0.87, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- ------------------------------------------
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
12/31/91 12/31/89 12/31/88++ 12/31/87++ 12/31/86++ 12/31/85++ 12/31/84++
<S> <C> <C> <C> <C> <C> <C>
$ 11.01 $ 10.33 $ 10.55 $ 12.91 $ 12.00 $ 10.88 $ 10.86
-------------------------------------------------------------------------------------
0.86 0.87# 0.90# 0.89 1.10 1.08 1.25
(0.57) 0.68 (0.24) (1.24) 1.16 1.54 0.14
-------------------------------------------------------------------------------------
0.29 1.55 0.66 (0.35) 2.26 2.62 1.39
(0.87) (0.87) (0.88) (1.12) (1.10) (1.39) (1.19)
-- -- -- -- -- -- --
-- -- -- (0.89) (0.25) (0.11) (0.18)
-- -- -- -- -- -- --
-------------------------------------------------------------------------------------
(0.87) (0.87) (0.88) (2.01) (1.35) (1.50) (1.37)
-------------------------------------------------------------------------------------
$ 10.43 $ 11.01 $ 10.33 $ 10.55 $ 12.91 $ 12.00 $ 10.88
-------------------------------------------------------------------------------------
2.98% 15.57% 6.43% (2.83)% 19.54% 26.43% 14.59%
-------------------------------------------------------------------------------------
$405,779 $483,382 $532,794 $705,561 $421,011 $233,880 $171,621
1.58% 1.63%*** 1.22%*** 1.62% 1.62% 1.79% 1.88%
8.20% 8.07% 8.74% 7.96% 7.74% 9.78% 12.11%
59% 118% 72% 79% 211% 717% 477%
-------------------------------------------------------------------------------------
<FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- ------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
12/31/93*++
<S> <C>
Net Asset Value, beginning of period $12.56
- -------------------------------------------------------
Income from investment operations:
Net investment income 0.63
Net realized and unrealized gain on
investments 0.65
- -------------------------------------------------------
Total from investment operations 1.28
Distributions to shareholders:
Distributions from net investment income (0.68)
Distributions in excess of net investment
income (0.01)
Distributions from net realized gains (0.14)
- -------------------------------------------------------
Total distributions (0.83)
- -------------------------------------------------------
Net Asset Value, end of period $13.01
- -------------------------------------------------------
Total return+ 10.38%
- -------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $ 208
Ratio of operating expenses to average net
assets 1.61%**
Ratio of net investment income to average
net assets 6.17%**
Portfolio turnover rate 65%
- -------------------------------------------------------
<FN>
*The Fund commenced selling Class D shares on February 26, 1993.
**Annualized.
+Total return represents aggregate total return for the period indicated.
++Per share amounts have been calculated using the monthly average share
method.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Investment Funds Inc. (the "Company") was incorporated in
Maryland on September 29, 1981 and commenced operations on January 4, 1982. The
Company is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified
open-end management investment company. Prior to the close of business on July
30, 1993, the Company's corporate name was "SLH Investment Portfolios Inc." and
it was doing business under the name "Shearson Lehman Brothers Investment
Funds." As of the date of this report, the Company is composed of five managed
investment funds (the "Funds"): Investment Grade Bond Fund, Government
Securities Fund, Special Equities Fund, Directions Value Fund, and European
Fund. The assets of each Fund are segregated and a shareholder's interest is
limited to the Fund in which he or she owns shares. As of November 6, 1992, each
Fund offered two classes of shares to the general public: Class A shares and
Class B shares. Class A shares are sold with a front-end sales charge. Class B
shares may be subject to a contingent deferred sales charge ("CDSC") upon
redemption. Class B shares will convert automatically to Class A shares
approximately eight years after date of purchase, beginning on September 30,
1994. As of January 29, 1993, the Investment Grade Bond Fund ("the Fund")
offered a third class of shares, Class D shares, and these shares were first
purchased by the public on February 26, 1993. Class D shares are offered to
plans participating in the Smith Barney Shearson Inc. ("Smith Barney Shearson")
401(k) program. Class D shares are offered without a front-end sales charge or
CDSC. All classes of shares have identical rights and privileges except with
respect to the effect of the respective sales charges to each class, the
distribution and/or service fees borne by each class, expenses allocable
exclusively to each class, voting rights on matters affecting a single class,
the exchange privilege of each class and the conversion feature of Class B
shares. The following is a summary of significant accounting policies
consistently followed by the Fund in preparation of its financial statements.
PORTFOLIO VALUATION: Securities listed on an exchange are valued on the basis of
the last sale prior to the time the valuation is made. If there has been no sale
since the immediately previous valuation, then the current bid price is used.
Over-the-counter securities are valued on the basis of the bid price at the
close of business on each day. Notwithstanding the above, bonds and
21
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
other fixed-income securities are valued by using market quotations and may be
valued on the basis of prices provided by a pricing service, when the Board of
Directors believes that such prices reflect the market value of such securities.
In cases where securities are traded on more than one exchange, the securities
are valued on the exchange designated by or under the authority of the Board of
Directors as the primary market. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors. Money market
instruments maturing within 60 days of the valuation date are valued at
amortized cost.
REPURCHASE AGREEMENTS: The Fund engages in repurchase agreement transactions.
Under the terms of a typical repurchase agreement, the Fund takes possession of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral is at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the right
to use the collateral to offset losses incurred. There is a potential loss to
the Fund in the event the Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities including the risk of a possible
decline in the value of the underlying securities during the period while the
Fund seeks to assert its rights. The Fund's investment adviser, acting under the
supervision of the Board of Directors, reviews the value of the collateral and
the creditworthiness of those banks and dealers with which the Fund enters into
repurchase agreements to evaluate potential risks.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Dividend income is recorded on the ex-dividend
date. Interest income is recorded on the accrual basis. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Investment income and realized and unrealized gains and losses are allocated
based upon the relative net assets of each class of shares.
22
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a regulated
investment company, if such qualification is in the best interest of its
shareholders, by complying with the requirements of the Internal Revenue Code of
1986, as amended (the "Code"), applicable to regulated investment companies and
to distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment
income, if any, are determined on a class level and will be declared daily and
paid monthly. Distributions from net realized capital gains, after utilization
of capital loss carryforwards, are determined on a Fund level and will be
distributed at least annually. Net short-term capital gains may be paid more
frequently, with the distribution of dividends from net investment income.
Additional distributions of net investment income and capital gains may be made
at the discretion of the Board of Directors to avoid application of the excise
tax imposed under the code for certain undistributed amounts. Income
distributions and capital gain distributions on a Fund level are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments of income and gains on various investment securities held by the
Fund, timing differences and differing characterization of distributions made by
the Fund as a whole.
RECLASSIFICATIONS: During the year, the Fund adopted Statement of Position 93-2
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies."
Accordingly, certain reclassifications have been made to the components of
capital in the Statement of Net Assets to conform with the accounting and
reporting guidelines of this statement. Distributions in excess of book basis
accumulated realized gains or undistributed net investment income that were the
result of permanent book and tax accounting differences have been reclassified
to paid-in capital. In addition, amounts distributed in excess of accumulated
net investment income as determined for financial statement purposes which had
previously been reported as distributions from paid-in capital have been
reclassified to accumulated net investment income. Accordingly, amounts as of
December 31, 1992 have been restated to reflect an increase in undistributed net
investment income of $788,270, a decrease in paid-in capital of $806,152 and a
decrease in
23
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
accumulated net realized losses of $17,882. The Statement of Changes in Net
Assets and Financial Highlights have not been restated to reflect this change in
presentation. Net investment income, net realized gains and net assets were not
affected by this change.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER RELATED PARTY
TRANSACTIONS
Up to the close of business on July 30, 1993, the Fund had entered into an
investment advisory agreement with Shearson Lehman Brothers Inc. ("Shearson
Lehman Brothers") on behalf of Shearson Lehman Advisors, a member of the Asset
Management Group of Shearson Lehman Brothers. Under the investment advisory
agreement, the Fund paid a monthly fee at the annual rate of 0.45% of the value
of its average daily net assets, up to $500 million and 0.42% of the value of
its average daily net assets thereafter.
As of the close of business on July 30, 1993, The Travelers Inc. (formerly known
as Primerica Corporation) ("Travelers") and Smith Barney, Harris Upham & Co.
Incorporated completed the acquisition of substantially all of the domestic
retail brokerage and asset management businesses of Shearson Lehman Brothers.
Smith Barney, Harris Upham & Co. Incorporated was subsequently renamed Smith
Barney Shearson.
As of the close of business on July 30, 1993, Greenwich Street Advisors, a
division of Mutual Management Corp., which is controlled by Smith Barney
Shearson Holdings Inc. ("Holdings"), succeeded Shearson Lehman Advisors as the
Fund's investment adviser. Holdings is a wholly owned subsidiary of Travelers.
The new investment advisory agreement with Greenwich Street Advisors (the
"Advisory Agreement") contains terms and conditions substantially similar to the
investment advisory agreement with the predecessor investment adviser and
provides for payment of fees at the same rate as was paid to such predecessor
investment adviser.
The Fund has also entered into an administration agreement (the "Administration
Agreement") dated May 21, 1993, with The Boston Company Advisors, Inc. ("Boston
Advisors"), an indirect wholly owned subsidiary of Mellon Bank Corporation
("Mellon"). Under the Administration Agreement, the Fund pays a monthly fee at
the annual rate of 0.20% of the value of its
24
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
average daily net assets up to $500 million and 0.18% of the value of its
average daily net assets thereafter. Prior to May 21, 1993, Boston Advisors
served as sub-investment adviser and administrator to the Fund.
For the year ended December 31, 1993, Smith Barney Shearson or its predecessor
received from investors $110,683 representing commissions (sales charges) on
sales of Class A shares.
A CDSC is generally payable by a shareholder in connection with the redemption
of Class B shares within five years (eight years in the case of certain 401(k)
plans) after the date of purchase. In circumstances in which the charge is
imposed, the amount of the charge ranges between 4.5% and 1% of net asset value
depending on the number of years since the date of purchase (except in the case
of purchases by certain 401(k) plans in which case a 3% charge is imposed for
the eight year period after the date of the purchase). For the year ended
December 31, 1993, Smith Barney Shearson or its predecessor received from
investors $498,515 representing CDSC fees on the redemption of Class B shares.
No officer, director or employee of Smith Barney Shearson or Boston Advisors or
of any parent or subsidiary of those corporations receives any compensation from
the Company for serving as an officer or director of the Company. The Company
pays each Director who is not an officer, director or employee of Smith Barney
Shearson or Boston Advisors or any of their affiliates $14,000 per annum plus
$3,000 per meeting attended and reimburses each such Director for travel and
out-of-pocket-expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, serves as the Fund's custodian. The Shareholder Services Group, Inc., a
subsidiary of First Data Corporation, serves as the Fund's transfer agent.
3. DISTRIBUTION AGREEMENT
Smith Barney Shearson acts as distributor of the Fund's shares pursuant to a
distribution agreement with the Company, and sells shares of all the Funds of
the Company through Smith Barney Shearson or its affiliates.
25
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Pursuant to Rule 12b-1 under the 1940 Act, the Company has adopted a Services
and Distribution Plan (the "Plan"). Under this Plan, the Company compensates
Smith Barney Shearson for servicing shareholder accounts for Class A, Class B
and Class D shareholders, and covers expenses incurred in distributing Class B
and Class D shares. Smith Barney Shearson is paid an annual service fee with
respect to Class A, Class B and Class D shares of the Fund at the rate of 0.25%
of the value of the average daily net assets of each respective class of shares.
Smith Barney Shearson is also paid an annual distribution fee with respect to
Class B and Class D shares at the rate of 0.50% of the value of the average
daily net assets of each respective class of shares. For the year ended December
31, 1993, the service fee for Class A and Class B shares was $16,729 and
$1,181,850, respectively. For the period from February 26, 1993 through December
31, 1993, the service fee for Class D shares was $148. For the year ended
December 31, 1993, the distribution fee for Class B shares was $2,363,700. For
the period from February 26, 1993 through December 31, 1993, the distribution
fee for Class D shares was $295.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any class of
shares are prorated among the classes based upon the relative net assets of each
class. Operating expenses directly attributable to a class of shares are charged
to that class' operations. In addition to the above service and distribution
fees, class specific operating expenses include the transfer agent fees. For the
year ended December 31, 1993, transfer agent fees for Class A and Class B shares
were $8,253 and $442,736, respectively. For the period from February 26, 1993
through December 31, 1993 transfer agent fees for Class D shares were $72.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-term
investments, aggregated $311,886,167 and $304,511,038, respectively, for the
year ended December 31, 1993.
At December 31, 1993, aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost was $39,170,957 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $4,302,485.
26
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHARES OF COMMON STOCK
At December 31, 1993, the Fund had authorized capital of 200 million shares of
$.001 par value common stock divided into four classes of shares, Class A, Class
B, Class C and Class D. The Fund has not yet commenced offering Class C shares.
Changes in common stock outstanding were as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
12/31/93 12/31/92*
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 814,955 $ 10,439,045 78,401 $ 922,565
Issued as reinvestment of dividends 30,012 391,603 243 2,864
Redeemed (144,428) (1,889,786) (133) (1,564)
- -------------------------------------------------------------------------------------
Net increase 700,539 $ 8,940,862 78,511 $ 923,865
- -------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
12/31/93 12/31/92
CLASS B SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 7,479,308 $ 95,869,084 7,993,753 $ 94,210,187
Issued as reinvestment of dividends 2,026,146 26,160,376 1,901,871 22,373,065
Redeemed (9,246,595) (119,364,881) (8,629,417) (101,419,861)
- -------------------------------------------------------------------------------------
Net increase 258,859 $ 2,664,579 1,266,207 $ 15,163,391
- -------------------------------------------------------------------------------------
<CAPTION>
PERIOD ENDED
12/31/93**
CLASS D SHARES: Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 15,619 $ 209,421
Issued as reinvestment of dividends 473 6,230
Redeemed (94) (1,246)
- -------------------------------------------------------------------------------------
Net increase 15,998 $ 214,405
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class A shares on November 6, 1992. Any shares
outstanding prior to November 6, 1992 were designated Class B shares.
**The Fund commenced selling Class D shares to the public on February 26, 1993.
</TABLE>
27
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LENDING OF PORTFOLIO SECURITIES
The Fund has the ability to lend its securities to brokers, dealers and other
financial organizations. Loans of securities by the Fund are collateralized by
cash, letters of credit or U.S. government securities that are maintained at all
times in an amount at least equal to the current market value of the loaned
security.
For the year ended December 31, 1993, the Fund loaned securities to certain
brokers for which the Fund received $9,314,900 as collateral. This amount is
invested in a repurchase agreement at December 31, 1993.
At December 31, 1993, the Fund loaned a security with an aggregate market value
of $9,279,257 which represents 1.91% of total net assets.
8. NOTES PAYABLE
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Continental Bank N.A. under an Amended and Restated Line of
Credit Agreement (the "Agreement") dated April 30, 1992, primarily for temporary
or emergency purposes, including the meeting of redemption requests that
otherwise might require the untimely disposition of securities. Under this
Agreement, the Fund may borrow up to the lesser of $25 million or 20% of its net
assets. Interest is payable either at the bank's Money Market Rate or the London
Interbank Offered Rate (LIBOR) plus 0.375% on an annualized basis. The Fund and
the other affiliated entities are charged an aggregate commitment fee of
$125,000 which is allocated equally among each of the participants. The
Agreement requires, among other provisions, each participating fund to maintain
a ratio of net assets (not including funds borrowed pursuant to the Agreement)
to aggregate amount of indebtedness pursuant to the Agreement of no less than 5
to 1. During the year ended December 31, 1993, the Fund had an average
outstanding daily balance of $618,356 with interest rates ranging from 3.375% to
4.375%. Interest expense for the year ended December 31, 1993 totalled $21,407
which has been included in other expenses on the Statement of Operations for the
year ended December 31, 1993. At December 31, 1993, the Fund had outstanding
borrowings under this Agreement of $1,900,191.
28
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- ---------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
SMITH BARNEY SHEARSON INVESTMENT GRADE BOND FUND OF
SMITH BARNEY SHEARSON INVESTMENT FUNDS INC.:
We have audited the accompanying statement of assets and liabilities of Smith
Barney Shearson Investment Grade Bond Fund of Smith Barney Shearson Investment
Funds Inc., including the schedule of portfolio investments, as of December 31,
1993, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended and the financial highlights for each of the five years in the 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, 1993 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Smith Barney Shearson Investment Grade Bond Fund of Smith Barney Shearson
Investment Funds Inc. as of December 31, 1993, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for each of the five years in
the period then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND
Boston, Massachusetts
February 2, 1994
29
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- --------------------------------------------------------------------
TAX INFORMATION
YEAR ENDED DECEMBER 31, 1993 (UNAUDITED)
The amount of long term capital gains paid for the fiscal year ended December
31, 1993 was $5,127,181.
30
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- --------------------------------------------------------------------
PARTICIPANTS
DISTRIBUTOR
Smith Barney Shearson Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Greenwich Street Advisors
Two World Trade Center
New York, New York 10048
ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
TRANSFER AGENT
The Shareholder Services Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit and
Trust Company
One Boston Place
Boston, Massachusetts 02108
31
<PAGE>
Smith Barney Shearson
Investment Grade Bond Fund
- ---------------------------------------------------------------------------
GLOSSARY OF COMMONLY USED MUTUAL FUND TERMS
CAPITAL GAIN (OR LOSS) This is the increase (or decrease) in the market value
(price) of a security in your portfolio. If a stock or bond appreciates in
price, there is a capital gain; if it depreciates there is a capital loss. A
capital gain or loss is "realized" upon the sale of a security; if net capital
gains exceed net capital losses, there may be a capital gain distribution to
shareholders.
CONTINGENT DEFERRED SALES CHARGE (CDSC) One kind of back-end load, a CDSC may be
imposed if shares are redeemed during the first few years of ownership. The CDSC
may be expressed as a percentage of either the original purchase price or the
redemption proceeds. Most CDSCs decline over time, and some will not be charged
if shares are redeemed after a certain period of time.
DISTRIBUTION RATE This is the rate at which a mutual fund pays out (or
distributes) interest, dividends and realized capital gains to shareholders. A
fund's distribution rate is usually expressed as an annualized percent of the
fund's offering price.
DIVIDEND This is income generated by securities in a portfolio and distributed
after expenses to shareholders.
FRONT-END SALES CHARGE This is the sales charge which may be applied to an
investment at the time of initial purchase.
NET ASSET VALUE (NAV) Net asset value is the total market value of all
securities held by a fund, minus any liabilities, divided by the number of
shares outstanding. It is the value of a single share of a mutual fund on a
given day. The total value of your investment would be the NAV multiplied by the
number of shares you own.
SEC YIELD This standardized calculation of a mutual fund's yield is based on a
formula developed by the Securities and Exchange Commission (SEC) to allow funds
to be compared on an equal basis. It is an annualized yield based on the
portfolio's potential earnings from dividends, interest and yield to maturity of
its holdings, and it reflects the payments of all portfolio expenses for the
most recent 30-day period. Mutual funds are required to use this figure when
stating yield.
TOTAL RETURN Total return measures a fund's performance, taking into account
the combination of dividends paid and the gain or loss in the value of the
securities held in the portfolio. It may be expressed on an AVERAGE ANNUAL basis
or CUMULATIVE basis (total change over a given period). In addition, total
return may be expressed with or without the effects of sales charges or the
reinvestment of dividends and capital gains.
Whenever a fund reports any type of performance, it must also report the average
annual total return according to the standardized calculation developed by the
SEC. The SEC AVERAGE ANNUAL TOTAL RETURN calculation includes the effects of all
fees and sales charges and assumes the reinvestment of all dividends and capital
gains.
32
<PAGE>
INVESTMENT
GRADE BOND
FUND
DIRECTORS
Alger B. Chapman
Dwight B. Crane
Allan R. Johnson
Frank G. Hubbard
Heath B. McLendon
John F. White
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
Stephen J. Treadway
PRESIDENT
Richard P. Roelofs
EXECUTIVE VICE PRESIDENT
George E. Mueller Jr.
INVESTMENT OFFICER
Kenneth A. Egan
FIRST VICE PRESIDENT
Vincent Nave
TREASURER
Francis J. McNamara, III
SECRETARY
Paul F. Roye
ASSISTANT SECRETARY
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF
SMITH BARNEY SHEARSON INVESTMENT GRADE BOND FUND. IT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS ACCOMPANIED OR PRECEDED BY AN
EFFECTIVE PROSPECTUS FOR THE FUND, WHICH CONTAINS INFORMATION CONCERNING THE
FUND'S INVESTMENT POLICIES AND EXPENSES AS WELL AS OTHER PERTINENT INFORMATION.
[LOGO]
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
Fund 104, 234, 242
FD0317 B4
1993. PLEASE CONSULT SMITH BARNEY SHEARSON
MUTUAL FUNDS QUARTERLY PERFORMANCE UPDATE FOR
FIGURES THROUGH THE MOST RECENT CALENDAR
QUARTER.
SMITH BARNEY SHEARSON
DIRECTIONS
VALUE
FUND
Two World Trade Center
New York, New York 10048
Fund 107, 235, 249
FD0314 B4
<PAGE>
[GRAPHIC]
Small box above fund name showing
4 bars with the words "growth
companies" printed on top of them.
Smith Barney Shearson
1993 Special
ANNUAL Equities
REPORT Fund
........................................
DECEMBER 31, 1993
[LOGO]
<PAGE>
Special Equities Fund
DEAR SHAREHOLDER:
We are pleased to provide the Annual Report for Smith Barney
Shearson Special Equities Fund for the fiscal year ended
December 31, 1993. In this report we
will provide you with a review of the Fund's performance, the market
environment and portfolio activities during the past twelve months. In
addition, we have taken this opportunity to simplify the report by
separating the historical performance information for Class A and B
shares into two distinct sections. Our goal is to provide clear,
concise information that makes it easier for you to follow your
investment.
THE MARKET AND ECONOMIC ENVIRONMENT
In 1993 the economy continued to benefit from low and stable
inflation, low interest rates and ample liquidity. The result was four
quarters of progressively better "real" growth. As we
exited 1993, much improved consumer confidence was captured by both sample
statistical surveys and an increase in spending in big ticket items such as
homes and autos.
Mother Nature clearly negatively affected the first quarter of 1994; first came
the California earthquake just as that state's lagging economy was beginning to
awaken, then came the frigid Arctic blast with its seemingly mountainous
snowfalls in much of the country's northern tier. At the same time, some signs
of an impending pickup in inflationary pricing pressure (particularly in some of
the commodities markets) motivated the Federal Reserve Board to take its first
move towards tightening monetary policy since 1989. Whether this move is a
preemptive strike or an over-reaction, it does signal the first reversal in an
accommodative monetary policy that has been supporting the move to ever-higher
prices for financial assets. At the risk of overstating this modest Fed action,
it must be said that it reflects a change that should be expected on a cyclical
basis as the economy's growth pace has accelerated.
INVESTMENT STRATEGY
The immediate response that we as investors should make is to reinforce the
importance of earnings when seeking attractive investments. That pushes stock
selection to the top of the critical portfolio decisions as opposed to broad
market judgments. We reflect this in our investment decisions by purchasing
shares of only those companies which have a proven track record of increasing
revenues and earnings, some unique attributes which set them apart from their
competitors, and sufficient trading activity not only to accommodate a purchase
but, more importantly, a sale.
Despite stock market averages hitting new highs and an almost euphoric view
toward the economy as the year progressed, 1993 proved to be a more difficult
year for performance-oriented funds than it appeared on the surface. Although
the averages may have hit new highs, the broader underlying
1
<PAGE>
markets did not perform as well. In our view, the year was characterized by
rolling corrections or rapid, volatile rotations between sectors of the market,
while the overall averages maintained their steady upward pace. This dichotomy
of performance proved to be difficult, particularly for growth fund managers,
whether large or small-capitalization. Stock selection, therefore, became an
even more critical component of the investment process and we think 1994 will be
no different. While we believe the small-capitalization world clearly has an
upward bias, the road will be bumpy with continued volatile moves. Hence, we
once again advise investors in the more aggressive funds to use them as an
integral part of an overall investment program.
PERFORMANCE
The performance of the Fund in 1993 was good, up approximately 32% for the year.
The Fund ended the year ranked fourth for Class A Shares and eighth for Class B
Shares among its 166-member peer group investing in small company growth stocks
as measured by Lipper Analytical Services, Inc., a nationally-recognized mutual
fund ranking service. However, this was not achieved without difficulty in the
sense that much of our portfolio was invested in the so-called "out of favor"
consumer sector. Moreover, the uniqueness of the companies in the Fund's
portfolio greatly contributed to its strong performance. This compares with
performance increases for the broader markets in the range of 7% to 17%. While
the Dow Jones Industrial Average (DJIA) had risen 13.72%, the Standard & Poor's
500 Composite Stock Price Index (S&P 500), a truer index comparison with the
Fund, was up just over 7%.
Our goal in 1994 is to continue to provide our investors with a rational,
carefully thought out investment program based on stock selection and geared to
outperform the averages. We cannot stress enough the concept of stock selection.
With group leadership seemingly lasting only days and weeks, the flexibility
needed to participate in such moves is often not available. Thus, we think stock
selection of high quality growth issues is a far more prudent strategy.
Once again, we thank you for your continued support and look forward to serving
your investment needs in the future.
Sincerely,
Heath B. McLendon George V. Novello
Chairman of the Board Investment Officer
FEBRUARY 1, 1994
2
<PAGE>
Smith Barney Shearson
Special Equities Fund
- ---------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Total
December 31, Beginning Ending Distributed Paid Return*
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------
11/6/92 -
12/31/92 $14.13 $ 15.47 -- -- 9.48%
-----------------------------------------------------------------------
1993 15.47 20.23 $0.33 -- 32.90
-----------------------------------------------------------------------
Total $0.33 --
-----------------------------------------------------------------------
Cumulative Total Return from 11/6/92 through 12/31/93 45.51%
-----------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends and capital gains distributions at
net asset value and do not assume deduction of the sales charge (maximum 5%).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS
AND CAPITAL GAINS, IF ANY, ANNUALLY.
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN -- CLASS A SHARES**
<TABLE>
<CAPTION>
Without Sales Charge With Sales Charge***
Without Expense Without Expense
Actual Reimbursement Actual Reimbursement
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
Year Ended 12/31/93 32.90% -- 26.26% --
- ---------------------------------------------------------------------------
Inception 11/6/92 through 12/31/93 39.00 -- 32.88 --
- ---------------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment of
dividends and capital gains at net asset value.
***Average annual total return figures shown assume the deduction of the maximum
5% sales charge.
NOTE: The Fund began offering Class A shares on November 6, 1992. Class A shares
are subject to a maximum 5% front-end sales charge and an annual service fee of
0.25% of the value of the average daily net assets attributable to that class.
</TABLE>
4
<PAGE>
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in the Special Equities
Fund's Class A shares on November 10, 1992 through December 31, 1993 as compared
with the growth of a $10,000 investment in Standard & Poor's Composite Stock
Price Index. The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
INVESTMENT IN THE
GROWTH OF $10,000 STANDARD & POOR'S
INVESTED IN CLASS A SHARES COMPOSITE STOCK
MONTH ENDED OF THE FUND PRICE INDEX
<S> <C> <C>
10/31/92 -- $ 10,000
11/10/92 $ 9,500 --
11/92 10,139 10,340
12/92 10,401 10,466
03/93 10,856 10,923
06/93 12,068 10,975
9/93 14,542 11,258
12/93 13,823 11,526
</TABLE>
+ Illustration of $10,000 invested in Class A shares on November 6, 1992,
assuming deduction of the maximum 5% sales charge at the time of investment
and reinvestment of dividends and capital gains at net asset value through
December 31, 1993.
The Standard & Poor's 500 Composite Stock Price Index ("S&P 500") is an index
composed of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange and over-the-counter market. The S&P 500 is
useful in depicting the general movement of the stock market, but because it
is unmanaged, it is not subject to the same management and trading expenses as
a mutual fund.
NOTE: All figures cited here and on the other pages represent past performance
of the Fund and do not guarantee future results of Class A shares.
5
<PAGE>
Smith Barney Shearson
Special Equities Fund
- ---------------------------------------------
HISTORICAL PERFORMANCE -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Total
December 31, Beginning Ending Distributed Paid Return*
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------
1984 $11.83 $ 9.94 $0.70 $0.05 -10.24%
--------------------------------------------------------------------------
1985 9.94 13.15 -- 0.21 35.17
--------------------------------------------------------------------------
1986 13.15 13.02 1.00 0.05 7.05
--------------------------------------------------------------------------
1987 13.02 11.48 0.14 -- -10.91
--------------------------------------------------------------------------
1988 11.48 12.04 0.30 0.55 12.60
--------------------------------------------------------------------------
1989 12.04 13.77 -- 0.51 18.60
--------------------------------------------------------------------------
1990 13.77 9.82 0.23 0.31 -24.71
--------------------------------------------------------------------------
1991 9.82 14.18 -- 0.03 44.76
--------------------------------------------------------------------------
1992 14.18 15.47 -- -- 9.10
--------------------------------------------------------------------------
1993 15.47 20.08 0.33 -- 31.93
--------------------------------------------------------------------------
Total $2.70 $1.71
--------------------------------------------------------------------------
Cumulative Total Return from 1/1/84 through 12/31/93 142.43%
--------------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends and capital gains distributions at
net asset value and do not assume deduction of the contingent deferred sales
charge (CDSC).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS
AND CAPITAL GAINS, IF ANY, ANNUALLY.
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN -- CLASS B SHARES**
<TABLE>
<CAPTION>
Without CDSC With CDSC***
Without Expense Without Expense
Actual Reimbursement Actual Reimbursement
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------
Year Ended 12/31/93 31.93% -- 26.93% --
- ----------------------------------------------------------------------------
Five Years Ended 12/31/93 13.22 -- 13.10 --
- ----------------------------------------------------------------------------
Ten Years Ended 12/31/93 9.26 9.25% 9.26 9.25%
- ----------------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment of
dividends and capital gains at net asset value. The Fund's investment adviser,
sub-investment adviser and administrator reimbursed expenses during 1988. A
shareholder's actual return for the period during which reimbursements were in
effect would be the higher of the two numbers shown.
***Average annual total return figures shown assume the deduction of the
applicable CDSC.
NOTE: On November 6, 1992, outstanding shares of the Fund were designated Class
B shares. Class B shares are subject to a maximum 5% CDSC and annual service and
distribution fees of 0.25% and 0.75%, respectively, of the value of the average
daily net assets attributable to that class.
</TABLE>
6
<PAGE>
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in Special Equities
Fund's Class B shares on December 31, 1983 through December 31, 1993 as compared
with the growth of a $10,000 investment in Standard & Poor's Composite Stock
Price Index. The plot points used to draw the line graph were as follows.
<TABLE>
<CAPTION>
GROWTH OF $10,000
INVESTMENT IN THE
GROWTH OF $10,000 STANDARD & POOR'S
INVESTED IN CLASS B SHARES COMPOSITE STOCK
MONTH ENDED OF THE FUND PRICE INDEX
<S> <C> <C>
12/83 $10,000 $10,000
01/84 9,581 9,944
03/84 9,165 9,760
06/84 8,813 9,511
9/84 9,048 10,433
12/84 8,976 10,629
03/85 10,213 11,605
06/85 11,016 12,459
9/85 10,453 11,948
12/85 12,132 14,004
03/86 14,104 15,980
06/86 14,586 16,921
09/86 12,595 15,741
12/86 12,988 16,618
03/87 15,966 20,167
06/87 15,210 21,179
09/87 16,198 22,576
12/87 11,571 17,491
03/88 12,875 18,484
06/88 13,340 19,715
09/88 12,720 19,780
12/88 13,030 20,385
03/89 14,015 21,829
06/89 14,307 23,752
09/89 15,638 26,292
12/89 15,454 26,832
03/90 14,781 26,025
06/90 15,544 27,659
09/90 11,064 23,862
12/90 11,636 25,988
03/91 13,650 29,768
06/91 12,963 29,697
09/91 14,444 31,282
12/91 16,844 33,902
03/92 16,273 33,047
06/92 14,028 33,674
09/92 14,848 34,736
12/92 18,376 36,481
03/93 19,172 38,071
06/93 21,250 38,254
09/93 25,562 39,239
12/93 24,243 40,173
</TABLE>
+ Illustration of $10,000 invested in Class B shares on December 31, 1983,
assuming reinvestment of dividends and capital gains at net asset value
through December 31, 1993.
The Standard & Poor's 500 Composite Stock Price Index ("S&P 500") is an index
composed of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange and over-the-counter market. The S&P 500 is
useful in depicting the general movement of the stock market, but because it
is unmanaged, it is not subject to the same management and trading expenses as
a mutual fund.
NOTE: All figures cited here and on the other pages represent past performance
of the Fund and do not guarantee future results of Class B shares.
7
<PAGE>
Smith Barney Shearson
Special Equities Fund
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) DECEMBER 31, 1993
INDUSTRY BREAKDOWN
Pie chart depicting the allocation of the Investment Funds Special Equities
Fund's investment securities held at December 31, 1993 by industry
classification. The pie is broken in pieces representing industries in the
following percentatges:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Environmental Services 5.0%
Consumer Non-Durables 5.1%
Restaurants 8.1%
Technology 9.5%
Consumer Durables 9.7%
Retail Stores 15.2%
Convertible Preferred Stock,
Repurchase Agreement and
Net Other Assets and
Liabilities 13.1%
Other Common Stocks 11.4%
Entertainment and Leisure 22.9%
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
Percentage of
Company Net Assets
<S> <C>
- ------------------------------------------------------------------
CALLAWAY GOLF COMPANY 7.7%
BOMBAY COMPANY 3.3
GENTEX CORPORATION 3.0
CHEESECAKE FACTORY 3.0
MICRO WAREHOUSE INC. 2.8
CML GROUP, INC. 2.8
MARVEL ENTERTAINMENT GROUP 2.6
STARBUCKS CORPORATION 2.6
SUNGLASS HUT INTERNATIONAL, INC. 2.5
HEILIG-MEYERS 2.5
</TABLE>
3
<PAGE>
Smith Barney Shearson
Special Equities Fund
- ---------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1993
<TABLE>
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
<C> <S> <C>
-------------------------------------------------------------------------------------
COMMON STOCKS -- 86.9%
ENTERTAINMENT AND LEISURE -- 22.9%
185,000 Acclaim Entertainment, Inc.+ $ 3,931,250
125,000 Aldila, Inc. 3,562,500
70,000 American Recreation Company Holdings Inc.+ 892,500
271,800 Callaway Golf Company 14,507,325
220,000 CML Group, Inc. 5,197,500
25,000 Coastcast Corporation+** 453,125
70,000 Cobra Golf Inc.+ 1,907,500
90,000 Gymboree Corporation+ 4,005,000
55,000 Iwerks Entertainment Inc.+ 1,471,250
60,000 Lodgenet Entertainment Corporation+ 877,500
180,000 Marvel Entertainment Group+ 4,905,000
85,000 StarSight Telecast Inc.+ 1,572,500
-------------------------------------------------------------------------------------
43,282,950
-------------------------------------------------------------------------------------
RETAIL STORES -- 15.2%
40,000 Amway Asia Pacific Ltd.+ 1,425,000
30,000 Authentic Fitness Corporation+ 843,750
110,000 Barnes and Noble Inc.+ 2,736,250
110,000 Bell Sports Corporation+** 3,410,000
40,000 Catherines Stores Corporation+ 700,000
100,000 Cato Corporation, Class A 2,000,000
60,000 Chicos Fas, Inc. 2,055,000
125,000 Micro Warehouse Inc.+ 5,203,125
309,800 National Record Mart, Inc.++ 1,909,143
30,000 Phillips Van Heusen Corporation 1,125,000
151,000 Sunglass Hut International, Inc. 4,756,500
40,000 Talbots Inc.+ 1,060,000
75,000 Tops Appliance City+** 1,443,750
-------------------------------------------------------------------------------------
28,667,518
-------------------------------------------------------------------------------------
CONSUMER DURABLES -- 9.7%
65,000 Bed Bath & Beyond Inc.+ 2,242,500
138,000 Bombay Company+ 6,210,000
205,000 Eagle Hardware & Garden Inc.+ 3,690,000
50,000 Ethan Allen Interiors, Inc.+ 1,562,500
120,000 Heilig-Meyers 4,680,000
-------------------------------------------------------------------------------------
18,385,000
-------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney Shearson
Special Equities Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1993
<TABLE>
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
TECHNOLOGY -- 9.5%
20,000 Adaptec Inc.+ $ 795,000
50,000 Arrow Electronics Inc.+ 2,087,500
100,000 Davidson & Associates, Inc.+ 1,800,000
115,000 Electronic Arts+ 3,450,000
8,595 Encore Marketing International, Inc.+ 6,983
90,000 Fuel-Tech N.V. 1,057,500
162,000 Gentex Corporation 5,710,500
50,000 Mercury Interactive Corporation+ 862,500
30,000 NetFRAME Systems Inc.+ 517,500
35,000 NetManage Inc.+ 1,286,250
25,000 Thermo Remediation Inc.+ 315,625
-------------------------------------------------------------------------------------
17,889,358
-------------------------------------------------------------------------------------
RESTAURANTS -- 8.1%
30,000 Boston Chicken Inc.+** 1,080,000
220,000 Checkers Drive-In Restaurants+** 2,557,500
166,000 Cheesecake Factory+** 5,685,500
131,000 Krystal Company+ 1,752,125
85,000 Landry's Seafood Restaurants+ 2,040,000
121,000 Taco Cabana Inc., Class A+ 2,147,750
-------------------------------------------------------------------------------------
15,262,875
-------------------------------------------------------------------------------------
CONSUMER NON-DURABLES -- 5.1%
60,000 Brothers Gourmet Coffees Inc.** 975,000
40,000 Nine West Group, Inc.+ 1,180,000
220,000 Starbucks Corporation+ 4,895,000
43,000 Starter Corporation 747,125
45,000 Summa Four Inc.+ 1,788,750
-------------------------------------------------------------------------------------
9,585,875
-------------------------------------------------------------------------------------
ENVIRONMENTAL SERVICES -- 5.0%
100,000 Ecoscience Corporation 600,000
100,000 Huntco, Inc., Class A 4,212,500
130,000 Molten Metal Technology, Inc.+ 3,022,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney Shearson
Special Equities Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1993
<TABLE>
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
ENVIRONMENTAL SERVICES -- (CONTINUED)
135,000 Omega Environmental, Inc.+** $ 1,383,750
15,000 Purus Inc.+ 195,000
-------------------------------------------------------------------------------------
9,413,750
-------------------------------------------------------------------------------------
COMMUNICATIONS -- 4.2%
60,000 CableMaxx Inc.+ 645,000
125,000 California Mircrowave Inc.+ 3,031,250
70,000 CenCall Communications Corporation+ 1,960,000
65,000 Comcast Corporation, Class A 2,340,000
-------------------------------------------------------------------------------------
7,976,250
-------------------------------------------------------------------------------------
PET FOOD -- 2.2%
150,000 PETsMART Inc.+ 4,087,500
-------------------------------------------------------------------------------------
TRANSPORTATION -- 1.8%
111,000 Johnstown America Industries Inc.+ 2,719,500
40,000 Mesa Airlines, Inc.+ 710,000
-------------------------------------------------------------------------------------
3,429,500
-------------------------------------------------------------------------------------
BUILDING AND CONSTRUCTION -- 1.1%
25,000 Brewer C Homes Inc., Class A+ 328,125
60,000 T J International Inc. 1,815,000
-------------------------------------------------------------------------------------
2,143,125
-------------------------------------------------------------------------------------
HEALTHCARE -- 1.1%
25,000 Chiron Corporation+ 2,100,000
-------------------------------------------------------------------------------------
FOREST PRODUCTS -- 0.5%
25,000 Wausau Paper Mills Company 993,750
-------------------------------------------------------------------------------------
GAMING -- 0.5%
30,000 International Game Technology 885,000
-------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $128,277,292) 164,102,451
-------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney Shearson
Special Equities Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1993
<TABLE>
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C>
CONVERTIBLE PREFERRED STOCK --0.1% (Cost $672,900)
75,000 Encore Marketing International, Series A $ 112,500
-------------------------------------------------------------------------------------
<CAPTION>
FACE VALUE
<C> <S> <C>
-------------------------------------------------------------------------------------
REPURCHASE AGREEMENT --17.9% (Cost $33,779,000)
$ 33,779,000 Agreement with Citibank, 3.000% dated 12/31/93,
to be repurchased at $33,787,445 on 1/3/94,
collateralized by $33,615,000 U.S. Treasury Notes,
5.250% due 7/31/98*** 33,779,000
-------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $162,729,192*) 104.9% 197,993,951
OTHER ASSETS AND LIABILITIES (NET) (4.9) (9,286,904)
-------------------------------------------------------------------------------------
NET ASSETS 100.0% $188,707,047
-------------------------------------------------------------------------------------
<FN>
*Aggregate cost for Federal tax purposes.
**Portions of securities were loaned at 12/31/93. (See Note 8 to Financial
Statements).
***Collateral for securities on loan at 12/31/93 (Note 8).
+Non-income producing security.
++Restricted security (Note 7).
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney Shearson
Special Equities Fund
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1993
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$162,729,192) (Note 1)
See accompanying schedule:
Investment securities $164,214,951
Repurchase agreement 33,779,000 $ 197,993,951
------------
Receivable for Fund shares sold 2,342,195
Receivable for investment securities
sold 36,750
Dividends and interest receivable 31,364
- -------------------------------------------------------------------------------
TOTAL ASSETS 200,404,260
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities
purchased 5,699,305
Collateral for securities loaned (Note
8) 5,499,752
Payable for Fund shares redeemed 148,606
Investment advisory fee payable (Note
2) 86,307
Distribution fee payable (Note 3) 66,656
Transfer agent fees payable (Note 2) 35,000
Service fees payable (Note 3) 34,956
Administration fee payable (Note 2) 31,384
Custodian fees payable (Note 2) 19,400
Accrued expenses and other payables 75,847
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 11,697,213
- -------------------------------------------------------------------------------
NET ASSETS $ 188,707,047
- -------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney Shearson
Special Equities Fund
- ---------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1993
<TABLE>
<S> <C> <C>
NET ASSETS consist of:
Distributions in excess of net realized
capital gains $ (270,779)
Unrealized appreciation of investments 35,264,759
Par value 9,382
Paid-in capital in excess of par value 153,703,685
- -------------------------------------------------------------------------------
TOTAL NET ASSETS $ 188,707,047
- -------------------------------------------------------------------------------
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($50,121,129 DIVIDED BY 2,478,169 shares of common
stock outstanding) $20.23
- -------------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE ($20.23 DIVIDED BY
0.95)
(based on maximum sales charge of 5% of the offering
price on
December 31, 1993) $21.29
- -------------------------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($138,400,985 DIVIDED BY 6,894,192 shares of common
stock outstanding) $20.08
- -------------------------------------------------------------------------------
CLASS D SHARES:
NET ASSET VALUE, offering and redemption price per share
($184,933 DIVIDED BY 9,212 shares of common stock
outstanding) $20.08
- -------------------------------------------------------------------------------
<FN>
+Redemption price per share for Class B shares is equal to net asset value less
any applicable contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney Shearson
Special Equities Fund
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of
$90) $ 883,056
Interest 329,449
- ---------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 1,212,505
- ---------------------------------------------------------------------------------
EXPENSES:
Distribution fee (Note 3) $681,175
Investment advisory fee (Note 2) 548,764
Transfer agent fees (Notes 2 and 4) 272,822
Service fee (Note 3) 249,438
Sub-investment advisory and administration fee
(Note 2) 199,551
Legal and audit fees 74,466
Custodian fees (Note 2) 43,685
Directors' fees and expenses (Note 2) 29,356
Other 176,170
- ---------------------------------------------------------------------------------
TOTAL EXPENSES 2,275,427
- ---------------------------------------------------------------------------------
NET INVESTMENT LOSS (1,062,922)
- ---------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTES 1 AND 5):
Net realized gain on investments during the year 11,887,764
Net unrealized appreciation of investments
during the year 15,305,261
- ---------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 27,193,025
- ---------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $26,130,103
- ---------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney Shearson
Special Equities Fund
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
12/31/93 12/31/92
<S> <C> <C>
Net investment loss $(1,062,922) $ (1,240,513)
Net realized gain on investments sold during the year 11,887,764 4,740,181
Net unrealized appreciation on investments during the
year 15,305,261 1,845,780
- -------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 26,130,103 5,345,448
Distributions to shareholders from net realized gain on
investments:
Class A (201,416) --
Class B (1,917,909) --
Class D (2,961) --
Net increase/(decrease) in net assets from:
Class A share transactions (Note 6) 45,287,453 183,152
Class B share transactions (Note 6) 40,880,321 (8,821,970)
Class D share transactions (Note 6) 207,013 --
- -------------------------------------------------------------------------------------
Net increase/(decrease) in net assets 110,382,604 (3,293,370)
NET ASSETS:
Beginning of year 78,324,443 81,617,813
- -------------------------------------------------------------------------------------
End of year (including accumulated net investment loss
of $1,809,635 at December 31, 1992) $188,707,047 $ 78,324,443
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney Shearson
Special Equities Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
12/31/93++ 12/31/92*
<S> <C> <C>
Net Asset Value, beginning of period $ 15.47 $14.13
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.08) (0.01)
Net realized and unrealized gain on investments 5.17 1.35
- -------------------------------------------------------------------------------------
Total from investment operations 5.09 1.34
Distributions from net realized gains (0.33) --
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $ 20.23 $15.47
- -------------------------------------------------------------------------------------
Total return+ 32.90% 9.48%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $50,121 $ 195
Ratio of operating expenses to average net assets 1.67% 1.51%**
Ratio of net investment loss to average net assets (0.46)% (0.97)%**
Portfolio turnover rate 112% 211%
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class A shares on November 6, 1992.
**Annualized.
+Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charges.
++Per share amounts have been calculated using the monthly average share
method.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Smith Barney Shearson
Special Equities Fund
- ---------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.*
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
12/31/93+++ 12/31/92 12/31/91 12/31/90
<S> <C> <C> <C> <C>
Net Asset Value, beginning of year $ 15.47 $ 14.18 $ 9.82 $ 13.77
- -------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income/(loss) (0.20) (0.26) (0.07) 0.29
Net realized and unrealized gain/
(loss) on investments 5.14 1.55 4.46 (3.70)
- -------------------------------------------------------------------------------------
Total from investment operations 4.94 1.29 4.39 (3.41)
Distributions to shareholders:
Distributions from net investment
income -- -- -- (0.29)
Distributions from net realized
gains (0.33) -- -- (0.23)
Distributions from capital -- -- (0.03) (0.02)
- -------------------------------------------------------------------------------------
Total distributions (0.33) 0.00 (0.03) (0.54)
- -------------------------------------------------------------------------------------
Net Asset Value, end of year $ 20.08 $ 15.47 $ 14.18 $ 9.82
- -------------------------------------------------------------------------------------
Total return+ 31.93% 9.10% 44.76% (24.71)%
- -------------------------------------------------------------------------------------
Ratios to average net assets/
supplemental data:
Net assets, end of year (in 000's) $138,401 $ 78,130 $ 81,618 $ 76,009
Ratio of operating expenses to
average net assets 2.34% 2.32% 2.31% 2.30%
Ratio of net investment income/
(loss) to average net assets (1.13)% (1.77)% (0.74)% 2.12%
Portfolio turnover rate 112% 211% 379% 372%
- -------------------------------------------------------------------------------------
<CAPTION>
YEAR
ENDED
12/31/89
<S> <C>
Net Asset Value, beginning of year $ 12.04
- -----------------------------------------------------
Income from investment
operations:
Net investment income/(loss) 0.28
Net realized and unrealized gain/
(loss) on investments 1.96
- -----------------------------------------------------
Total from investment operations 2.24
Distributions to shareholders:
Distributions from net investment
income (0.27)
Distributions from net realized
gains --
Distributions from capital (0.24)
- -----------------------------------------------------
Total distributions (0.51)
- -----------------------------------------------------
Net Asset Value, end of year $ 13.77
- -----------------------------------------------------
Total return+ 18.60%
- -----------------------------------------------------
Ratios to average net assets/
supplemental data:
Net assets, end of year (in 000's) $141,630
Ratio of operating expenses to
average net assets 2.34%
Ratio of net investment income/
(loss) to average net assets 1.69%
Portfolio turnover rate 228%
- -----------------------------------------------------
<FN>
*On November 6, 1992 the Fund commenced selling Class A shares. Those shares in
existence prior to November 6, 1992 were designated Class B shares.
+Total return represents aggregate total return for the year indicated and does
not reflect any applicable sales charges.
+++Per share amounts have been calculated using the monthly average share
method.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney Shearson
Special Equities Fund
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR (CONTINUED).
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
12/31/88++ 12/31/87++ 12/31/86++ 12/31/85++
<S> <C> <C> <C> <C>
Net Asset Value, beginning of year $ 11.48 $ 13.02 $ 13.15 $ 9.94
- -------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income/(loss) 0.71# (0.10) (0.05) 0.05
Net realized and unrealized gain/
(loss) on investments 0.70 (1.30) 0.97 3.37
- -------------------------------------------------------------------------------------
Total from investment operations 1.41 (1.40) 0.92 3.42
Distributions to shareholders:
Distributions from net investment
income (0.55) -- (0.05) (0.21)
Distributions from net realized
gains (0.30) (0.14) (1.00) --
Distributions from capital -- -- -- --
- -------------------------------------------------------------------------------------
Total distributions (0.85) (0.14) (1.05) (0.21)
- -------------------------------------------------------------------------------------
Net Asset Value, end of year $ 12.04 $ 11.48 $ 13.02 $ 13.15
- -------------------------------------------------------------------------------------
Total return+ 12.60% (10.91)% 7.05% 35.17%
- -------------------------------------------------------------------------------------
Ratios to average net assets/
supplemental data:
Net assets, end of year (in 000's) $169,983 $178,905 $214,419 $163,468
Ratio of operating expenses to
average net assets 2.32%** 2.09% 2.12% 2.20%
Ratio of net investment income/
(loss) to average net assets 5.23% (0.63)% (0.34)% 0.43%
Portfolio turnover rate 165% 148% 114% 146%
- -------------------------------------------------------------------------------------
<CAPTION>
YEAR
ENDED
12/31/84++
<S> <C>
Net Asset Value, beginning of year $ 11.83
- -----------------------------------------------------
Income from investment
operations:
Net investment income/(loss) 0.21
Net realized and unrealized gain/
(loss) on investments (1.35)
- -----------------------------------------------------
Total from investment operations (1.14)
Distributions to shareholders:
Distributions from net investment
income (0.05)
Distributions from net realized
gains (0.70)
Distributions from capital --
- -----------------------------------------------------
Total distributions (0.75)
- -----------------------------------------------------
Net Asset Value, end of year $ 9.94
- -----------------------------------------------------
Total return+ (10.24)%
- -----------------------------------------------------
Ratios to average net assets/
supplemental data:
Net assets, end of year (in 000's) $129,856
Ratio of operating expenses to
average net assets 2.10%
Ratio of net investment income/
(loss) to average net assets 2.01%
Portfolio turnover rate 163%
- -----------------------------------------------------
<FN>
**Expense ratio before reimbursement of expenses by investment adviser and
sub-investment adviser and administrator for the year ended December 31, 1988
was 2.39%.
+Total return represents aggregate total return for the year indicated and does
not reflect any applicable sales charges.
++Not covered by Coopers & Lybrand's report.
#Net investment income before reimbursement of expenses by investment adviser
and sub-investment adviser and administrator for the year ended December 31,
1988 was $0.70.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
Smith Barney Shearson
Special Equities Fund
- ---------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
12/31/93*++
<S> <C>
Net Asset Value, beginning of period $ 22.62
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.16)
Net realized and unrealized loss on investments (2.05)
- --------------------------------------------------------------------------------
Total from investment operations (2.21)
Distributions from net realized gains (0.33)
- --------------------------------------------------------------------------------
Net Asset Value, end of period $ 20.08
- --------------------------------------------------------------------------------
Total return+ (9.77)%
- --------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 185
Ratio of operating expenses to average net assets 2.19%**
Ratio of net investment loss to average net assets (0.98)%**
Portfolio turnover rate 112%
- --------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class D shares on October 18, 1993.
**Annualized.
+Total return represents aggregate total return for the period indicated.
++Per share amounts have been calculated using the monthly average share
method.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
Smith Barney Shearson
Special Equities Fund
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Investment Funds Inc. (the "Company") was incorporated in
Maryland on September 29, 1981 and commenced operations on January 4, 1982. The
Company is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified
open-end management investment company. Prior to the close of business on July
30, 1993, the Company's corporate name was "SLH Investment Portfolios Inc." and
it was doing business under the name "Shearson Lehman Brothers Investment
Funds". As of the date of this report, the Company is composed of five managed
investment funds (the "Funds"): Investment Grade Bond Fund, Government
Securities Fund, Special Equities Fund, Directions Value Fund, and European
Fund. The assets of each Fund are segregated and a shareholder's interest is
limited to the Fund in which he or she owns shares. As of November 6, 1992, each
Fund offered two classes of shares to the general public: Class A shares and
Class B shares. Class A shares are sold with a front-end sales charge. Class B
shares may be subject to a contingent deferred sales charge ("CDSC") upon
redemption. Class B shares will convert automatically to Class A shares
approximately eight years after the date of original purchase, beginning on
September 30, 1994. On January 29, 1993, the Special Equities Fund (the "Fund")
offered a third class of shares, Class D shares, and these shares were first
purchased by the public on October 18, 1993. Class D shares are offered to plans
participating in the Smith Barney Shearson Inc. ("Smith Barney Shearson") 401(k)
program. Class D shares are offered without a front-end sales charge or CDSC.
All classes of shares have identical rights and privileges except with respect
to the effect of the respective sales charges to each class, the distribution
and/or service fees borne by each class, expenses allocable exclusively to each
class, voting rights on matters affecting a single class, the exchange privilege
of each class and the conversion feature of Class B shares. The following is a
summary of significant accounting policies consistently followed by the Fund in
preparation of its financial statements.
PORTFOLIO VALUATION: Securities listed on an exchange are valued on the basis of
the last sale prior to the time the valuation is made. If there has been no sale
since the immediately previous valuation, then the current bid price is used.
Over-the-counter securities are valued on the basis of the bid price at the
close of business on each day. Notwithstanding the above, bonds and
20
<PAGE>
Smith Barney Shearson
Special Equities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
other fixed-income securities are valued by using market quotations and may be
valued on the basis of prices provided by a pricing service, when the Board of
Directors believes that such prices reflect the market value of such securities.
In cases where securities are traded on more than one exchange, the securities
are valued on the exchange designated by or under the authority of the Board of
Directors as the primary market. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors. Money market
instruments maturing within 60 days of the valuation date are valued at
amortized cost.
REPURCHASE AGREEMENTS: The Fund engages in repurchase agreement transactions.
Under the terms of a typical repurchase agreement, the Fund takes possession of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral is at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the right
to use the collateral to offset losses incurred. There is a potential loss to
the Fund in the event the Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities including the risk of a possible
decline in the value of the underlying securities during the period while the
Fund seeks to assert its rights. The Fund's investment adviser, acting under the
supervision of the Board of Directors, reviews the value of the collateral and
the creditworthiness of those banks and dealers with which the Fund enters into
repurchase agreements to evaluate potential risks.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Dividend income is recorded on the ex-dividend
date. Interest income is recorded on the accrual basis. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Investment income and realized and unrealized gains and losses are allocated
based upon the relative net assets of each class of shares.
21
<PAGE>
Smith Barney Shearson
Special Equities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a regulated
investment company, if such qualification is in the best interest of its
shareholders, by complying with the requirements of the Internal Revenue Code of
1986, as amended (the "Code"), applicable to regulated investment companies and
to distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment
income, if any, are determined on a class level and will be declared and paid at
least annually. Distributions from net realized capitals gains, after
utilization of capital loss carry forwards, are determined on a Fund level and
will be distributed at least annually. Net short-term capital gains may be paid
more frequently, with the distribution of dividends from net investment income.
Additional distributions of net investment income and capital gains may be made
at the discretion of the Board of Directors to avoid the application of the
excise tax imposed under the Code for certain undistributed amounts. Income
distributions and capital gain distributions on a Fund level are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments of income and gains on various investment securities held by the
fund, timing differences and differing characterization of distributions made by
the fund as a whole. Permanent differences incurred during the year ended
December 31, 1993 resulting from a tax basis net operating loss were
reclassified to paid-in capital at year end.
RECLASSIFICATIONS: During the year, the Fund adopted Statement of Position 93-2
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies."
Accordingly, certain reclassifications have been made to the components of
capital in the Statement of Net Assets to conform with the accounting and
reporting guidelines of this statement. Distributions in excess of book basis
accumulated realized gains or undistributed net investment income that were the
result of permanent book and tax accounting differences have been reclassified
to paid-in capital. In addition, amounts distributed in excess of accumulated
net investment income as determined for financial statement purposes which had
previously been reported as distributions from paid-in capital have been
reclassified to accumulated net investment income. Accordingly, amounts as of
December 31, 1992 have
22
<PAGE>
Smith Barney Shearson
Special Equities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
been restated to reflect a decrease in paid-in capital of $1,789,894, an
increase in accumulated net realized loss of $19,741 and a decrease in
accumulated net investment loss of $1,809,635. The Financial Highlights have not
been restated to reflect this change in presentation. Net investment income, net
realized gains and net assets were not affected by this change.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER RELATED PARTY
TRANSACTIONS
Up to the close of business on July 30, 1993, the Fund had entered into an
investment advisory agreement with Shearson Lehman Brothers Inc. ("Shearson
Lehman Brothers") on behalf of Shearson Lehman Advisors, a member of the Asset
Management Group of Shearson Lehman Brothers. Under the investment advisory
agreement, the Fund paid a monthly fee at the annual rate of 0.55% of the value
of its average daily net assets.
As of the close of business on July 30, 1993, The Travelers Inc. (formerly known
as Primerica Corporation) ("Travelers") and Smith Barney, Harris Upham & Co.
Incorporated completed the acquisition of substantially all of the domestic
retail brokerage and asset management businesses of Shearson Lehman Brothers.
Smith Barney, Harris Upham & Co. Incorporated was subsequently renamed Smith
Barney Shearson.
As of the close of business on July 30, 1993, Greenwich Street Advisors, a
division of Mutual Management Corp., which is controlled by Smith Barney
Shearson Holdings Inc. ("Holdings"), succeeded Shearson Lehman Advisors as the
Fund's investment adviser. Holdings is a wholly owned subsidiary of Travelers.
The new investment advisory agreement with Greenwich Street Advisors (the
"Advisory Agreement") contains terms and conditions substantially similar to the
investment advisory agreement with the predecessor investment adviser and
provides for payment of fees at the same rate as was paid to such predecessor
investment adviser.
The Fund has also entered into an administration agreement (the "Administration
Agreement") dated May 21, 1993, with The Boston Company Advisors, Inc. ("Boston
Advisors"), an indirect wholly owned subsidiary of Mellon Bank Corporation
("Mellon"). Under the Administration Agreement,
23
<PAGE>
Smith Barney Shearson
Special Equities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the Fund pays a monthly fee at an annual rate of 0.20% of the value of its
average daily net assets. Prior to May 21, 1993 Boston Advisors served as
sub-investment adviser and administrator to the Fund.
For the year ended December 31, 1993, the Fund incurred total brokerage
commissions of $139,427, of which $16,614 were paid to Smith Barney Shearson or
its predecessor.
For the year ended December 31, 1993, Smith Barney Shearson or its predecessor
received from investors $172,978, representing commissions (sales charges) on
sales of Class A shares.
A CDSC is generally payable by a shareholder in connection with the redemption
of Class B shares within five years (eight years in the case of certain 401(k)
plans) after the date of purchase. In circumstances in which the charge is
imposed, the amount of the charge ranges between 5% and 1% of net asset value
depending on the number of years since the date of purchase (except in the case
of purchases by certain 401(k) plans in which case a 3% charge is imposed for
the eight year period after the date of the purchase. For the year ended
December 31, 1993, Smith Barney Shearson or its predecessor received from
investors $73,089 representing CDSC fees on the redemption of Class B shares.
No officer, director or employee of Smith Barney Shearson or Boston Advisors or
of any parent or subsidiary of those corporations receives any compensation from
the Company for serving as an officer or director of the Company. The Company
pays each Director who is not an officer, director or employee of Smith Barney
Shearson or Boston Advisors or any of their affiliates $14,000 per annum plus
$3,000 per meeting attended and reimburses each such Director for travel and
out-of-pocket-expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, serves as the Fund's custodian. The Shareholder Services Group, Inc., a
subsidiary of First Data Corporation, serves as the Fund's transfer agent.
24
<PAGE>
Smith Barney Shearson
Special Equities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. DISTRIBUTION AGREEMENT
Smith Barney Shearson acts as distributor of the Fund's shares pursuant to a
distribution agreement with the Company, and sells shares of all Funds of the
Company through Smith Barney Shearson or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a Services and
Distribution Plan (the "Plan"). Under this Plan, the Company compensates Smith
Barney Shearson for servicing shareholder accounts for Class A, Class B and
Class D shareholders, and covers expenses incurred in distributing Class B and
Class D shares. Smith Barney Shearson is paid an annual service fee with respect
to Class A, Class B and Class D shares of the Fund at the rate of 0.25% of the
value of the average daily net assets of each respective class of shares. Smith
Barney Shearson is also paid an annual distribution fee with respect to Class B
and Class D shares at the rate of 0.75% of the value of the average daily net
assets attributable to each respective class of shares. For the year ended
December 31, 1993, the service fee for Class A and Class B shares was $22,380
and $226,964, respectively. For the period from October 18, 1993 through
December 31, 1993, the service fee for Class D shares was $94. For the year
ended December 31, 1993, the distribution fee for Class B shares was $680,894.
For the period from October 18, 1993 through December 31, 1993, the distribution
fee for Class D shares was $281.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any class of
shares are prorated among the classes based upon the relative net assets of each
class. Operating expenses directly attributable to a class of shares are charged
to that class' operations. In addition to the above servicing and distribution
fees, class specific operating expenses include the transfer agent fees. For the
year ended December 31, 1993, transfer agent fees for Class A and Class B shares
were $31,423 and $241,356, respectively. For the period from October 18, 1993
through December 31, 1993, transfer agent fees for Class D shares were $43.
25
<PAGE>
Smith Barney Shearson
Special Equities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-term
investments, aggregated $136,477,477 and $105,820,975, respectively, for the
year ended December 31, 1993.
At December 31, 1993, aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost was $40,087,352 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $4,822,593.
6. SHARES OF COMMON STOCK
At December 31, 1993, the Fund had authorized capital of 100 million shares of
$.001 par value common stock divided into four classes of shares, Class A, Class
B, Class C and Class D. The Fund has not yet commenced offering Class C shares.
Changes in the common stock outstanding were as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
12/31/93 12/31/92*
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 1,956,806 $ 32,135,851 32,578 $ 482,157
Issued as reinvestment of dividends 9,933 199,734 -- --
Issued in exchange for shares of Small
Capitalization Fund (Note 11) 1,707,528 34,338,381 -- --
Redeemed (1,208,680) (21,386,513) (19,996) (299,005)
- -------------------------------------------------------------------------------------
Net increase 2,465,587 $ 45,287,453 12,582 $ 183,152
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class A shares on November 6, 1992. Any shares
outstanding prior to November 6, 1992 were designated Class B shares.
</TABLE>
26
<PAGE>
Smith Barney Shearson
Special Equities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
12/31/93 12/31/92
CLASS B SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 6,238,027 $119,893,345 3,832,456 $ 53,071,383
Issued as reinvestment of dividends 94,014 1,878,397 -- --
Issued in exchange for shares of Small
Capitalization Fund (Note 11) 267,249 5,339,634 -- --
Redeemed (4,756,506) (86,231,055) (4,536,113) (61,893,353)
- -------------------------------------------------------------------------------------
Net increase/(decrease) 1,842,784 $ 40,880,321 (703,657) $ (8,821,970)
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
12/31/93**
CLASS D SHARES: Shares Amount
<S> <C> <C>
- ---------------------------------------------------------------------
Sold 9,085 $ 204,530
Issued as reinvestment of dividends 148 2,963
Issued in exchange for shares of Small
Capitalization Fund (Note 11) 1 20
Redeemed (22) (500)
- ---------------------------------------------------------------------
Net increase 9,212 $ 207,013
- ---------------------------------------------------------------------
<FN>
**The Fund commenced selling Class D shares to the public on October 18, 1993.
</TABLE>
7. RESTRICTED SECURITY
The Fund's investment in the following security is restricted as to resale and
is valued under the direction of the Fund's Board of Directors in good faith, at
fair value, taking into consideration all indications of value available. The
following table shows the security description, acquisition date, fair value,
percentage of total net assets, aggregate cost and value per unit of the
restricted security:
<TABLE>
<CAPTION>
FAIR VALUE AT PERCENTAGE OF VALUE PER UNIT
ACQUISITION DECEMBER 31, TOTAL NET AT DECEMBER 31,
SECURITY DATE 1993 ASSETS COST 1993
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
National Record Mart,
Inc.,
Common Stock 5/16/86 $1,909,143 1.01% $ 500,000 $ 6.1625
- -------------------------------------------------------------------------------------
</TABLE>
The Fund may purchase securities which are subject to legal or contractual
restrictions on resale if not more than 10% of the value of the Fund's total
assets would be invested in such securities or in securities for which there is
27
<PAGE>
Smith Barney Shearson
Special Equities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
no readily available market. In purchasing securities which could not be sold by
the Fund without registration under the Securities Act of 1933, as amended, the
Fund will endeavor to obtain the right to registration at the expense of the
issuer. There generally will be a lapse of time between the decision by the Fund
to sell any such security and the registration of the security permitting sale.
During any such period the security will be subject to market fluctuations.
8. LENDING OF PORTFOLIO SECURITIES
The Fund has the ability to lend its securities to brokers, dealers and other
financial organizations. Loans of securities by the Fund are collateralized by
cash, letters of credit or U.S. government securities that are maintained at all
times in amounts at least equal to the current market value of the loaned
security.
For the year ended December 31, 1993 the Fund loaned securities to certain
brokers for which the Fund received $5,499,752 as collateral. This amount is
invested in a repurchase agreement at December 31, 1993.
At December 31, 1993, the Fund loaned securities with an aggregate market value
of $5,838,588 which represents 3.09% of total net assets.
9. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Continental Bank N.A. under an Amended and Restated Line of
Credit Agreement (the "Agreement") dated April 30, 1992, primarily for temporary
or emergency purposes, including the meeting of redemption requests that
otherwise might require the untimely disposition of securities. Under this
Agreement, the Fund may borrow up to the lesser of $25 million or 20% of its net
assets. Interest is payable either at the bank's Money Market Rate or the London
Interbank Offered Rate (LIBOR) plus 0.375% on an annualized basis. The Fund and
the other affiliated entities are charged an aggregate commitment fee of
$125,000 which is allocated equally among each of the participants. The
Agreement requires, among other provisions, each participating fund to maintain
a ratio of net assets (not including funds borrowed pursuant to the Agreement)
to aggregate amount
28
<PAGE>
Smith Barney Shearson
Special Equities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
of indebtedness pursuant to the Agreement of no less than 5 to 1. During the
year ended December 31, 1993, the Fund did not borrow under the Agreement.
10. REORGANIZATION
On November 19, 1993, the Fund (Acquiring Fund) acquired the assets and certain
liabilities of Smith Barney Shearson Small Capitalization Fund, (Acquired Fund),
in exchange for shares of the Acquiring Fund, pursuant to a plan of
reorganization approved by the Acquired Fund's shareholders on November 18,
1993. Total shares issued by the Acquiring Fund, the value of the shares issued
by the Acquiring Fund, the total net assets of the Acquired Fund and the
Acquiring Fund and any unrealized appreciation included in the Acquired Fund's
total net assets are as follows:
<TABLE>
<CAPTION>
TOTAL
VALUE OF NET
SHARES SHARES ASSETS TOTAL NET ACQUIRED
ISSUED BY ISSUED BY OF ASSETS OF FUND
ACQUIRING ACQUIRED ACQUIRING ACQUIRING ACQUIRED ACQUIRING UNREALIZED
FUND FUND FUND FUND FUND* FUND APPRECIATION
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Small
Capitalization
The Fund Fund 1,974,778 $39,678,035 $39,678,035 $131,829,124 $4,017,511
- -------------------------------------------------------------------------------------
<FN>
*The net assets of the Acquiring Fund immediately after the acquisition were
$171,507,159.
</TABLE>
29
<PAGE>
Smith Barney Shearson
Special Equities Fund
- ---------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
SMITH BARNEY SHEARSON SPECIAL EQUITIES FUND OF
SMITH BARNEY SHEARSON INVESTMENT FUNDS INC.:
We have audited the accompanying statement of assets and liabilities of Smith
Barney Shearson Special Equities Fund of Smith Barney Shearson Investment Funds
Inc., including the schedule of portfolio investments, as of December 31, 1993,
and the related statement of operations for the year then ended, the statement
of changes in net assets for each of the two years in the period then ended and
the financial highlights for each of the five years in the 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, 1993 by correspondence with the custodian and brokers. 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 Smith
Barney Shearson Special Equities Fund of Smith Barney Shearson Investment Funds
Inc. as of December 31, 1993, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the period
then ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND
Boston, Massachusetts
February 2, 1994
30
<PAGE>
Smith Barney Shearson
Special Equities Fund
- ---------------------------------------------
TAX INFORMATION (UNAUDITED)
YEAR ENDED DECEMBER 31, 1993
The amount of long term capital gains paid for the fiscal year ended December
31, 1993 was $2,122,286.
31
<PAGE>
Smith Barney Shearson
Special Equities Fund
- ---------------------------------------------------------------------------
PARTICIPANTS
DISTRIBUTOR
Smith Barney Shearson Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Greenwich Street Advisors
Two World Trade Center
New York, New York 10048
ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Dechert Price & Rhoads
1500 K. Street, N.W.
Washington, D.C. 20005
TRANSFER AGENT
TSSG
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit and
Trust Company
One Boston Place
Boston, Massachusetts 02108
32
<PAGE>
SPECIAL
EQUITIES FUND
DIRECTORS
Alger B. Chapman
Dwight B. Crane
Frank G. Hubbard
Allan R. Johnson
Heath B. McLendon
John F. White
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
Stephen J. Treadway
PRESIDENT
Richard P. Roelofs
EXECUTIVE VICE PRESIDENT
Kenneth A. Egan
FIRST VICE PRESIDENT
George V. Novello
INVESTMENT OFFICER
Vincent Nave
TREASURER
Francis J. McNamara, III
SECRETARY
Paul Roye
ASSISTANT SECRETARY
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF
SMITH BARNEY SHEARSON SPECIAL EQUITIES FUND. IT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS ACCOMPANIED OR PRECEDED BY AN
EFFECTIVE PROSPECTUS FOR THE FUND, WHICH CONTAINS INFORMATION CONCERNING THE
FUND'S INVESTMENT POLICIES AND EXPENSES AS WELL AS OTHER PERTINENT INFORMATION.
[LOGO]
Smith Barney Shearson
Mutual Funds
Two World Trade Center
New York, New York 10048
Fund 102, 193, 253
<PAGE>
FD0313 B4
<PAGE>
[GRAPHIC]
Small box above fund name showing
the globe of the world with a
three-dimensional picture of
Europe.
1993 Smith Barney Shearson
ANNUAL European
REPORT Fund
........................................
DECEMBER 31, 1993
[LOGO]
<PAGE>
European Fund
DEAR SHAREHOLDER:
We are pleased to provide the Annual Report for Smith Barney
Shearson European Fund for the year ended December 31, 1993.
In this report, we will provide you with a review of the
Fund's performance, the market environment and portfolio activities
during the past twelve months. In addition, we also have taken this
opportunity to simplify this report by separating the historical
performance information for A and B classes of shares into two
distinct sections. Our goal is to give you clear, concise information
that makes it easier for you to follow your investment.
ECONOMIC REVIEW
The year 1993 has been a very rewarding year for European equity markets with
the Morgan Stanley Capital International (MSCI) European Index (which measures
the aggregate performance of European markets), appreciating by 37.1% in local
currency terms. However, the appreciation of the U.S. dollar against the
European currencies over the last 12 months resulted in a return of 29.3% for
the MSCI European Index in U.S. dollar terms. The MSCI European Index rose in
all four quarters, although the last two quarters provided the strongest
returns.
Two trends characterized the European equity markets for most of 1993: (1)
continued economic weakness in continental Europe and (2) interest rate
declines. Even though there are some indications that most continental European
economies may have bottomed out in the second or third quarter of 1993, no
significant economic recovery is expected until the second half of 1994. The key
concern of European policymakers has now become the continued growth in
unemployment.
Monetary policy, which was kept excessively tight by the German Bundesbank in
1992, eased significantly in 1993, with a 2.5% cut in the German discount rate
from 8.25% at the start of the year to 5.75% at the end of the year. The easing
of monetary policy in Germany was followed and exceeded by most European central
banks. The combination of significant declines in interest rates and the strong
performance of bond markets provided the main driving force behind the
revaluation of European equity markets. However, the speed and extent of
monetary easing caused friction within the European Rate Mechanism (ERM). At the
end of July 1993, Germany's reluctance to cut interest rates more quickly led to
strong tensions within the ERM. This resulted in the eventual widening of the
1
<PAGE>
currency fluctuation bands to 15% and the end of the ERM in all but name.
European central banks are no longer required to defend their currencies with
interest rates which are out of line with economic fundamentals.
At the end of 1993 the controversial Uruguay round of the General Agreement on
Trade and Tariffs ("GATT") talks on further tariff reductions was successfully
concluded. The Uruguay round, which started in 1986, has been the most complex
and ambitious GATT agreement so far. Its twenty-eight (28) separate accords for
the first time extend fair trade to agriculture, textiles, services,
intellectual property and foreign investment. This potentially far reaching
tariff-cutting deal, as illustrated by the cut by over a third of tariffs on
industrial goods, has rekindled investors' interest in Europe which stands to
benefit significantly from expanding trade liberalization.
Superior performance during 1993 resulted in markets, such as Finland (+82.7% in
$U.S. terms), Sweden (+37%) and Italy (+28.5% in $U.S. terms), which experienced
significant depreciation of their currency as strong cuts in interest rates
improved their competitiveness. Those markets which were perceived as key
beneficiaries of a global economic recovery or from trade expansion resulting
from the GATT agreement, such as Switzerland (+45.8%), Germany (+35.6%) and The
Netherlands (+35.3%), were also strong performers.
OUTLOOK AND PORTFOLIO STRATEGY
For most of the year the Fund was positioned to take advantage of the decline in
interest rates in the European markets. This explains the Fund's exposure to the
financial sector through investments in European banks and insurance companies,
which traditionally benefit from a declining interest rate environment. The Fund
was also underweighted in the United Kingdom ("U.K.") market compared to the
MSCI European Index and overweighted in the markets of continental Europe for
most of the year because most of the interest cuts in the U.K. had already taken
place in 1992 and the U.S. market had discounted most of the benefits resulting
from those cuts. In contrast, the continental European markets had seen only
limited declines in interest rates in 1992 and were therefore mostly driven by
interest rates. The U.K. market was more dependent on positive earnings
developments than the continental European markets. This strategy served the
Fund well in 1993. However, with the potential for improvement in U.K. corporate
earnings and the valuation of the U.K. market falling more in line with that of
continental European markets, we may begin to increase the Fund's exposure to
the U.K. over the next year.
2
<PAGE>
After the recent strong performance of continental European markets, valuations
are less attractive than at the beginning of the year. We nevertheless remain
bullish for the next twelve months. The forces which drove European bourses
higher in 1993 are still in place. We anticipate that core inflation will remain
very low in both 1994 and 1995 due in part to the recent decline in the price of
oil. This will underpin European bonds and encourage policy makers to ease
monetary policy still further. The more monetary policy is eased, the greater
the scope for a cyclical recovery in earnings that should take the equity
markets higher even when bond yields stop falling. This should maintain the
positive liquidity picture coming from continued U.S. investments and
increasingly from domestic money market funds shifting into equities. As we go
through 1994, earnings will become more important than interest rates. We will
strive to position the holdings of the Fund to take advantage of this trend.
Sincerely,
Heath B. McLendon Erich Stock
CHAIRMAN OF THE BOARD INVESTMENT OFFICER
FEBRUARY 1, 1994
3
<PAGE>
Smith Barney Shearson
European Fund
- ---------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Total
12/31/94 Beginning Ending Distributed Paid Return*
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------
11/6/92 -
12/31/92 $11.52 $11.72 -- -- 1.74%
- -------------------------------------------------------------------------
1993 11.72 14.47 -- -- 23.46
- -------------------------------------------------------------------------
Total -- --
- -------------------------------------------------------------------------
Cumulative Total Return from 11/06/92 through 12/31/93 25.61%
- -------------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends and capital gains distributions at
net asset value and do not assume deduction of the sales charge (maximum 5%).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS
AND CAPITAL GAINS, IF ANY, ANNUALLY.
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN -- CLASS A SHARES**
<TABLE>
<CAPTION>
Without Sales Charge With Sales Charge***
Without Fee Without Fee
Waiver/ Waiver/
Expense Expense
Actual Reimbursement Actual Reimbursement
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
Year Ended 12/31/93 23.46% -- 17.29% --
- ---------------------------------------------------------------------------
Inception 11/6/92 through 12/31/93 22.17% -- 16.79% --
- ---------------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment of
dividends and capital gains at net asset value.
***Average annual total return figures shown assume the deduction of the maximum
5% sales charge.
NOTE: The Fund began offering Class A shares on November 6, 1992. Class A shares
are subject to a maximum 5% front-end sales charge and an annual service fee of
0.25% of the value of the average daily net assets attributable to that class.
</TABLE>
4
<PAGE>
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in European Fund's Class
A shares on November 10, 1992 through December 31, 1993 as compared with the
growth of a $10,000 investment in Morgan Stanley Capital International European
Index. The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
INVESTMENT IN THE
GROWTH OF $10,000 MORGAN STANLEY
INVESTED IN CLASS A SHARES CAPITAL INTERNATIONAL
MONTH ENDED OF THE PORTFOLIO EUROPEAN INDEX
<S> <C> <C>
10/31/92 -- $10,000
11/10/92 $ 9,500 --
11/92 $ 9,549 $ 9,995
12/92 $ 9,665 $10,224
03/93 $10,077 $10,891
06/93 $ 9,987 $11,087
09/93 $10,902 $12,064
12/93 $11,933 $13,219
</TABLE>
+ Illustration of $10,000 invested in Class A shares on November 6, 1992,
assuming deduction of the maximum 5% sales charge at the time of investment and
reinvestment of dividends and capital gains at net asset value through December
31, 1993.
The Morgan Stanley Capital International European Index includes 619 companies
representing thirteen countries currently comprising the Europe, Australia, Far
East ("EAFE") Index. Dividends are reinvested monthly, net after withholding
taxes for foreigners.
NOTE: All figures cited here and on the other pages represent past performance
of the Fund and do not guarantee future results of Class A shares.
FOR A GLOSSARY OF TERMS, PLEASE TURN TO THE END OF THIS REPORT.
5
<PAGE>
Smith Barney Shearson
European Fund
- -------------------------------------------
HISTORICAL PERFORMANCE -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Total
12/31/94 Beginning Ending Distributed Paid Return*
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------
11/6/87 -
12/31/87 $10.00 $10.44 -- -- 4.40%
- -------------------------------------------------------------------------
1988 10.44 11.32 $0.27 $0.12 12.28
- -------------------------------------------------------------------------
1989 11.32 13.29 0.48 0.07 22.26
- -------------------------------------------------------------------------
1990 13.29 12.97 0.31 0.16 1.17
- -------------------------------------------------------------------------
1991 12.97 12.80 -- 0.28 0.88
- -------------------------------------------------------------------------
1992 12.80 11.72 -- -- -8.44
- -------------------------------------------------------------------------
1993 11.72 14.40 -- -- 22.87
- -------------------------------------------------------------------------
Total $1.06 $0.63
- -------------------------------------------------------------------------
Cumulative Total Return from 11/06/87 through 12/31/93 64.56%
- -------------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends and capital gains distributions at
net asset value and do not assume deduction of the contingent deferred sales
charge (CDSC).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS
AND CAPITAL GAINS, IF ANY, ANNUALLY.
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN -- CLASS B SHARES**
<TABLE>
<CAPTION>
Without CDSC With CDSC***
Without Fee Without Fee
Waiver/ Waiver/
Expense Expense
Actual Reimbursement Actual Reimbursement
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------
Year Ended 12/31/93 22.87% -- 17.87% --
- ----------------------------------------------------------------------------
Five Years Ended 12/31/93 7.02% 5.27% 6.87% 5.12%
- ----------------------------------------------------------------------------
Inception 11/6/87 through 12/31/93 8.44% 6.11% 8.44% 6.11%
- ----------------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment of
dividends and capital gains at net asset value. The Fund commenced operations on
November 6, 1987. The Fund's investment adviser, sub-investment adviser and
administrator waived fees and reimbursed expenses from November 1987 to December
1989. A shareholder's actual return for the period during which waivers and
reimbursements were in effect would be the higher of the two numbers shown.
***Average annual total return figures shown assume the deduction of the
applicable CDSC, as described in the Fund's prospectus.
NOTE: As of November 6, 1992, outstanding shares of the Fund were designated
Class B shares. Class B shares are subject to a maximum 5% CDSC and annual
service and distribution fees of 0.25% and 0.75%, respectively, of the value of
the average daily net assets attributable to that class.
</TABLE>
6
<PAGE>
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in European Fund's Class
B shares on November 6, 1987 through December 31, 1993 as compared with the
growth of a $10,000 investment in Morgan Stanley Capital International European
Index. The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
INVESTMENT IN THE
GROWTH OF $10,000 MORGAN STANLEY
INVESTED IN CLASS B SHARES CAPITAL INTERNATIONAL
MONTH ENDED OF THE PORTFOLIO EUROPEAN INDEX
<S> <C> <C>
10/31/87 -- $10,000
11/06/87 $10,000 --
11/87 $ 9,820 $ 9,559
12/87 $10,440 $10,115
03/88 $10,380 $10,554
06/88 $10,694 $10,443
09/88 $11,038 $10,534
12/88 $11,723 $11,714
03/89 $11,723 $12,089
06/89 $12,147 $12,274
09/89 $13,348 $13,780
12/89 $14,332 $15,054
03/90 $14,547 $14,861
06/90 $15,798 $16,193
09/90 $13,688 $13,411
12/90 $14,499 $14,475
03/91 $14,231 $15,180
06/91 $13,739 $14,166
09/91 $14,791 $15,886
12/91 $14,627 $16,373
03/92 $14,193 $15,857
06/92 $15,187 $17,355
09/92 $14,068 $16,404
12/92 $13,393 $15,602
03/93 $13,965 $16,620
06/93 $13,839 $16,919
09/93 $15,073 $18,409
12/93 $16,456 $20,171
</TABLE>
+ Illustration of $10,000 invested in Class B shares on November 6, 1987,
assuming reinvestment of dividends and capital gains at net asset value through
December 31, 1993.
The Morgan Stanley Capital International European Index includes 619 companies
representing thirteen countries currently comprising the Europe, Australia, Far
East ("EAFE") Index. Dividends are reinvested monthly, net after withholding
taxes for foreigners.
NOTE: All figures cited here and on the other pages represent past performance
of the Fund and do not guarantee future results of Class B shares.
FOR A GLOSSARY OF TERMS, PLEASE TURN TO THE END OF THIS REPORT.
7
<PAGE>
Smith Barney Shearson
European Fund
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) DECEMBER 31, 1993
COUNTRY BREAKDOWN
Pie chart depicting the allocation of the Investment Portfolios European Fund's
investment securities held at December 31, 1993 by country classification. The
pie is broken in pieces representing industries in the following percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Convertible Bond 0.9%
Warrants 0.1%
Spain 4.7%
Netherlands 7.5%
Switzerland 8.7%
Germany 13.8%
France 17.1%
Repurchase Agreement and Net
Other Assets and Liabilities 5.5%
Other Common Stocks 10.4%
United Kingdom 29.5%
Preferred Stock 1.8%
-----------
100.0%
-----------
-----------
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
Percentage of
Company Net Assets
<S> <C>
- ------------------------------------------------------------------
DEUTSCHE BANK AG 2.9%
NORWEB 2.7
INTERNATIONAL NEDERLANDEN GROUP 2.6
AEGON NV 2.6
BARCLAYS BANK 2.6
ALLIANZ AG 2.5
ROYAL BANK OF SCOTLAND 2.4
ROYAL DUTCH PETROLEUM 2.3
BAYERISCHE MOTOREN WERKE AG 2.3
COMPAGNIE FINANCIERE DE SUEZ 2.2
</TABLE>
8
<PAGE>
Smith Barney Shearson
European Fund
- ------------------------------------------
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1993
<TABLE>
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
<C> <S> <C>
---------------------------------------------------------------------------------
COMMON STOCKS -- 91.7%
UNITED KINGDOM -- 29.5%
54,000 Agryll Group $ 220,605
136,000 Allied Colloids 462,162
102,084 Barclays Bank 957,765
59,315 B.A.T. Industries 484,638
142,000 British Telecommunications 453,179
114,942 BTR 630,057
87,556 Cable & Wireless 680,454
37,000 Carlton Communications 517,975
153,160 Coats Viyella PLC 582,707
44,391 General Accident 468,952
793 Grand Metropolitan 5,554
136,400 Hanson 540,103
76,738 Hepworth 487,536
53,400 Kingfisher 610,674
92,000 Norweb 1,026,271
81,500 Prudential Corporation 433,498
131,000 Royal Bank of Scotland 880,664
59,661 Smithkline Beecham Group 321,304
137,207 TI Group 822,043
37,200 Zeneca Group 461,689
---------------------------------------------------------------------------------
11,047,830
---------------------------------------------------------------------------------
FRANCE -- 17.1%
5,518 Alcatel Alsthom Cie Generale D'Electric 784,923
6,600 Assurances Generales de France 794,999
1,672 Cie Generale des Eaux 825,655
13,900 Compagnie Financiere de Suez 838,098
27,200 Matra Hachette 734,309
23,200 Michelin Group 822,293
6,361 Societe Generale 823,166
14,000 Total Cie Francaise Des Petroles, Series B 763,239
---------------------------------------------------------------------------------
6,386,682
---------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney Shearson
European Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1993
<TABLE>
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
---------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
GERMANY -- 13.8%
560 Allianz AG $ 949,054
2,500 Bayerische Hypo UND Wechsel Bank 760,995
2,055 Bayerische Motoren Werke AG 852,952
2,070 Deutsche Bank AG 1,054,933
4,240 Hoechst Group AG 775,119
1,430 Linde AG 779,327
---------------------------------------------------------------------------------
5,172,380
---------------------------------------------------------------------------------
SWITZERLAND -- 8.7%
1,300 Ciba-Geigy AG 786,290
7,250 Credit Suisse Holdings+ 716,230
860 Landis & GYR 511,492
1,700 Merkur Holdings 423,858
1,338 Saurer 494,556
676 Schweiz Ruckverversicherungs+ 333,911
---------------------------------------------------------------------------------
3,266,337
---------------------------------------------------------------------------------
NETHERLANDS -- 7.5%
17,700 Aegon NV 959,584
20,400 International Nederlanden Group 973,874
8,300 Royal Dutch Petroleum 870,519
---------------------------------------------------------------------------------
2,803,977
---------------------------------------------------------------------------------
SPAIN -- 4.7%
3,000 Argentaria 126,581
67,400 Iberdrola I SA Ord 482,606
20,560 Repsol 639,134
40,000 Telefonica de Espanol 521,132
---------------------------------------------------------------------------------
1,769,453
---------------------------------------------------------------------------------
SWEDEN -- 3.9%
9,100 Asea AB Free, Series A 643,117
10,900 Astra AB Free, Class A 248,071
11,600 Stora Kopparbergs 'B' Free 548,848
---------------------------------------------------------------------------------
1,440,036
---------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney Shearson
European Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1993
<TABLE>
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
---------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
ITALY -- 3.5%
265,600 Parmalat Finanziaria $ 345,210
275,000 Stet di Risp 558,171
23,420 Toro Assicurazioni 402,267
---------------------------------------------------------------------------------
1,305,648
---------------------------------------------------------------------------------
IRELAND -- 1.1%
133,000 Irish Life 417,480
---------------------------------------------------------------------------------
AUSTRIA -- 1.0%
83,000 Fotex 359,834
---------------------------------------------------------------------------------
FINLAND -- 0.5%
16,600 Outokumpu, Class A 194,583
---------------------------------------------------------------------------------
CANADA -- 0.4%
242,957 International UNP Holdings+ 146,796
---------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $29,566,755) 34,311,036
---------------------------------------------------------------------------------
PREFERRED STOCK -- 1.8% (Cost $634,048)
2,300 GEA AG, Pfd 667,721
---------------------------------------------------------------------------------
WARRANTS -- 0.1%
3,482 BTR PLC, expires 12/31/98+ 2,547
31,000 Deutsche Bank, expires 12/31/03+ 32,791
33,200 Paramalat Finanziaria, expires 1999+ 24
Schweiz Ruckverversicherungs:
1,176 Class A, expires 10/14/94+ 9,089
1,176 Class B, expires 6/30/95+ 8,101
---------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost $23,149) 52,552
---------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney Shearson
European Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1993
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------------
<C> <S> <C>
CONVERTIBLE BOND -- 0.9% (Cost $140,599)
FF 1,504,800 Cie Generale des Eaux,
6.000% due 1/1/98 $ 331,558
---------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 5.4% (Cost $2,001,000)
$2,001,000 Agreement with Citibank, 3.000% dated
12/31/93, to be
repurchased at $2,001,500 on 1/3/94,
collateralized by $1,995,000 U.S. Treasury
Bond,
5.250% due 7/31/98 2,001,000
---------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $32,365,551*) 99.9% 37,363,867
OTHER ASSETS AND LIABILITIES (NET) 0.1 41,499
---------------------------------------------------------------------------------
NET ASSETS 100.0% $ 37,405,366
---------------------------------------------------------------------------------
<FN>
*Aggregate cost for Federal tax purposes.
+Non-income producing security.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney Shearson
European Fund
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1993
<TABLE>
<CAPTION>
PERCENTAGE OF MARKET VALUE
SECTOR DIVERSIFICATION (UNAUDITED) NET ASSETS (NOTE 1)
<S> <C> <C>
----------------------------------------------------------------------------
COMMON STOCKS:
Banking 16.1% $ 6,027,433
Multi-Industries 13.0 4,860,497
Engineering and Construction 6.8 2,530,227
Communication 6.6 2,478,094
Consumer Durables 5.8 2,170,093
Technology 5.7 2,125,191
Utilities 5.4 2,030,009
Chemicals 4.5 1,698,970
Insurance 4.4 1,653,842
Financial Services 4.0 1,477,224
Oil and Gas 3.7 1,402,373
Manufacturing 3.5 1,313,190
Electrical 3.1 1,154,609
Autos 2.3 852,952
Textiles 1.6 582,707
Pharmaceuticals 1.5 569,375
Paper Products 1.5 548,848
Consumer Non-Durables 1.3 484,638
Food and Beverages 0.9 350,764
----------------------------------------------------------------------------
TOTAL COMMON STOCKS 91.7 34,311,036
----------------------------------------------------------------------------
Preferred Stock 1.8 667,721
Warrants 0.1 52,552
Convertible Bonds 0.9 331,558
Repurchase Agreement 5.4 2,001,000
Other Assets and Liabilities (Net) 0.1 41,499
----------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO 100.0% $ 37,405,366
----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney Shearson
European Fund
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1993
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$32,365,551) (Note 1)
See accompanying schedule $ 37,363,867
Currency, at value (Cost $194,299) 191,919
Dividends and interest receivable 175,811
Receivable for Fund shares sold 154,600
Prepaid expenses 15,746
- -------------------------------------------------------------------------------
TOTAL ASSETS 37,901,943
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities
purchased $ 419,728
Distribution fee payable (Note 3) 22,129
Investment advisory fee payable (Note
2) 21,661
Custodian fees payable (Note 2) 9,338
Service fees payable (Note 3) 7,736
Administration fee payable (Note 2) 6,189
Transfer agent fees payable (Note 2) 5,300
Payable for Fund shares redeemed 2,496
Accrued expenses and other payables 2,000
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 496,577
- -------------------------------------------------------------------------------
NET ASSETS $ 37,405,366
- -------------------------------------------------------------------------------
NET ASSETS consist of:
Accumulated net realized loss on
securities, forward foreign exchange
contracts and foreign currency
transactions $ (1,923,050)
Unrealized appreciation of securities,
forward foreign exchange contracts,
foreign currencies and net other
assets 4,989,932
Par value 2,597
Paid-in capital in excess of par value 34,335,887
- -------------------------------------------------------------------------------
TOTAL NET ASSETS $ 37,405,366
- -------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney Shearson
European Fund
- --------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1993
<TABLE>
<S> <C> <C>
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($1,707,459 DIVIDED BY 118,021 shares of common stock
outstanding) $14.47
- -------------------------------------------------------------------------------
MAXIMUM OFFERING PRICE per share ($14.47 DIVIDED BY
0.95)
(based on maximum sales charge of 5% of the offering
price on
December 31, 1993) $15.23
- -------------------------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($35,697,893 DIVIDED BY 2,479,040 shares of common
stock outstanding) $14.40
- -------------------------------------------------------------------------------
CLASS D SHARES:
NET ASSET VALUE, offering and redemption price per share
($14.40 DIVIDED BY 1 share of common stock outstanding) $14.40
- -------------------------------------------------------------------------------
<FN>
+Redemption price per share for Class B is equal to net asset value less any
applicable contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney Shearson
European Fund
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $121,541) $ 692,976
Interest 90,326
- ----------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 783,302
- ----------------------------------------------------------------------------------
EXPENSES:
Distribution fee (Note 3) $ 202,801
Investment advisory fee (Note 2) 195,586
Shareholder reports expense 78,652
Service fee (Note 3) 69,877
Transfer agent fees (Notes 2 and 4) 65,345
Custodian fees (Note 2) 57,894
Sub-investment advisory and administration fee
(Note 2) 55,902
Registration and filing fees 52,285
Legal and audit fees 31,122
Directors' fees and expenses (Note 2) 30,556
Amortization of organization costs (Note 7) 1,366
Other 4,750
- ----------------------------------------------------------------------------------
TOTAL EXPENSES 846,136
- ----------------------------------------------------------------------------------
NET INVESTMENT LOSS (62,834)
- ----------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTES 1 AND 5):
Net realized gain/(loss) on:
Securities 510,943
Forward foreign exchange contracts (85,836)
Foreign currency transactions 43,713
- ----------------------------------------------------------------------------------
Net realized gain on investments sold during the
year 468,820
Net change in unrealized
appreciation/(depreciation) of:
Securities 5,804,893
Forward foreign exchange contracts (70,938)
Foreign currencies and net other assets 20,629
- ----------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 5,754,584
- ----------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 6,223,404
- ----------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,160,570
- ----------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Smith Barney Shearson
European Fund
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
12/31/93 12/31/92
<S> <C> <C>
Net investment loss $ (62,834) $ (228,426)
Net realized gain/(loss) on securities, forward foreign
exchange contracts and foreign currency transactions
during the year 468,820 (401,973)
Net unrealized appreciation/(depreciation) of
securities, forward foreign exchange contracts,
foreign currencies and net other asset during the
year 5,754,584 (1,694,544)
- -------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
operations 6,160,570 (2,324,943)
Net increase/(decrease) in net assets from:
Class A share transactions (Note 6) 1,389,860 39,441
Class B share transactions (Note 6) 6,688,242 (3,181,627)
Class D share transactions (Note 6) 14 --
- -------------------------------------------------------------------------------------
Net increase/(decrease) in net assets 14,238,686 (5,467,129)
NET ASSETS:
Beginning of year 23,166,680 28,633,809
- -------------------------------------------------------------------------------------
End of year (including accumulated net investment loss
of $228,426 at December 31, 1992) $37,405,366 $ 23,166,680
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney Shearson
European Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
12/31/93## 12/31/92*
<S> <C> <C>
Net Asset Value, beginning of period $ 11.72 $11.52
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income/(loss) 0.07 0.00++
Net realized and unrealized gain on investments 2.68 0.20
- -------------------------------------------------------------------------------------
Total from investment operations 2.75 0.20
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $ 14.47 $11.72
- -------------------------------------------------------------------------------------
Total return+ 23.46% 1.74%
- -------------------------------------------------------------------------------------
Ratios to average net assets/ supplemental data:
Net assets, end of period (in 000's) $ 1,707 $ 46
Ratio of operating expenses to average net assets 2.32% 1.87%**
Ratio of net investment income/(loss) to average net assets 0.48% (0.04)%**
Portfolio turnover rate 68% 108%
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class A shares on November 6, 1992.
**Annualized.
+Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charges.
++Amount represents less than (0.01).
##Per share amounts have been calculated using the monthly average share
method.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
Smith Barney Shearson
European Fund
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.**
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
12/31/93## 12/31/92 12/31/91
<S> <C> <C> <C>
Net Asset Value, beginning of year $ 11.72 $ 12.80 $ 12.97
- -----------------------------------------------------------------------------------
Income from investment operations:
Net investment income/(loss) (0.03) (0.12) 0.19
Net realized and unrealized gain/(loss) on
investments 2.71 (0.96) (0.08)
- -----------------------------------------------------------------------------------
Total from investment operations 2.68 (1.08) 0,11
Distributions to shareholders:
Distributions from net investment income -- -- (0.27)
Distributions from net realized gains -- -- --
Distributions from capital -- -- (0.01)
- -----------------------------------------------------------------------------------
Total distributions -- -- (0.28)
- -----------------------------------------------------------------------------------
Net Asset Value, end of year $ 14.40 $ 11.72 $ 12.80
- -----------------------------------------------------------------------------------
Total return+ 22.87% (8.44)% 0.88%
- -----------------------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of year (in 000's) $ 35,698 $ 23,120 $28,634
Ratio of operating expenses to average net
assets 3.05% 2.68% 2.55%
Ratio of net investment income/(loss) to
average net assets (0.25)% (0.85)% 1.49%
Portfolio turnover rate 68% 108% 94%
- -----------------------------------------------------------------------------------
<FN>
**Shares in existence prior to November 6, 1992 have been designated Class B
shares.
+Total return represents aggregate total return for the year indicated and does
not reflect any applicable sales charges.
##Per share amounts have been calculated using the monthly average share
method.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
Smith Barney Shearson
European Fund
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR (CONTINUED).
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
12/31/90 12/31/89 12/31/88+++ 12/31/87*+++
<S> <C> <C> <C> <C>
Net Asset Value, beginning of year $ 13.29 $ 11.32 $ 10.44 $ 10.00
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income/(loss) 0.24 0.14# (0.06)# 0.05#
Net realized and unrealized gain/(loss) on
investments (0.09) 2.38 1.33 0.39
- -------------------------------------------------------------------------------------
Total from investment operations 0.15 2.52 1.27 0.44
Distributions to shareholders:
Distributions from net investment income (0.16) (0.05) (0.12) --
Distributions from net realized gains (0.31) (0.48) (0.27) --
Distributions from capital -- (0.02) -- --
- -------------------------------------------------------------------------------------
Total distributions (0.47) (0.55) (0.39) --
- -------------------------------------------------------------------------------------
Net Asset Value, end of year $ 12.97 $ 13.29 $ 11.32 $ 10.44
- -------------------------------------------------------------------------------------
Total return+ 1.17% 22.26% 12.28% 4.40%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of year (in 000's) $28,017 $7,445 $2,287 $1,708
Ratio of operating expenses to average net
assets 2.92% 2.37%++ 2.51%++ 4.30%***++
Ratio of net investment income/(loss) to
average net assets 2.21% 0.97% (0.71)% 4.73%***
Portfolio turnover rate 118% 109% 105% 167%
- -------------------------------------------------------------------------------------
*The Fund commenced operations on November 6, 1987.
***Annualized.
+Total Return represents aggregate total return for the period indicated and does not reflect any applicable sales
charges.
++Anualized expense ratios before waiver of fees and reimbursement of expenses by investment adviser, sub-investment
adviser and administrator for the years ended December 31, 1989 and 1988 and the period ended December 31, 1987 were
8.33%, 9.11% and 18.07%, respectively.
+++Not covered by Coopers & Lybrand's report.
#Net investment loss before waiver of fees and reimbursement of expenses by the investment adviser, sub-investment
adviser and administrator for the years ended December 31, 1989 and 1988 and the period ended December 31, 1987 were
$1.00, $0.58 and $0.09, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
Smith Barney Shearson
European Fund
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Investment Funds Inc. (the "Company") was incorporated in
Maryland on September 29, 1981 and commenced operations on January 4, 1982. The
Company is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified
open-end management investment company. Prior to the close of business on July
30, 1993, the Company's corporate name was "SLH Investment Portfolios Inc." and
it was doing business under the name "Shearson Lehman Brothers Investment
Funds". As of the date of this report, the Company is composed of five managed
investment funds (the "Funds"): Investment Grade Bond Fund, Government
Securities Fund, Special Equities Fund, Directions Value Fund and European Fund.
The assets of each Fund are segregated and a shareholder's interest is limited
to the Fund in which he or she owns shares. As of November 6, 1992, each Fund
offered two classes of shares to the general public: Class A shares and Class B
shares. Class A shares are sold with a front-end sales charge. Class B shares
may be subject to a contingent deferred sales charge ("CDSC") upon redemption.
Class B shares will convert automatically to Class A shares approximately eight
years after date of purchase, beginning on September 30, 1994. As of January 29,
1993, the European Fund (the "Fund") offered a third class of shares, Class D
shares, to investors eligible to participate in the Smith Barney Shearson Inc.
("Smith Barney Shearson") 401(k) program. Class D shares are offered without a
front-end sales charge or CDSC. All classes of shares have identical rights and
privileges except with respect to the effect of the respective sales charges to
each class, the distribution and/or service fees borne by each class, expenses
allocable exclusively to each class, voting rights on matters affecting a single
class, the exchange privilege of each class and the conversion feature of Class
B shares. The following is a summary of significant accounting policies
consistently followed by the Fund in preparation of its financial statements.
PORTFOLIO VALUATION: Securities listed on an exchange are valued on the basis of
the last sale prior to the time the valuation is made. If there has been no sale
since the immediate previous valuation, then the current bid price is used.
Over-the-counter securities are valued on the basis of the bid price at the
close of business on each day. Notwithstanding the above, bonds and
21
<PAGE>
Smith Barney Shearson
European Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
other fixed-income securities are valued by using market quotations and may be
valued on the basis of prices provided by a pricing service, when the Board of
Directors believes that such prices reflect the market value of such securities.
Foreign securities are valued on the basis of prices provided by pricing
services. The service generally values foreign securities at the last quoted
sales price on the exchange on which such securities are being valued, or
lacking any sales, at the last available sale price, except that in certain
circumstances, prices provided by the pricing service are within the range of
the available bid and offer prices. Unlisted foreign securities are valued at
the mean between the last available bid and offer price prior to the time of
valuation. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Directors as the primary market. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors.
Money market instruments maturing within 60 days of the valuation date are
valued at amortized cost.
FOREIGN CURRENCY TRANSACTIONS: The books and records of the Fund are maintained
in United States (U.S.) dollars. Foreign currencies, investments and other
assets and liabilities are translated into U.S. dollars at the exchange rates
prevailing at the end of the period, and purchases and sales of investment
securities, income and expenses are translated on the respective dates of such
transactions. Unrealized gains and losses which result from changes in foreign
currency exchange rates have been included in the unrealized
appreciation/(depreciation) of investments. Exchange gains and losses included
in net investment income include foreign currency gains and losses between trade
date and settlement date on investment securities transactions, foreign currency
transactions and the difference between the amounts of interest and dividends
recorded on the books of the Fund and the amount actually received. The portion
of foreign currency gains and losses related to fluctuation in exchange rates
between the initial purchase trade date and subsequent sale trade date is
included in realized gains and losses on investment securities sold.
FORWARD FOREIGN CURRENCY CONTRACTS: Forward foreign currency contracts are
valued at the forward rate, and are marked-to-market daily. The change in market
value is recorded by the Fund as an unrealized gain or loss. When
22
<PAGE>
Smith Barney Shearson
European Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the contract is closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
The use of forward foreign currency contracts does not eliminate fluctuations in
the underlying prices of the Fund securities, but it does establish a rate of
exchange that can be achieved in the future. Although forward foreign currency
contracts limit the risk of loss due to a decline in the value of the hedged
currency, they also limit any potential gain that might result should the value
of the currency increase. In addition, the Fund could be exposed to risks if the
counterparties to the contracts are unable to meet the terms of their contracts.
REPURCHASE AGREEMENTS: The Fund engages in repurchase agreement transactions.
Under the terms of a typical repurchase agreement, the Fund takes possession of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral is at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the right
to use the collateral to offset losses incurred. There is a potential loss to
the Fund in the event the Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities including the risk of a possible
decline in the value of the underlying securities during the period while the
Fund seeks to assert its rights. The Fund's investment adviser, acting under the
supervision of the Board of Directors, reviews the value of the collateral and
the creditworthiness of those banks and dealers with which the Fund enters into
repurchase agreements to evaluate potential risks.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Dividend income is recorded on the ex-dividend
date except that certain dividends from foreign securities are recorded as soon
as the Fund is informed of the ex-dividend date. Interest income is recorded on
the accrual basis. Realized gains and losses from
23
<PAGE>
Smith Barney Shearson
European Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
securities transactions are recorded on the identified cost basis. Investment
income and realized and unrealized gains and losses are allocated based upon the
relative net assets of each class of shares.
FEDERAL INCOME TAXES: The Fund intends to qualify as a regulated investment
company, if such qualification is in the best interest of its shareholders, by
complying with the requirements of the Internal Revenue Code of 1986, as amended
(the "Code"), applicable to regulated investment companies and to distribute
substantially all of its taxable income to its shareholders. Therefore, no
Federal income tax provision is required.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment
income, if any, are determined on a class level and will be declared and paid at
least annually. Distributions from net realized capital gains, after utilization
of capital loss carryforwards, are determined on a Fund level and will be
distributed at least annually. Net short-term capital gains may be paid more
frequently, with the distribution of dividends from net investment income.
Additional distributions of net investment income and capital gains may be made
at the discretion of the Board of Directors to avoid the application of the
excise tax imposed under the Code for certain undistributed amounts. Income
distributions and capital gain distributions on a Fund level are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments of income and gains on various investment securities held by the
Fund, timing differences and differing characterization of distributions made by
the Fund as a whole. Permanent differences incurred during the year ended
December 31, 1993 resulting from a tax basis net operating loss were
reclassified to paid-in capital at year end.
RECLASSIFICATIONS: During the year, the Fund adopted Statement of Position 93-2
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies."
Accordingly, certain reclassifications have been made to the components of
capital in the Statement of Net Assets to conform with the accounting and
reporting guidelines of this statement. Distributions in excess of book basis
accumulated realized gains or undistributed net investment income that were the
result of permanent book and tax accounting differences have been reclassified
to paid-in capital. In addition, amounts
24
<PAGE>
Smith Barney Shearson
European Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
distributed in excess of accumulated net investment income as determined for
financial statement purposes which had previously been reported as distributions
from paid-in capital have been reclassified to accumulated net investment
income. Accordingly, amounts as of December 31, 1992 have been restated to
reflect a decrease in accumulated net investment loss of $228,426, a decrease in
paid-in capital of $206,891 and an increase in accumulated net realized losses
of $21,535. The Financial Highlights have not been restated to reflect this
change in presentation. Net investment income, net realized gains and net assets
were not affected by this change.
2. INVESTMENT ADVISORY FEES, ADMINISTRATION FEE AND OTHER RELATED PARTY
TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Lehman Brothers Global Asset Management Limited ("Global Asset
Management"), a wholly owned subsidiary of Lehman Brothers Holdings Inc.
("Holdings"). American Express Company owns 100% of Holdings' issued and
outstanding common stock, which represents approximately 92% of Holdings' voting
stock. The remainder of Holdings' voting stock is owned by Nippon Life Insurance
Company. Fees accrued by the Fund to Global Asset Management are payable monthly
based on an annual rate of 0.70% of the value of its average daily net assets.
The Fund has also entered into an administration agreement (the "Administration
Agreement") dated May 21, 1993, with The Boston Company Advisors, Inc. ("Boston
Advisors"), an indirect wholly owned subsidiary of Mellon Bank Corporation
("Mellon"). Under the Administration Agreement, the Fund pays a monthly fee at
the annual rate of 0.20% of the value of its average daily net assets. Prior to
May 21, 1993, Boston Advisors served as sub-investment advisor and administrator
to the Fund.
For the year ended December 31, 1993, the Fund incurred total brokerage
commissions of $100,366, of which $9,401 were paid to Smith Barney Shearson or
its predecessor.
For the year ended December 31, 1993, Smith Barney Shearson or its predecessor
received from investors $8,730 representing commissions (sales charges) on sales
of Class A shares.
25
<PAGE>
Smith Barney Shearson
European Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A CDSC is generally payable by a shareholder in connection with the redemption
of Class B shares within five years (eight years in the case of certain 401(k)
plans) after the date of purchase. In circumstances in which the charge is
imposed, the amount of the charge ranges between 5% and 1% of net asset value
depending on the number of years since the date of purchase (except in the case
of purchases by certain 401(k) plans in which case a 3% charge is imposed for
the eight year period after the date of the purchase). For the year ended
December 31, 1993, Smith Barney Shearson or its predecessor received from
investors $70,120 representing CDSC fees on the redemption of Class B shares.
No officer, director or employee of Smith Barney Shearson or Boston Advisors or
any of their affiliates receives any compensation from the Company for serving
as an officer or director of the Company. The Company pays each Director who is
not an officer, director or employee of Smith Barney Shearson or Boston Advisors
or any of their affiliates $14,000 per annum plus $3,000 per meeting attended
and reimburses each such Director for travel and out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, serves as the Fund's custodian. The Shareholder Services Group, Inc., a
subsidiary of First Data Corporation, serves as the Fund's transfer agent.
3. DISTRIBUTION AGREEMENT
Smith Barney Shearson acts as distributor of the Fund's shares pursuant to a
distribution agreement with the Company, and sells shares of all the Funds of
the Company through Smith Barney Shearson or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Company has adopted a Services
and Distribution Plan (the "Plan"). Under this Plan, the Company compensates
Smith Barney Shearson for servicing shareholder accounts for Class A, Class B
and Class D shareholders, and covers expenses incurred in distributing Class B
and Class D shares. Smith Barney Shearson is paid an annual service fee with
respect to Class A, Class B and Class D shares of the Fund at the rate of 0.25%
of the value of the average daily net assets attributable to each respective
class of shares. Smith Barney Shearson is also
26
<PAGE>
Smith Barney Shearson
European Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
paid an annual distribution fee with respect to Class B shares at the rate of
0.75% of the value of the average daily net assets of each respective class of
shares. For the year ended December 31, 1993, the service fee for Class A and
Class B shares was $2,277 and $67,600, respectively. For the year ended December
31, 1993 the distribution fee for Class B shares was $202,801. For the year
ended December 31, 1993, no service or distribution fees were paid for Class D
shares.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any class of
shares are prorated among the classes based upon the relative net assets of each
class. Operating expenses directly attributable to a class of shares are charged
to that class' operations. In addition to the above servicing and distribution
fees, class specific operating expenses include transfer agent fees. For the
year ended December 31, 1993, transfer agent fees for Class A and Class B shares
were $2,339 and $63,006, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-term
investments, aggregated $23,008,389 and $17,441,012, respectively, for the year
ended December 31, 1993.
At December 31, 1993, aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost was $5,326,779 and aggregate
gross unrealized depreciation for all securities in which there is an excess of
tax cost over value was $328,463.
6. SHARES OF COMMON STOCK
At December 31, 1993, the Fund had authorized capital of 100 million shares of
$.001 par value common stock divided into four classes, Class A, Class B, Class
C and Class D. The Fund has not yet commenced offering Class C shares.
27
<PAGE>
Smith Barney Shearson
European Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Changes in common stock outstanding were as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
12/31/93 12/31/92*
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 1,006,830 $ 12,641,308 411,988 $ 4,816,938
Redeemed (892,758) (11,251,448) (408,039) (4,777,497)
- -------------------------------------------------------------------------------------
Net increase 114,072 $ 1,389,860 3,949 $ 39,441
- -------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
12/31/93 12/31/92
CLASS B SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 2,857,156 $ 36,736,827 1,589,184 $ 20,001,131
Redeemed (2,351,504) (30,048,585) (1,853,055) (23,182,758)
- -------------------------------------------------------------------------------------
Net increase/(decrease) 505,652 $ 6,688,242 (263,871) $ (3,181,627)
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class A shares on November 6, 1992. Any shares
outstanding prior to November 6, 1992 were designated Class B shares.
</TABLE>
As of December 31, 1993, the Fund had one Class D share issued in the amount of
$14.40 to Smith Barney Shearson. During the period ended December 31, 1993,
there was no income or expenses allocated to the one Class D share.
7. ORGANIZATION AND OFFERING EXPENSES
Organization costs were amortized on a straight-line basis over a period of five
years. As of December 31, 1993 all costs have been fully amortized.
8. CAPITAL LOSS CARRYFORWARD
At December 31, 1993, the Fund had available for federal tax purposes unused
capital loss carryforward (in thousands) of $1,304 and $619 expiring in 1999 and
2000, respectively.
9. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments involves
special risks and considerations not typically associated with investing in U.S.
companies and the U.S. government. These risks include revaluation of
28
<PAGE>
Smith Barney Shearson
European Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
currencies and future adverse political and economic developments. Moreover,
securities of many foreign companies and foreign governments and their markets
may be less liquid and their prices more volatile than those of securities of
comparable U.S. companies and the U.S. government.
10. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Continental Bank N.A. under an Amended and Restated Line of
Credit Agreement (the "Agreement") dated April 30, 1992, primarily for temporary
or emergency purposes, including the meeting of redemption requests that
otherwise might require the untimely disposition of securities. Under this
Agreement, the Fund may borrow up to the lesser of $25 million or 20% of its net
assets. Interest is payable either at the bank's Money Market Rate or the London
Interbank Offered Rate (LIBOR) plus 0.375% on an annualized basis. The Fund and
the other affiliated entities are charged an aggregate commitment fee of
$125,000 which is allocated equally among the participants. The Agreement
requires, among other provisions, each participating fund to maintain a ratio of
net assets (not including funds borrowed pursuant to the Agreement) to aggregate
amount of indebtedness pursuant to the Agreement of no less than 5 to 1. During
the year ended December 31, 1993, the Fund did not borrow under the Agreement.
11. SUBSEQUENT EVENT
On February 8, 1994, the Board of Directors of the Fund approved a new
investment advisory agreement by and between the Fund and Smith Barney Advisers,
Inc., subject to shareholder approval, to take effect on or about April 8, 1994.
29
<PAGE>
Smith Barney Shearson
European Fund
- ---------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
SMITH BARNEY SHEARSON EUROPEAN FUND OF
SMITH BARNEY SHEARSON INVESTMENT FUNDS INC.:
We have audited the accompanying statement of assets and liabilities of Smith
Barney Shearson European Fund of Smith Barney Shearson Investment Funds Inc.,
including the schedule of portfolio investments, as of December 31, 1993, and
the related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the 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, 1993 by correspondence with the custodian and brokers. 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 Smith
Barney Shearson European Fund of Smith Barney Shearson Investment Funds Inc. as
of December 31, 1993, the results of its operations for the year then ended, the
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND
Boston, Massachusetts
February 8, 1994
30
<PAGE>
Smith Barney Shearson
European Fund
- ---------------------------------------------------------------------------
PARTICIPANTS
DISTRIBUTOR
Smith Barney Shearson
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Lehman Brothers Global Asset
Management Limited
Two Broadgate
London EC2M 7HA
United Kingdom
ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
TRANSFER AGENT
TSSG
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit and
Trust Company
One Boston Place
Boston, Massachusetts 02108
31
<PAGE>
Smith Barney Shearson
European Fund
- ---------------------------------------------------------------------------
GLOSSARY OF COMMONLY USED MUTUAL FUND TERMS
CAPITAL GAIN (OR LOSS) This is the increase (or decrease) in the market value
(price) of a security in your portfolio. If a stock or bond appreciates in
price, there is a capital gain; if it depreciates there is a capital loss. A
capital gain or loss is "realized" upon the sale of a security; if net capital
gains exceed net capital losses, there may be a capital gain distribution to
shareholders.
CONTINGENT DEFERRED SALES CHARGE (CDSC) One kind of back-end load, a CDSC may be
imposed if shares are redeemed during the first few years of ownership. The CDSC
may be expressed as a percentage of either the original purchase price or the
redemption proceeds. Most CDSCs decline over time, and some will not be charged
if shares are redeemed after a certain period of time.
DIVIDEND This is income generated by securities in a portfolio and distributed
after expenses to shareholders.
FRONT-END SALES CHARGE This is the sales charge applied to an investment at the
time of initial purchase.
NET ASSET VALUE (NAV) Net asset value is the total market value of all
securities held by a fund, minus any liabilities, divided by the number of
shares outstanding. It is the value of a single share of a mutual fund on a
given day. The total value of your investment would be the NAV multiplied by the
number of shares you own.
TOTAL RETURN Total return measures a fund's performance, taking into account
the combination of dividends paid and the gain or loss in the value of the
securities held in the portfolio. It may be expressed on an AVERAGE ANNUAL basis
or CUMULATIVE basis (total change over a given period). In addition, total
return may be expressed with or without the effects of sales charges or the
reinvestment of dividends and capital gains.
Whenever a fund reports any type of performance, it must also report the average
annual total return according to the standardized calculation developed by the
SEC. The SEC AVERAGE ANNUAL TOTAL RETURN calculation includes the effects of all
fees and sales charges and assumes the reinvestment of all dividends and capital
gains.
32
<PAGE>
EUROPEAN
FUND
DIRECTORS
Alger B. Chapman
Dwight B. Crane
Frank G. Hubbard
Allan R. Johnson
Heath B. McLendon
John F. White
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
Stephen J. Treadway
PRESIDENT
Richard P. Roelofs
EXECUTIVE VICE PRESIDENT
Erich Stock
INVESTMENT OFFICER
Kenneth A. Egan
FIRST VICE PRESIDENT
Vincent Nave
TREASURER
Francis J. McNamara, III
SECRETARY
Paul F. Roye
ASSISTANT SECRETARY
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE
EUROPEAN FUND OF SMITH BARNEY SHEARSON INVESTMENT FUNDS INC. IT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS ACCOMPANIED OR
PRECEDED BY AN EFFECTIVE PROSPECTUS FOR THE FUND, WHICH CONTAINS INFORMATION
CONCERNING THE FUND'S INVESTMENT POLICIES AND EXPENSES AS WELL AS OTHER
PERTINENT INFORMATION.
PERFORMANCE CITED IS THROUGH DECEMBER 31, 1993. PLEASE CONSULT SMITH BARNEY
SHEARSON MUTUAL FUNDS QUARTERLY PERFORMANCE UPDATE FOR FIGURES THROUGH THE MOST
RECENT CALENDAR QUARTER.
[LOGO]
Smith Barney Shearson
Mutual Funds
Two World Trade Center
New York, New York 10048
Fund 109, 203, 255
FD0315 B4
