SEMI-
ANNUAL
REPORT
DESCRIPTION 0F ART WORK ON REPORT COVER
Small box above fund name showing the globe of the world with a three-
dimensional picture of Europe colored in green.
Smith Barney Shearson
EUROPEAN
FUND
JUNE 30, 1994
SMITH BARNEY
EUROPEAN FUND
DEAR SHAREHOLDER:
We are pleased to provide the Semi-Annual Report for Smith Barney Shearson
European Fund. During the six month period ended June 30, 1994, the net
asset value per share for Class A and Class B shares of the Fund was
$14.11 and $13.98, respectively, with Class A and Class B shares declining
2.49% and 2.92%, respectively, against a 4.35% drop
of the Financial Times European Index.
On May 10, 1994, management of the Fund was assumed by Smith, Barney Ad-
visers, Inc. The new portfolio management team has extensive experience in
global equity management with well over 125 years of experience among the
team's principals. The portfolio team employs a strategy focused on compa-
nies with strong earnings growth balanced by broad portfolio diversifica-
tion. In the past few months, the team has repositioned the Fund's portfo-
lio more in line with other global portfolios under its management. For
instance, we reduced the weighting in the United Kingdom to 15.6% of the
total portfolio against 28.3%, we initiated a 5% weighting in Austria, and
we reduced the number of positions from 64 to 54.
Most European equity markets (except Italy and Finland) declined 10%-15%
from their highs reached in early February 1994, as long-term interest
rates rose between 160-250 basis points in most countries during the last
five months. Thus, the sharp sell-off in the European bond markets af-
fected the European equity markets rather badly during this period.
After three years of recession, many European economies are no longer in
decline, and are beginning to show signs of modest improvement. In several
ways, the overall economic cycle in Europe has been very similar to what
we have seen in the United States, but at a lag of about two years. First
of all, many companies have been forced to implement cost reduction pro-
grams and corporate restructuring, in response to the sharp deterioration
in profitability seen over the past several years. As the overall economy
continues to turn upward, we believe that the effects of these restructur-
ing will be reflected in strong earnings comparisons over the next two
years. Another similarity is evidenced by the huge flow of funds moving
out of low-interest bearing money market funds into the equity markets.
This shift is in response to the significant decline over the past 18
months in short-term interest rates (amounting to approximately 300 basis
points, depending on the country).
In terms of investment strategy, the Fund is heavily underweighted in the
United Kingdom, as the British economic cycle is about 12 months ahead of
Continental Europe and, therefore, interest rates have less room to de-
cline. Moreover, we feel the corporate earnings cycle should be more ex-
plosive on the Continent. On the other hand, Ireland is overweighted as
the economic conditions are by far superior compared to the United King-
dom. We also tend to overweight Austria, as a means of participating in
the exciting new developments in Eastern Europe. Germany's weighting has
only been reduced slightly, as Mr. Kohl's Christian Democrats (CDU) seem
to be succeeding in regaining some lost ground for the October 1994 elec-
tions and the German economic recovery is doing much better than antici-
pated a few months ago. Switzerland's position has been raised, as the
price/earnings ratios are relatively favorable, the Swiss conservative ac-
counting is being adjusted towards more liberal European rules, and Swiss
corporate management seems to become more interested in improving share-
holders values.
The Italian equity market was the best performing, up 18.7% during the
first half of 1994, propelled by Mr. Berlusconi's victory, but the going
will get tougher for his coalition as budget proposals have to be adopted.
France's weighting has been reduced, as Mr. Balladur does not seem to have
much room to introduce any pump-priming measures in order to reduce the
12% unemployment rate before the May 1995 Presidential elections. Although
the Social Democrats could win the September 1994 elections, Sweden is
overweighted due to some attractive opportunities, which could benefit
from a "yes" vote in the November European Union (EU) referendum.
The Fund and the Morgan Stanley Capital International European Index's
country of origin weightings expressed as a percentage of total net assets
held at June 30, 1994 are outlined below:
<TABLE>
<CAPTION>
SBS EUROPEAN FUND MSCI EUROPEAN
INDEX
<S> <C> <C>
Austria 5.0% 0.9%
Belgium 1.0 2.4
Denmark -- 1.5
Finland 2.7 1.0
France 12.7 13.4
Germany 12.4 13.9
Hungary/Poland 1.4 --
Ireland 0.9 0.5
Italy 4.5 5.6
Netherlands 10.4 6.9
Norway -- 0.8
Portugal -- --
Spain 5.0 4.2
Sweden 6.1 3.3
Switzerland 10.0 10.5
United Kingdom 15.6 35.1
United States 12.3 --
</TABLE>
Once again, we thank you for your continued support and look forward to
serving your investment needs in the future.
Sincerely,
Heath B. McLendon
Chairman of the Board
August 22, 1994
PORTFOLIO HIGHLIGHTS (UNAUDITED) JUNE 30, 1994
INDUSTRY BREAKDOWN
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
Pie chart depicting the allocation of the Investment Funds European Fund's
investment securities held at June 30, 1994 by Industry Breakdown. The pie
is broken in pieces representing industries in the following percentages:
<TABLE>
<CAPTION>
Industry
Percentage
<S> <C>
COMMUNICATION
6.2%
ENGINEERING AND CONSTRUCTION
8.4%
MULTI-INDUSTRIES
11.6%
FINANCIAL SERVICES
16.1%
PREFERRED STOCKS, WARRANTS, REPURCHASE AGREEMENT AND NET
OTHER ASSETS AND LIABILITIES
18.6%
OTHER COMMON STOCKS
12.0%
UTILITIES
3.4%
TECHNOLOGY
3.5%
OIL AND GAS
4.5%
CONSUMER DURABLES
4.9%
CONSUMER NON-DURABLES
5.2%
MANUFACTURING
5.6%
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
Percentage of
Company Net
Assets
<S> <C>
HOOGOVENS AND STAALF 3.3%
ROYAL DUTCH PETROLEUM 2.7
INTERNATIONAL NEDERLANDEN GROUP 2.7
GEA AG 2.5
BARCLAYS BANK 2.5
MICHELIN GROUP 2.4
CIBA-GEIGY AG 2.3
TOTAL CIE FRANCAISE DES PETROLES, SERIES B 2.3
GUILBERT SA 2.3
NORWEB 2.2
</TABLE>
PORTFOLIO OF INVESTMENTS (UNAUDITED) JUNE 30, 1994
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE
1)
<C> <S> <C>
COMMON STOCKS -- 81.4%
UNITED KINGDOM -- 15.6%
124,004 Barclays Bank $
988,235
114,942 BTR
627,871
113,018 Cable & Wireless
705,680
37,000 Carlton Communications
462,340
92,000 Norweb
896,902
83,779 Prudential Corporation
371,430
133,382 Royal Bank of Scotland
867,921
137,207 TI Group
749,494
50,000 Wolseley
566,754
6,236,627
FRANCE -- 12.6%
6,045 Castorama Dubois
751,083
1,872 Cie Generale des Eaux
755,241
10,000 Dollfus-Mieg and CIE
727,848
10,000 Guilbert SA
911,647
23,200 Michelin Group
963,700
16,000 Total Cie Francaise Des Petroles, Series B
922,235
5,031,754
NETHERLANDS -- 10.4%
32,500 Hoogovens and Staalf
1,310,618
25,010 International Nederlanden Group
1,076,184
20,000 Nedlloyd Grouep NV
710,785
10,200 Royal Dutch Petroleum
1,077,161
4,174,748
SWITZERLAND -- 10.0%
1,560 Ciba-Geigy AG
922,669
860 Landis & GYR
515,742
1,000 Magazine Zum Globus
727,136
2,210 Scheizerischer Bankverein
652,729
500 Societe Generale
745,877
700 Sulzer AG
464,393
4,028,546
GERMANY -- 9.9%
560 Allianz AG
829,055
38 Allianz AG, Registered
55,059
4,000 Bayerische Motoren Werke AG
868,852
2,070 Deutsche Bank AG
892,736
1,430 Linde AG
806,967
600 WERU AG
512,610
3,965,279
SWEDEN -- 6.1%
9,100 Asea AB Free, Series A
684,827
19,100 Astra AB Free, Class A
386,796
15,000 Hennes and Mauritz
748,638
35,150 Stora Kopparbergs "B", Free
619,978
2,440,239
ITALY -- 4.5%
130,000 Fiat S.p.A
524,120
320,600 Parmalat Finanziaria
429,838
325,000 Stet di Risp
860,143
1,814,101
SPAIN -- 4.3%
3,000 Argentaria
116,861
13,800 Corporacion Mapfre
530,181
67,400 Iberdrola I SA Ord
474,644
20,560 Repsol
593,598
1,715,284
AUSTRIA -- 4.1%
23,000 Baumax Corporation
877,646
83,000 Fotex
346,524
5,000 Vatechnologie AG
413,010
1,637,180
BELGIUM -- 1.0%
10,000 Delhaize
405,273
IRELAND -- 1.0%
136,826 Irish Life
396,050
UNITED STATES -- 0.7%
10,000 Repsol, ADR
286,250
FINLAND -- 0.7%
16,600 Outokumpu Oy
270,567
CANADA -- 0.5%
242,957 International UNP Holdings+
193,304
TOTAL COMMON STOCKS (Cost $30,474,076)
32,595,202
PREFERRED STOCKS -- 6.3%
7,000 BAU Holdings
694,485
2,875 GEA Ag
1,009,694
10,000 Nokia
822,524
TOTAL PREFERRED STOCKS (Cost $2,281,368)
2,526,703
WARRANTS -- 0.1%
3,482 BTR PLC, expire 12/31/98+
3,448
27,200 Lagardere Groupe, expire 6/30/97+
44,994
TOTAL WARRANTS (Cost $3,126)
48,442
FACE VALUE
REPURCHASE AGREEMENT -- 8.7% (Cost $3,498,000)
$3,498,000 Agreement with Morgan Stanley, 4.050% 6/30/94,
to be repurchased at $3,498,394 on 7/1/94 col-
lateralized by $3,645,000 U.S. Treasury Bond,
12.000% due 5/15/05
3,498,000
TOTAL INVESTMENTS (Cost $36,256,570*) 96.5%
38,668,347
OTHER ASSETS AND LIABILITIES (NET) 3.5
1,401,392
NET ASSETS 100.0%
$40,069,739
<FN>
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
SCHEDULE OF FORWARD FOREIGN EXCHANGE CONTRACTS (UNAUDITED)
JUNE 30, 1994
<TABLE>
<CAPTION>
CONTRACT VALUE MARKET
VALUE
DATE
(NOTE 1)
<S> <C> <C>
FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
(Contract Amount $420,459)
2,277,629 French Francs 7/29/94
$(418,266)
<FN>
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1994
<TABLE>
<S>
<C> <C>
ASSETS:
Investments, at value (Cost $36,256,570) (Note 1)
See accompanying schedule
$38,668,347
Currency, at value (Cost $634,704)
646,004
Receivable for investment securities sold
674,563
Receivable for forward foreign exchange contracts to sell
420,459
Dividends and interest receivable
318,805
Receivable for Fund shares sold
58,723
Prepaid expenses
13,123
TOTAL ASSETS
40,800,024
LIABILITIES:
Forward foreign exchange contracts to sell, at value
(Contract cost $420,459) (Note 1)
See accompanying schedule
$418,266
Payable for investment securities purchased
255,935
Distribution fee payable (Note 3)
15,694
Transfer agent fees payable (Note 2)
12,700
Service fee payable (Note 3)
8,275
Administration fee payable (Note 2)
6,620
Investment advisory fee payable (Note 2)
5,981
Custodian fees payable (Note 2)
5,000
Accrued Directors' fees and expenses (Note 2)
754
Accrued expenses and other payables
1,060
TOTAL LIABILITIES
730,285
NET ASSETS
$40,069,739
NET ASSETS CONSIST OF:
Undistributed net investment income
$28,857
Accumulated net realized loss on securities, forward foreign
exchange contracts and foreign currency transactions
(598,619)
Net unrealized appreciation of securities, forward foreign exchange
contracts, foreign currencies and net other net assets
2,425,270
Par value
2,864
Paid-in capital in excess of par value
38,211,367
TOTAL NET ASSETS
$40,069,739
<FN>
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) (continued)
JUNE 30, 1994
<TABLE>
<S>
<C>
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share+
($2,040,861 / 144,686 shares of common stock outstanding)
$14.11
Maximum offering price per share ($14.11 / .95) (based on maximum
sales charge of 5% of the offering price on June 30, 1994)
$14.85
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($38,028,864 / 2,719,290 shares of common stock outstanding)
$13.98
CLASS D SHARES:
NET ASSET VALUE, offering and redemption price per share
($14 / 1 share of common stock outstanding)
$14.00
<FN>
+ Redemption price per share is equal to net asset value less any applica-
ble contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1994
<TABLE>
<S> <C>
<C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of $85,019)
$ 539,843
Interest
60,881
TOTAL INVESTMENT INCOME
600,724
EXPENSES:
Investment advisory fee (Note 2) $140,021
Distribution fee (Note 3) 134,750
Legal and audit fees 52,243
Custodian fees (Note 2) 50,644
Service fee (Note 3) 49,647
Transfer agent fees (Notes 2 and 4) 44,878
Administration fee (Note 2) 40,006
Registration and filing fees 36,851
Directors' fees and expenses (Note 2) 14,248
Other 8,579
TOTAL EXPENSES
571,867
NET INVESTMENT INCOME
28,857
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
(NOTES 1 AND 5):
Net realized gain on:
Securities transactions
1,006,375
Forward foreign exchange contracts
151,029
Foreign currency transactions
167,027
Net realized gain on investments during the period
1,324,431
Net change in unrealized appreciation/(depreciation) of:
Securities
(2,586,539)
Forward foreign exchange contracts
2,193
Foreign currencies and net other assets
19,684
Net unrealized depreciation of investments during the period
(2,564,662)
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(1,240,231)
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
$(1,211,374)
<FN>
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR
ENDED
ENDED
6/30/94
12/31/93
(UNAUDITED)
<S> <C> <C>
Net investment income/(loss) $ 28,857 $
(62,834)
Net realized gain on securities, forward foreign
exchange contracts and foreign currency trans-
actions during the period 1,324,431
468,820
Net unrealized appreciation/(depreciation) of
securities, forward foreign exchange contracts,
foreign currencies and net other assets during
the period (2,564,662)
5,754,584
Net increase/(decrease) in net assets resulting
from operations (1,211,374)
6,160,570
Net increase in net assets from Fund share
transactions (Note 6):
Class A 346,521
1,389,860
Class B 3,529,226
6,688,242
Class D --
14
Net increase in net assets 2,664,373
14,238,686
NET ASSETS:
Beginning of period 37,405,366
23,166,680
End of period (including undistributed net in-
vestment income of $28,857 at June 30, 1994) $40,069,739
$37,405,366
<FN>
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR PERIOD
ENDED
ENDED ENDED
6/30/94+++
12/31/93## 12/31/92*
(UNAUDITED)
<S> <C> <C>
<C>
Net Asset Value, beginning of period $14.47
$11.72 $11.52
Income from investment operations:
Net investment income 0.05
0.07 0.00++
Net realized and unrealized gain/(loss) on investments (0.41)
2.68 0.20
Total from investment operations (0.36)
2.75 0.20
Net Asset Value, end of period $14.11
$14.47 $11.72
Total return+ (2.49)%
23.46% 1.74%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $2,041
$1,707 $46
Ratio of operating expenses to average net assets 2.20%**
2.32% 1.87%**
Ratio of net investment income/(loss) to average net
assets 0.80%**
0.48% (0.04)%**
Portfolio turnover rate 50%
68% 108%
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
** Annualized.
+ Total return represents aggregate total return for the periods indi-
cated and does not reflect any
applicable sales charge.
++ Amount represents less than $0.01.
+++ As of May 10, 1994, the Fund changed its investment adviser from Leh-
man Brothers Global Asset Management Limited to its current adviser.
## Per share amounts have been calculated using the monthly average share
method which more appropriately presents the per share data for the pe-
riod since the use of the undistributed method does not accord with the
results of operations.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR
ENDED
ENDED
6/30/94+++
12/31/93##
(UNAUDITED)
<S> <C> <C>
Net Asset Value, beginning of period $14.40
$11.72
Income from investment operations:
Net investment income/(loss) 0.01
(0.03)
Net realized and unrealized gain/(loss) on investments (0.43)
2.71
Total from investment operations (0.42)
2.68
Less distributions:
Distributions to shareholders from:
Distributions from net investment income --
- --
Distributions from net realized gains --
- --
Distributions from capital --
- --
Total distributions --
- --
Net Asset Value, end of period $13.98
$14.40
Total return+ (2.92)%
22.87%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $38,029
$35,698
Ratio of operating expenses to average net assets 2.89%**
3.05%
Ratio of net investment income/(loss) to average net
assets 0.11%**
(0.25)%
Portfolio turnover rate 50%
68%
<FN>
* The Fund commenced operations on November 6, 1987. Any shares in exist-
ence prior to November 6, 1992 were designated Class B shares.
** Annualized.
+ Total return represents aggregate total return for the periods indi-
cated and does not reflect any applicable sales charge.
++ Annualized expense ratios before waiver of fees and reimbursement of
expenses by investment adviser, sub-investment adviser and administra-
tor 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.
+++ As of May 10, 1994, the Fund changed its investment adviser from Leh-
man Brothers Global Asset Management Limited to its current adviser.
# Net investment loss per share before waiver of fees and reimbursement
of expenses by the investment adviser, sub-investment adviser and ad-
ministrator for the years ended December 31, 1989 and 1988 and the pe-
riod ended December 31, 1987 were $1.00, $0.58 and $0.09, respectively.
## Per share amounts have been calculated using the monthly average share
method which more appropriately presents the per share data for the pe-
riod since the use of the undistributed method does not accord with the
results of operations.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
YEAR
ENDED ENDED ENDED ENDED ENDED
ENDED
12/31/92 12/31/91 12/31/90 12/31/89 12/31/88
12/31/87*
<S> <C> <C> <C> <C> <C>
$12.80 $12.97 $13.29 $11.32 $10.44
$10.00
(0.12) 0.19 0.24 0.14# (0.06)#
0.05#
(0.96) (0.08) (0.09) 2.38 1.33
0.39
(1.08) 0.11 0.15 2.52 1.27
0.44
-- (0.27) (0.16) (0.05) (0.12) -
- -
-- -- (0.31) (0.48) (0.27) -
- -
-- (0.01) -- (0.02) -- -
- -
-- (0.28) (0.47) (0.55) (0.39) -
- -
$11.72 $12.80 $12.97 $13.29 $11.32
$10.44
(8.44)% 0.88% 1.17% 22.26% 12.28%
4.40%
$23,120 $28,634 $28,017 $7,445 $2,287
$1,708
2.68% 2.55% 2.92% 2.37%++ 2.51%++
4.30%**++
(0.85)% 1.49% 2.21% 0.97% (0.71)%
4.73%**
108% 94% 118% 109% 105%
167%
<FN>
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Investment Funds Inc. (the "Company") was incorpo-
rated in Maryland on September 29, 1981 and commenced operations on Janu-
ary 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. The Com-
pany is composed of four managed investment funds: Smith Barney Shearson
Investment Grade Bond Fund, Smith Barney Shearson Government Securities
Fund, Smith Barney Shearson Special Equities Fund and Smith Barney Shear-
son European Fund (the "Fund"). As of November 6, 1992, the 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 date of purchase. As of January 29, 1993, the Fund of-
fered a third class of shares, Class D shares, to investors eligible to
participate in the Smith Barney 401(k) program. Class D shares are offered
without a front-end sales charge or CDSC. All classes of shares have iden-
tical rights and privileges except with respect to the effect of the re-
spective 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 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 avail-
able 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 securi-
ties 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 Di-
rectors. Short-term securities maturing within 60 days are valued at amor-
tized cost.
Foreign currency transactions: The books and records of the Fund are
maintained in United States (U.S.) dollars. Foreign currencies, invest-
ments 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 foreign currencies and
net other assets. Net realized foreign currency gains and losses resulting
from changes in exchange rates include foreign currency gains and losses
between trade date and settlement date on investment securities transac-
tions, 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 pur-
chase 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 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 fluctua-
tions in the underlying prices of the Fund securities, but it does estab-
lish a rate of exchange that can be achieved in the future. Although for-
ward 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 transac-
tions. 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 pe-
riod. 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 collat-
eral 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 de-
cline in the value of the underlying securities during the period while
the Fund seeks to assert its rights. The Fund's investment adviser, admin-
istrator or sub-administrator, 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
securities transactions are recorded on the identified cost basis. Invest-
ment 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 invest-
ment company, if such qualification is in the best interest of its share-
holders, by complying with the requirements of the Internal Revenue Code
of 1986, as amended, 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 in-
vestment income, if any, are determined on a class level and will be de-
clared 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 divi-
dends from net investment income. Additional distributions of net invest-
ment income and capital gains may be made at the discretion of the Board
of Directors to avoid the application of a 4% nondeductible excise tax im-
posed on certain amounts of undistributed net income and capital gains.
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 se-
curities held by the Fund, timing differences and differing characteriza-
tion of distributions made by the Fund as a whole.
2. INVESTMENT ADVISORY FEES, ADMINISTRATION FEE
AND OTHER TRANSACTIONS
Prior to May 10, 1994, the Fund had 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. ("Lehman Holdings"). Lehman Holdings is a
publicly-owned corporation. Nippon Life Insurance Company owns approxi-
mately 11.2% of the outstanding voting stock of Lehman Holdings. Fees ac-
crued by the Fund were payable monthly to Global Asset Management and were
based on an annual rate of 0.70% of the value of its average daily net as-
sets.
As of the close of business on May 10, 1994, Smith, Barney Advisers, Inc.
("SBA"), which is controlled by Smith Barney Holdings Inc. ("Holdings"),
succeeded Global Asset Management as the Fund's investment adviser. The
new advisory agreement contains substantially the same terms and condi-
tions, including the level of fees, as the predecessor agreement.
Prior to May 5, 1994, the Fund was party to 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 paid
a monthly fee at the annual rate of 0.20% of the value of its average
daily net assets.
As of the close of business on May 5, 1994, SBA succeeded Boston Advisors
as the Fund's administrator. The new administration agreement contains
substantially the same terms and conditions, including the level of fees,
as the predecessor agreement.
As of the close of business on May 5, 1994, the Fund also entered into a
sub-administration agreement (the "Sub-Administration Agreement") with
Boston Advisors. Under the Sub-Administration Agreement, Boston Advisors
is paid a portion of the fee paid by the Fund to SBA at a rate agreed upon
from time to time between SBA and Boston Advisors.
For the six months ended June 30, 1994, the Fund incurred total brokerage
commissions of $115,210, of which $9,360 was paid to Smith Barney Inc.
("Smith Barney").
For the six months ended June 30, 1994, Smith Barney received from
investors $3,307 representing commissions (sales charges) on sales of
Class A shares.
A CDSC is generally payable by a shareholder in connection with the re-
demption 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 six months ended June 30, 1994, Smith Barney re-
ceived from investors $46,229 representing CDSCs on the redemption of
Class B shares.
No officer, director or employee of Smith Barney or any of its 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 of-
ficer, director or employee of Smith Barney or any of its 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 Company's custodian. The Shareholder Services
Group, Inc., a subsidiary of First Data Corporation, serves as the Compa-
ny's transfer agent.
3. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Fund's shares pursuant to a dis-
tribution agreement with the Company, and sells shares of the Fund through
Smith Barney or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Company has adopted a ser-
vices and distribution plan (the "Plan"). Under this Plan, the Company
compensates Smith Barney for servicing shareholder accounts for Class A,
Class B and Class D shareholders, and covers expenses incurred in distrib-
uting Class B shares. Smith Barney is paid an annual service fee with re-
spect 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 is also paid an annual distribu-
tion 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 of each respective class of
shares. For the six months ended June 30, 1994 service fees for Class A
and Class B shares were $2,236 and $47,411, respectively. For the six
months ended June 30, 1994 distribution fees for Class B shares were
$134,750. For the six months ended June 30, 1994, the Fund paid no service
or distribution fees 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 six months ended June 30, 1994, the Fund in-
curred transfer agent fees of $2,862 and $42,016 for Class A and Class B
shares, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-
term investments, aggregated $19,575,142 and $18,187,498, respectively,
for the six months ended June 30, 1994. At June 30, 1994, aggregate gross
unrealized appreciation for all securities in which there was an excess of
value over tax cost was $3,609,568 and aggregate gross unrealized depreci-
ation for all securities in which there is an excess of tax cost over
value was $1,197,791.
6. SHARES OF COMMON STOCK
At June 30, 1994, the Company had authorized on behalf of the Fund capital
of 100 million shares of $.001 par value common stock divided into three
classes, Class A, Class B and Class D.
Changes in common stock outstanding were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR
ENDED
6/30/94 12/31/93
CLASS A SHARES: SHARES AMOUNT SHARES
AMOUNT
<S> <C> <C> <C> <C>
Sold 311,500 $ 4,462,119 1,006,830 $
12,641,308
Redeemed (284,835) (4,115,598) (892,758)
(11,251,448)
Net increase 26,665 $ 346,521 114,072 $
1,389,860
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR
ENDED
6/30/94
12/31/93
CLASS B SHARES: SHARES AMOUNT SHARES
AMOUNT
<S> <C> <C> <C>
<C>
Sold 1,747,617 $ 25,645,481 2,857,156
$ 36,736,829
Redeemed (1,507,367) (22,116,255) (2,351,504)
(30,048,585)
Net decrease/increase 240,250 $ 3,529,226 505,652
$ 6,688,244
</TABLE>
As of June 30, 1994, the Fund had one Class D share issued in the amount
of $14.00 to Smith Barney. During the six months ended June 30, 1994,
there was no income or expenses allocated to the one Class D share.
7. CAPITAL LOSS CARRYFORWARD
At December 31, 1993, the Fund had available for Federal tax purposes un-
used capital loss carryforward (in thousands) of $1,304 and $619 expiring
in 1999 and 2000, respectively.
8. 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 United States government. These risks
include revaluation of currencies and future adverse political and eco-
nomic 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 United States government.
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 and re-
newed effective May 31, 1994, primarily for temporary or emergency pur-
poses, 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. Under
the terms of the Agreement, as amended, the Fund and the other affiliated
entities are charged an aggregate commitment fee of $100,000 which is al-
located 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 aggre-
gate amount of indebtedness pursuant to the Agreement of no less than 5 to
1. During the six months ended June 30, 1994, the Fund did not borrow
under the Agreement.
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
AND ADMINISTRATOR
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10105
SUB-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
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
Jeffrey Russell
Investment Officer
Lewis E. Daidone
Treasurer
Christina T. Sydor
Secretary
This report is submitted for
the general information of the
shareholders of Smith Barney
Shearson European 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, fees and expenses as well
as other pertinent information.
SMITH BARNEY
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
Fund 109, 203, 255
FD0406 H4
<PAGE>
[GRAPHIC]
SMALL BOX ABOVE FUND NAME SHOWING
THE AMERICAN FLAG WITH A GOLD EAGLE
POSITIONED IN THE CENTER.
SEMI- Smith Barney Shearson
ANNUAL GOVERNMENT
REPORT SECURITIES
FUND
.......................................
JUNE 30, 1994
[LOGO]
<PAGE>
Government Securities Fund
DEAR SHAREHOLDER:
We are pleased to provide you with the Semi-Annual
Report,
which includes the portfolio of investments for Smith
Barney
Shearson Government Securities Fund, for the six-month
period
ended June 30, 1994. During the past six months the Fund paid
distributions of $.29, $.27 and $.27 per share for Class A, Class
B
and Class D shares, respectively, which somewhat offset the
decline in
the Fund's net asset value to $9.33 from $10.01 per share but
nonetheless resulted in a negative total return of (3.94)%,
(4.18)%
and (4.18)% for Class A, Class B and Class D shares, repectively,
for
this fiscal period.
AN OVERVIEW OF THE MARKET
AND ECONOMIC ENVIRONMENT
The economic and investment environment of this fiscal year is
shaping
up to be quite different from that of last year. When we
last reported to you at the close of the Fund's 1993 fiscal year, the
economy
appeared to be growing and interest rates were rebounding after touching
bottom
earlier in 1993. Nevertheless, doubt as to the sustainability of these
changes
quite justifiably lingered in the minds of many investors because of the
uneven
growth and false starts the economy had exhibited in previous months.
During the
first half of the current fiscal year it became clear that the economy's
strong
growth was both real and sustainable. Historically low mortgage rates
encouraged
a record number of homeowners to refinance existing mortgages, which
increased
their disposable income. After a long period of financial anxiety and
stifled
spending, this additional money was a welcome relief and quickly reflected
in
higher consumer spending. Since consumer spending accounts for
approximately
two-thirds of GDP (Gross Domestic Product, which is the broadest available
measure of aggregate economic activity), the growth rate of the economy
surged
in the fourth quarter of 1993.
After maintaining an accommodative policy and keeping interest rates low to
encourage economic growth, on February 4 the Federal Reserve signaled an
important shift in direction and tightened monetary policy for the first
time
since 1989. The Federal Reserve subsequently increased the Federal funds
rate
(an important indicator of the direction of short-term interest rates)
three
more times, most recently on May 17, and also increased the discount rate.
1
<PAGE>
The goal of the Federal Reserve's actions was to control the level of
growth and
avoid rising inflation. The textbook result of an increase in short-term
rates
is slower economic growth and low long-term interest rates.
However, at the time there were many leveraged investments in the
marketplace
based on short-term interest rates staying low. As short-term interest
rates
rose, investors met liquidity demands by selling U.S. Treasuries which
caused an
unintended and unwarranted rise in interest rates across the maturity
spectrum.
INTEREST RATES ON TREASURIES ROSE ACROSS THE MATURITY
SPECTRUM IN RESPONSE TO FEDERAL RESERVE ACTIVITY
<TABLE>
<CAPTION>
SIX MONTHS AGO THE MARKET LOW
CURRENT RATES
12/31/93 10/20/93
6/30/94
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
- ----------
3 month 3.08% 3.10%
4.22%
2 year 4.23 3.81
6.17
5 year 5.20 4.63
6.95
10 year 5.79 5.24
7.32
30 year 6.35 5.82
7.61
- ---------------------------------------------------------------------------
</TABLE>
The intermediate-term market continues to be under some real pressure
because it
is more directly impacted by Federal Reserve activity and the movement of
short-term rates.
PORTFOLIO STRATEGY
It's clear to us from the Federal Reserve's actions of the last few months
that
they will continue to raise interest rates as long as they see inflation
building into the economy. The real issue is whether or not the economy
reaches
the equilibrium state of growth with low inflation that the Federal Reserve
is
striving for. Because of this uncertainty we have adopted a neutral
investment
stance and are keeping the Fund's average maturity at 6.9 years. Should we
become very negative on the long-term prospects for the Treasury market we
would
shorten the Fund's average maturity to the two to three year range;
conversely,
we would lengthen the Fund's average maturity to the seven to ten year
range if
we become very positive on the prospects for the Treasury market.
Within the context of the Fund's current average maturity of 6.9 years, we
have
adopted a higher-coupon strategy that uses generic mortgage-backed
2
<PAGE>
securities. At no time have mortgage derivative securities been used to
boost
the Fund's dividend yield at the risk of market liquidity. Our mortgage
holdings
have been complemented with intermediate-maturity Treasury securities and a
modest presence in Treasury STRIPS.
The past six months have been a difficult investment environment, but we
believe
our investment strategies have proven to be relatively successful in
meeting our
stated goal of providing investors with a high current return while
attempting
to preserve principal from investments in U.S. government securities.
During the
next six months we will endeavor to do the same, and look forward to
reporting
to you in the Fund's Annual Report.
Sincerely,
Heath B. McLendon James E. Conroy
CHAIRMAN OF THE BOARD FIRST VICE PRESIDENT AND
INVESTMENT OFFICER
AUGUST 22, 1994
3
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) JUNE 30,
1994
PORTFOLIO BREAKDOWN
Pie chart depicting the allocation of the Appreciation Fund's investment
securities held at December 31, 1992 by industry classification. The pie is
broken in pieces representing industries in the following percentages:
<TABLE>
<CAPTION>
SECURITY TYPES PERCENTAGE
<S> <C>
U.S. Treasury Obligations 41.1%
Mortgage-Backed Securities 55.4
Repurchase Agreement and Net Other Assets
and Liabilities 3.5
</TABLE>
U.S. TREASURY SECURITIES are debt obligations of the United States
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 6.9 years
4
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) JUNE 30,
1994
-------------------------------------------------------------
<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>
------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES -- 55.4%
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION
(GNMA) CERTIFICATES -- 53.6%
$177,595,174 GNMA 9.000%, 30 Year $ 183,921,114
193,334,937 GNMA 9.500%, 30 Year 203,968,359
40,742 GNMA 10.000%, 30 Year 43,824
114,561 GNMA 10.500%, 30 Year 125,337
238,156 GNMA 11.000%, 30 Year 264,872
------------------------------------------------------------------------
388,323,506
------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE
CORPORATION
(FHLMC) CERTIFICATES -- 1.8%
12,731,837 FHLMC 9.000%, 30 Year 13,113,792
------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION
(FNMA) CERTIFICATES -- 0.0%
944 FNMA Dwarf 8.000% due 7/2/95 953
------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED
SECURITIES
(Cost $406,791,823) 401,438,251
------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 41.1%
U.S. TREASURY NOTES -- 32.0%
25,000,000 6.750% due 5/31/99 24,777,000
5,000,000 5.750% due 8/15/03 4,471,300
115,000,000 5.875% due 2/15/04 103,359,700
100,000,000 7.250% due 5/15/04 99,368,000
------------------------------------------------------------------------
231,976,000
------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30,
1994
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
------------------------------------------------------------------------
<C> <S> <C>
U.S. TREASURY OBLIGATIONS -- (CONTINUED)
ZERO COUPON TREASURY
SECURITIES -- 9.1%
$ 45,100,000 U.S. Treasury Strips, due
2/15/15 $ 8,910,858
305,000,000 U.S. Treasury Strips, due
11/15/15 56,922,150
------------------------------------------------------------------------
65,833,008
------------------------------------------------------------------------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $325,074,486) 297,809,008
------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 2.3% (Cost $16,407,000)
16,407,000 Agreement with Barclay's Bank
of New York, 4.100% dated
6/30/94, to be repurchased
at $16,408,869 on 7/1/94,
collateralized by
$16,940,000 U.S. Treasury
Notes,
4.100% due 9/30/95 16,407,000
------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $748,273,309*) 98.8% 715,654,259
OTHER ASSETS AND LIABILITIES (NET) 1.2 8,495,229
------------------------------------------------------------------------
NET ASSETS 100.0% $ 724,149,488
------------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30,
1994
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$748,273,309) (Note 1)
See accompanying schedule $
715,654,259
Receivable for investment securities
sold
129,539,063
Interest receivable
9,270,419
Receivable for Fund shares sold
500,833
- ---------------------------------------------------------------------------
- -------
TOTAL ASSETS
854,964,574
- ---------------------------------------------------------------------------
- -------
LIABILITIES:
Payable for investment securities
purchased $ 128,649,391
Dividends payable 571,678
Payable for Fund shares redeemed 490,335
Distribution fee payable (Note 3) 301,330
Investment advisory fee payable (Note
2) 212,295
Service fee payable (Note 3) 152,188
Custodian fees payable (Note 2) 126,700
Administration fee payable (Note 2) 121,312
Transfer agent fees payable (Note 2) 115,192
Due to custodian 6,837
Accrued expenses and other payables 67,828
- ---------------------------------------------------------------------------
- -------
TOTAL LIABILITIES
130,815,086
- ---------------------------------------------------------------------------
- -------
NET ASSETS $
724,149,488
- ---------------------------------------------------------------------------
- -------
NET ASSETS consist of:
Distributions in excess of net
investment income earned
to date $
(898,487)
Accumulated net realized loss on
investments sold
(585,779,759)
Unrealized depreciation of
investments
(32,619,050)
Par value
77,628
Paid-in capital in excess of par
value
1,343,369,156
- ---------------------------------------------------------------------------
- -------
TOTAL NET ASSETS $
724,149,488
- ---------------------------------------------------------------------------
- -------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------- JUNE 30,
1994
<TABLE>
<S> <C>
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price
per share
($7,323,590 DIVIDED BY 785,083 shares
of common stock outstanding) $9.33
- --------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE ($9.33
DIVIDED BY .955)
(based on maximum sales charge of 4.5%
of the offering price on June 30,
1994) $9.77
- --------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per
share+
($716,427,903 DIVIDED BY 76,800,721
shares of common stock outstanding) $9.33
- --------------------------------------------------------------
CLASS D SHARES:
NET ASSET VALUE, offering and
redemption price per share
($397,995 DIVIDED BY 42,668 shares of
common stock outstanding) $9.33
- --------------------------------------------------------------
<FN>
+ Redemption price per share is equal to Net Asset Value less any
applicable
contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30,
1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $
27,793,204
EXPENSES:
Distribution fee (Note 3) $ 1,931,045
Investment advisory fee (Note 2) 1,364,080
Service fee (Note 3) 974,343
Administration fee (Note 2) 779,474
Transfer agent fees (Notes 2 and 4) 366,051
Custodian fees (Note 2) 175,504
Legal and audit fees 66,882
Directors' fees and expenses (Note 2) 13,494
Other 94,070
- ---------------------------------------------------------------------------
- --------
Total operating expenses before interest
5,764,943
Interest expense (Note 5)
1,446,462
- ---------------------------------------------------------------------------
- --------
TOTAL EXPENSES
7,211,405
- ---------------------------------------------------------------------------
- --------
NET INVESTMENT INCOME
20,581,799
- ---------------------------------------------------------------------------
- --------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 5):
Net realized gain/(loss) on:
Securities transactions
(30,702,671)
Futures contracts
1,548,780
- ---------------------------------------------------------------------------
- --------
Net realized loss on investments during the
period
(29,153,891)
- ---------------------------------------------------------------------------
- --------
Net change in unrealized
appreciation/(depreciation) of:
Securities
(25,641,182)
Futures contracts
48,469
- ---------------------------------------------------------------------------
- --------
Net unrealized depreciation of investments
during the period
(25,592,713)
- ---------------------------------------------------------------------------
- --------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(54,746,604)
- ---------------------------------------------------------------------------
- --------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $
(34,164,805)
- ---------------------------------------------------------------------------
- --------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR
6/30/94
ENDED
(UNAUDITED)
12/31/93
<S> <C> <C>
Net investment income $ 20,581,799 $
69,810,331
Net realized gain/(loss) on investments
sold and futures contracts during the
period (29,153,891)
54,093,456
Net unrealized depreciation on investments
and futures contracts during the period (25,592,713)
(24,623,673)
- ---------------------------------------------------------------------------
- --------
Net increase/(decrease) in net assets
resulting from operations (34,164,805)
99,280,114
Distributions to shareholders from net
investment income:
Class A (212,581)
(411,654)
Class B (21,352,030)
(61,210,432)
Class D (8,357)
(7,883)
Net increase/(decrease) in net assets from
Fund share transactions (Note 6):
Class A 761,774
6,782,595
Class B (79,710,172)
(233,212,716)
Class D 205,499
214,302
- ---------------------------------------------------------------------------
- --------
Net decrease in net assets (134,480,672)
(188,565,674)
NET ASSETS:
Beginning of period 858,630,160
1,047,195,834
- ---------------------------------------------------------------------------
- --------
End of period (including distributions in
excess of net investment income earned
to date and undistributed net
investment income of $898,487 and
$92,682, respectively) $ 724,149,488 $
858,630,160
- ---------------------------------------------------------------------------
- --------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR PERIOD
6/30/94+++
ENDED ENDED
(UNAUDITED)
12/31/93+++ 12/31/92*
<S> <C>
<C> <C>
Net Asset Value, beginning of period $ 10.01 $
9.69 $ 9.56
- ---------------------------------------------------------------------------
- ----------
Income from investment operations:
Net investment income# 0.27
0.81 0.10
Net realized and unrealized gain/(loss) on investments (0.66)
0.23 0.13
- ---------------------------------------------------------------------------
- ----------
Total from investment operations (0.39)
1.04 0.23
Less distributions:
Distributions from net investment income (0.29)
(0.72) (0.08)
Distributions from capital --
- -- (0.02)
- ---------------------------------------------------------------------------
- ----------
Total distributions (0.29)
(0.72) (0.10)
- ---------------------------------------------------------------------------
- ----------
Net Asset Value, end of period $ 9.33 $
10.01 $ 9.69
- ---------------------------------------------------------------------------
- ----------
Total return+ (3.94)%
10.87% 2.41%
- ---------------------------------------------------------------------------
- ----------
Ratios to average net assets/supplemental data:
Net assets end of period (in 000's) $ 7,324 $
7,067 $ 275
Ratio of operating expenses to average net assets++ 1.00%**
0.92% 0.68%**
Ratio of net investment income to average net assets 5.76%**
7.76% 6.24%**
Portfolio turnover rate 119%
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 six months ended June 30, 1994, the
year
ended December 31, 1993 and the period ended December 31, 1992 were
1.37%,
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.
11
<PAGE>
Smith Barney Shearson
Government Securities Fund
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR YEAR YEAR
6/30/94+++
ENDED ENDED ENDED
(UNAUDITED)
12/31/93+++ 12/31/92** 12/31/91
<S> <C>
<C> <C> <C>
Net Asset Value, beginning of period $ 10.01 $
9.68 $ 9.81 $ 9.11
- ---------------------------------------------------------------------------
- ----------
Income from investment operations:
Net investment income# 0.25
0.73 0.53 0.70
Net realized and unrealized gain/(loss) on investments (0.66)
0.27 (0.02) 0.71
- ---------------------------------------------------------------------------
- ----------
Total from investment operations (0.41)
1.00 0.51 1.41
Less distributions:
Distributions from net investment income (0.27)
(0.67) (0.53) (0.63)
Distributions in excess of net investment income and
net realized gain --
- -- -- --
Distributions from net realized gain --
- -- -- --
Distributions from capital --
- -- (0.11) (0.08)
- ---------------------------------------------------------------------------
- ----------
Total distributions (0.27)
(0.67) (0.64) (0.71)
- ---------------------------------------------------------------------------
- ----------
Net Asset Value, end of period $ 9.33 $
10.01 $ 9.68 $ 9.81
- ---------------------------------------------------------------------------
- ----------
Total return+ (4.18)%
10.45% 5.45% 16.28%
- ---------------------------------------------------------------------------
- ----------
Ratios to average net assets/supplemental data:
Net assets end of period (in 000's) $ 716,428 $
851,350 $ 1,046,921 $ 1,285,937
Ratio of operating expenses to average net assets++ 1.48%***
1.40% 1.45% 1.40%
Ratio of net investment income to average net assets 5.28%***
7.28% 5.47% 6.80%
Portfolio turnover rate 119%
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 six months ended June 30, 1994 and the years
ended
December 31, 1993 and 1992 were 1.85%, 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.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<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.
13
<PAGE>
Smith Barney Shearson
Government Securities Fund
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
PERIOD
6/30/94+++
ENDED
(UNAUDITED)
12/31/93*+++
<S> <C>
<C>
Net Asset Value, beginning of period $ 10.01
$ 9.90
- ---------------------------------------------------------------------------
- ----------
Income from investment operations:
Net investment income# 0.25
0.68
Net realized and unrealized gain/(loss) on investments (0.66)
0.04
- ---------------------------------------------------------------------------
- ----------
Total from investment operations (0.41)
0.72
Distributions from net investment income (0.27)
(0.61)
- ---------------------------------------------------------------------------
- ----------
Net Asset Value, end of period $ 9.33
$ 10.01
- ---------------------------------------------------------------------------
- ----------
Total return+ (4.18)%
7.36%
- ---------------------------------------------------------------------------
- ----------
Ratios to average net assets/supplemental data:
Net assets end of period (in 000's) $ 398
$ 213
Ratio of operating expenses to average net assets++ 1.48%**
1.40%**
Ratio of net investment income to average net assets 5.28%**
7.28%**
Portfolio turnover rate 119%
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 six months ended June 30, 1994 and
the
period ended December 31, 1993 was $1.85% and 1.55%, respectively.
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.
14
<PAGE>
Smith Barney Shearson
Government Securities Fund
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Investment Funds (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. As of the date of this report, the
Company is composed of four managed investment funds: Smith Barney Shearson
Investment Grade Bond Fund, Smith Barney Shearson Government Securities
Fund
(the "Fund"), Smith Barney Shearson Special Equities Fund and Smith Barney
Shearson European Fund. As of November 6, 1992, the 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. As of January 29, 1993, the Fund offered a third class
of
shares, Class D shares and these shares were first purchased on February 4,
1993. Class D shares are offered to plans participating in the Smith Barney
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 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
15
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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.
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-
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.
OPTION CONTRACTS: Upon the purchase of a put option or a call option by the
Fund, the premium paid is recorded as an investment, the value of which is
marked-to-market daily. When a purchased option expires, the Fund will
realize a
loss in the amount of the cost of the option. When the Fund enters into a
16
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
closing sale transaction, the Fund will realize a gain or loss depending on
whether the sales proceeds from the closing sale transaction are greater or
less
than the cost of the option. When the Fund exercises a put option, it will
realize a gain or loss from the sale of the underlying security and the
proceeds
from such sale will be decreased by the premium originally paid. When the
Fund
exercises a call option, the cost of the security which the Fund purchases
upon
exercise will be increased by the premium originally paid.
When a Fund writes a call option or a put option, an amount equal to the
premium
received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a
gain
equal to the amount of the premium received. When the Fund enters into a
closing
purchase transaction, the Fund realizes a gain (or loss if the cost of the
closing purchase transaction exceeds the premium received when the option
was
sold) without regard to any unrealized gain or loss on the underlying
security,
and the liability related to such option is eliminated. When a call option
is
exercised, the Fund realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are increased by the premium
originally
received. When a put option is exercised, the amount of the premium
originally
received will reduce the cost of the security which the Fund purchased upon
exercise.
The risk associated with purchasing options is limited to the premium
originally
paid. The risk in writing a call option is the Fund may forego the
opportunity
of profit if the market price of the underlying security increases and the
option is exercised. The risk in writing a put option is that the Fund may
incur
a loss if the market price of the underlying security decreases and the
option
is exercised. In addition, there is the risk the Fund may not be able to
enter
into a closing transaction because of an illiquid secondary market.
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, "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
17
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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.
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,
administrator or
sub-administrator, acting under the supervision of the Company's 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. 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 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
18
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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.
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 a 4%
nondeductible excise tax imposed on certain amounts of undistributed
ordinary
income and capital gains. 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.
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, 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.
19
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. INVESTMENT ADVISORY FEE, ADMINISTRATION
FEE AND OTHER TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors, a division of Mutual Management
Corp., which is controlled by Smith Barney Holdings Inc. ("Holdings").
Holdings
is a wholly owned subsidiary of The Travelers Inc. Under the Advisory
Agreement,
the Fund pays a monthly fee at the following annual rates: 0.35% of the
value of
its average daily net assets up to $2 billion, 0.25% of the value of its
value
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.
Prior to May 5, 1994, the Fund was party to an administration agreement
with The
Boston Company Advisors, Inc. ("Boston Advisors") an indirect wholly owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under this agreement, the
Fund
paid a monthly fee at an annual rate of .20% up to the value of it's
average
daily net assets.
As of the close of business on May 5, 1994, Smith, Barney Advisers, Inc.
("SBA"), which is controlled by Holdings, succeeded Boston Advisors as the
Fund's administrator. The new administration agreement contains
substantially
the same terms and conditions, including the level of fees as the
predecessor
agreement.
As of the close of business on May 5, 1994, the Fund also entered into a
sub-administration agreement (the "Sub-Administration Agreement") with
Boston
Advisors. Under the Sub-Administration Agreement, Boston Advisors is paid a
portion of the fee paid by the Fund to SBA at a rate agreed upon from time
to
time between SBA and Boston Advisors.
For the six months ended June 30, 1994, Smith Barney Inc. ("Smith Barney")
received from investors $20,271 representing commissions (sales charges) 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
20
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 purchased 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 six months
ended
June 30, 1994, Smith Barney received from investors $340,949 representing
CDSCs
on the redemption of Class B shares.
No officer, director or employee of Smith Barney of any parent or
subsidiary
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 or any of its 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 PLAN
Smith Barney acts as distributor of the Fund's shares pursuant to a
distribution
agreement with the Company, and sells shares of the Fund through Smith
Barney 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 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 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
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 six months ended June 30, 1994, the
Fund
paid service fees of $8,820, $965,147 and $376 for
21
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Class A, Class B and Class D shares respectively. For the six months ended
June
30, 1994, the Fund paid distribution fees of $1,930,293 and $752 for Class
B and
Class D shares, respectively.
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
six months ended June 30, 1994, the Fund paid transfer agent fees of
$3,916,
$362,001 and $134 for Class A, Class B and Class D
shares, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of U.S. government securities,
excluding short-term investments, aggregated $990,340,293 and
$1,076,108,535,
respectively, for the six months ended June 30, 1994.
At June 30, 1994, aggregate gross unrealized appreciation for all
securities in
which there was an excess of value over tax cost was $577,931 and aggregate
gross unrealized depreciation for all securities in which there is an
excess of
tax cost over value was $33,196,981.
At June 30, 1994, the Fund had no outstanding borrowings under reverse
repurchase agreements. The maximum amount outstanding during the period was
$256,750,000 and the average amount outstanding during the period was
$114,765,219. The average amount outstanding during the period was
calculated by
summing borrowings at the end of each day and dividing the sum by the
number of
days in the six months ended June 30, 1994. Interest rates ranged from
0.880% to
3.750% during the six months ended June 30, 1994. Interest paid for the six
months ended June 30, 1994, on borrowings by the Fund under reverse
repurchase
agreements aggregated $1,446,462.
22
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. SHARES OF COMMON STOCK
As of June 30, 1994, the Company had authorized capital of 1 billion shares
of
$.001 par value common stock. The shares are divided by the Fund into three
classes of shares, Class A, Class B, and Class D.
Changes in the common stock outstanding were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED
CLASS A SHARES: Shares 6/30/94 Amount
Shares 12/31/93 Amount
<S> <C> <C>
<C> <C>
- ---------------------------------------------------------------------------
- ----------
Sold 158,242 $ 1,528,014
1,054,136 $ 10,586,533
Issued as reinvestment of dividends 16,392 157,906
30,502 308,583
Redeemed (95,301) (924,146)
(407,209) (4,112,521)
- ---------------------------------------------------------------------------
- ----------
Net increase 79,333 $ 761,774
677,429 $ 6,782,595
- ---------------------------------------------------------------------------
- ----------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED
CLASS B SHARES: Shares 6/30/94 Amount
Shares 12/31/93 Amount
<S> <C> <C>
<C> <C>
- ---------------------------------------------------------------------------
- ----------
Sold 1,945,601 $ 18,874,565
6,495,924 $ 65,355,298
Issued as reinvestment of dividends 1,438,626 13,874,325
3,961,687 39,944,292
Redeemed (11,595,017) (112,459,062)
(33,549,100) (338,512,306)
- ---------------------------------------------------------------------------
- ----------
Net decrease (8,210,790) $ (79,710,172)
(23,091,489) $ (233,212,716)
- ---------------------------------------------------------------------------
- ----------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PERIOD ENDED
CLASS D SHARES: Shares 6/30/94 Amount
Shares 12/31/93* Amount
<S> <C> <C>
<C> <C>
- ---------------------------------------------------------------------------
- ----------
Sold 22,203 $ 213,574
20,640 $ 207,781
Issued as reinvestment of dividends 838 8,046
780 7,883
Redeemed (1,661) (16,121)
(132) (1,362)
- ---------------------------------------------------------------------------
- ----------
Net increase 21,380 $ 205,499
21,288 $ 214,302
- ---------------------------------------------------------------------------
- ----------
<FN>
* The Fund commenced selling Class D shares on February 4, 1993.
</TABLE>
23
<PAGE>
Smith Barney Shearson
Government Securities Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. CAPITAL LOSS CARRYFORWARD
At December 31, 1993, the Fund had available for Federal tax purposes
unused
capital loss carryforward of $391,564,060 and $148,463,086 expiring in 1995
and
1996, respectively.
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, and renewed
effective
May 31, 1994, 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. Under the terms of the Agreement, as
amended, the
Fund and the other affiliated entities are charged an aggregate commitment
fee
of $100,000 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 six months ended June 30, 1994, the Fund did not borrow
under
the Agreement.
24
<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
Lewis E. Daidone
TREASURER
Christina T. Sydor
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, FEES AND EXPENSES AS WELL AS OTHER PERTINENT
INFORMATION.
[LOGO]
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
[LOGO]
Fund 105,177,212
FD0408 H4
SEMI-
ANNUAL
REPORT
DESCRIPTION OF ART WORK ON REPORT COVER
Small box above fund name showing S&P Stock Guide and a calculator, pen
and desk pad.
Smith Barney Shearson
INVESTMENT
GRADE BOND
FUND
JUNE 30, 1994
SMITH BARNEY
INVESTMENT GRADE BOND FUND
DEAR SHAREHOLDER:
We are pleased to provide you with the Semi-Annual Report, which includes
the portfolio of investments for Smith Barney Shearson Investment Grade
Bond Fund, for the six-month period ended June 30, 1994. During the past
six months, in response to declining prices for corporate bonds, the
Fund's net asset value declined to $11.30 from $13.01 for Class A and
Class B shares. Investors owning Class A shares received income distribu-
tions of $.44 per share; investors owning Class B shares received income
distributions of $.41 per share. The total return for the six-month period
was (9.82)% for Class A shares and (10.05)% for Class B shares. Further
information about the performance of your investment during this and pre-
vious fiscal periods is available from the "Financial Highlights" pages of
this report.
THE ECONOMIC AND INVESTMENT ENVIRONMENT
Over the past six months we've seen dramatic increases in both short-term
and long-term interest rates. The catalyst for this increase was the Fed-
eral Reserve's decision to move to a "neutral" policy that increased the
short- term Federal funds rate from the accommodative policy they had
maintained for the past five years. We believe that the intent of the Fed-
eral Reserve was to prevent an escalation or spiraling of inflation. How-
ever, long- term interest rates also rose in response to higher short-term
interest rates, problems in the derivatives market, and the amount of
speculation that had been built into the system. We believe these higher
interest rates will slow the growth of a number of key industries, such as
the automobile and housing industries, that saw notable improvement in
1993. Both industries are very sensitive to the level of interest rates,
and we think that the strong increase in economic activity in the fourth
quarter of 1993 was the result of lower interest rates and pent-up demand.
The question we are now asking is whether the rate of growth will continue
to slow during the second half of 1994 and not just in the second quarter
of 1994. We believe that it will continue to slow and that long-term in-
terest rates will decline in either the second half of this year or in the
early part of 1995. Wage growth has been on the order of two-to-three per-
cent, which is enough to maintain a very modest level of growth, but not
enough to get the economy going in any sort of robust fashion. In addi-
tion, and this may be an even more important factor, the jobs that are
being created are at lower income levels than the middle-management jobs
lost during the recession. The defense industry is just one example of
this phenomenon. While it may look like there is a growth trend in employ-
ment, the level of income isn't going to be sufficient to allow people to
maintain the lifestyle they had before. Just looking at raw economic num-
bers doesn't always give you a very clear picture. The windfall from lower
mortgage costs also has come to an end. This obviously took away the psy-
chological wealth effect, which occurred when people refinanced mortgages
at lower interest rates. These people felt as though they came into a
windfall of money and invested in home improvements and larger-ticket
items such as appliances.
THE CORPORATE MARKET
The corporate bond market, similar to what is going on in the U.S. Trea-
sury and municipal markets, is suffering through a very lethargic period.
Encouraged by lower interest rates, the corporate market last year was
driven by liquidity in the form of new issuance. Thus far this year, it's
been the converse: higher interest rates are discouraging issuance, and
corporations don't have a tremendous demand for capital. Many companies
have restructured and brought down their costs. This has improved cash
flow that can be used to make capital improvements or raise dividends.
Ratings also are improving, and many corporations have stated that their
objective is to continue to improve their credit rating. We maintain that
this makes the corporate sector very viable, and bodes well for the corpo-
rate market.
One of the offshoots of this restructuring is that not every corporation
will be a winner. There will be fewer companies and the competition will
be keener. Unlike prior economic recoveries where virtually every company
within an industry prospered if the industry prospered, investors are
going to have to become more selective.
PORTFOLIO STRATEGY
Since we believe that the trend for lower interest rates remains intact,
we did not make any changes in the portfolio during the past six months.
We continued to invest in older, established companies that have dominant
market positions. These include companies such as Ford Motor Company, Gen-
eral Motors Corporation, Anheuser-Busch and American Airlines. Although
the results have been disappointing for airlines, we believe that they are
moving in the right direction by reducing staff and favorably settling
labor negotiations, and that companies such as American Airlines and Delta
Airlines, Inc. have the potential to participate in the growth in interna-
tional travel. Last year a number of companies that were looking to change
their images issued bonds for the first time in many years. We haven't as
yet bought any of these securities, but we are looking at some of them as
areas of opportunity. In general, however, we will adhere to our strategy
of investing in well-managed companies and industries that have good fun-
damentals.
SOME CLOSING THOUGHTS ABOUT INVESTING IN THE '90S
We would like to remind investors that investing is a long-term process.
Looking at the history of the financial markets, the one dominant theme is
that most successful investors are those who are patient enough and disci-
plined enough to not move with the crowd. We are averaging the high rates
of returns from the 1980s and early 1990s with the returns available in
the 1970s, resulting in an average rate of return very close to the his-
toric average. We think that the returns in the remaining years of the
1990s will be closer to the historic average than they were in the 1980s
and the early years of this decade. Nonetheless, investors with an ex-
tended investment horizon are very likely to be satisfied with their accu-
mulated rate of return.
The past six months were a difficult investment environment, but we be-
lieve we have been successful in meeting our stated investment goal. Dur-
ing the next six months we will endeavor to do the same, and look forward
to reporting to you in the Fund's Annual Report.
Sincerely,
Heath B. McLendon George E. Mueller, Jr.
Chairman of the Board Investment Officer
August 22, 1994
PORTFOLIO HIGHLIGHTS (UNAUDITED) JUNE 30, 1994
INDUSTRY BREAKDOWN
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
Pie chart depicting the allocation of the Investment Portfolios Investment
Grade Bond Portfolio's investment securities held at June 30, 1994 by in-
dustry classification. The pie is broken in pieces representing industries
in the following percentages:
<TABLE>
<CAPTION>
Industry
Percentage
<S> <C>
AIRLINES
11.0%
FOOD AND BEVERAGE
20.6%
U.S. GOVERNMENT AGENCY SECURITIES, REPURCHASE AGREEMENT
AND NET OTHER ASSETS AND LIABILITIES
3.9%
YANKEE BONDS
12.8%
OTHER CORPORATE BONDS AND NOTES
17.0%
RETAIL STORES
5.1%
PUBLISHING
6.1%
PAPER PRODUCTS
7.0%
AEROSPACE
7.9%
AUTOMOTIVE
8.6%
</TABLE>
AVERAGE MATURITY: 26 YEARS
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
Percentage of
Company Net
Assets
<S> <C>
FORD MOTOR COMPANY 4.4%
GENERAL MOTORS CORPORATION 4.2
HYDRO-QUEBEC 4.1
BOEING COMPANY 4.1
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT 3.9
SEAGRAMS LTD. 3.9
HERSHEY FOODS CORPORATION 3.9
UNITED TECHNOLOGIES CORPORATION 3.9
UNITED AIRLINES INC. 3.8
AMR CORPORATION 3.8
</TABLE>
PORTFOLIO OF INVESTMENTS (UNAUDITED) JUNE 30, 1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE
1)
<S> <C> <C>
U.S. CORPORATE BONDS AND NOTES -- 83.3%
FOOD AND BEVERAGE -- 20.6%
$ 14,000,000 American Brands Inc., Notes,
7.875% due 1/15/2023 $
13,037,500
16,750,000 Borden Inc., Note,
7.875% due 2/15/2023
14,614,375
12,500,000 Coca-Cola Enterprises Inc., Deb.,
6.750% due 9/15/2023
10,375,000
15,200,000 Hershey Foods Corporation, Deb.,
8.800% due 2/15/2021
16,112,000
16,000,000 Ralston Purina Company, Deb.,
8.125% due 2/1/2023
14,780,000
16,800,000 Seagrams Ltd., Deb.,
8.350% due 1/15/2022
16,212,000
85,130,875
AIRLINES -- 11.0%
AMR Corporation, Deb.:
12,500,000 9.000% due 9/15/2016
11,375,000
4,500,000 9.880% due 6/15/2020
4,398,750
Delta Air Lines, Inc., Deb.:
10,735,000 9.000% due 5/15/2016
9,272,356
5,000,000 9.750% due 5/15/2021
4,618,750
17,650,000 United Airlines Inc., Deb.,
9.750% due 8/15/2021
15,885,000
45,549,856
AUTOMOTIVE -- 8.6%
17,500,000 Ford Motor Company, Deb.,
8.875% due 1/15/2022
18,287,500
16,000,000 General Motors Corporation, Note,
9.400% due 7/15/2021
17,220,000
35,507,500
AEROSPACE -- 7.9%
20,500,000 Boeing Company, Deb.,
6.875% due 10/15/2043
16,810,000
15,500,000 United Technologies Corporation, Deb.,
8.750% due 3/1/2021
16,061,875
32,871,875
PAPER PRODUCTS -- 7.0%
$ 11,000,000 Boise Cascade Corporation, Deb.,
9.450% due 11/1/2009 $
11,123,750
14,000,000 Bowater, Inc., Deb.,
9.375% due 12/15/2021
14,245,000
Georgia-Pacific Corporation, Deb.:
3,000,000 9.500% due 12/1/2011
3,191,250
500,000 9.625% due 3/15/2022
523,750
29,083,750
PUBLISHING -- 6.1%
13,000,000 News America Holdings Inc., Note,
8.250% due 08/10/2018
11,570,000
15,000,000 Time Warner, Inc., Deb.,
9.150% due 2/1/2023
13,856,250
25,426,250
RETAIL STORES -- 5.1%
14,000,000 K Mart Corporation, Deb.,
7.950% due 2/1/2023
12,530,000
5,000,000 Penney (J.C.) Company, Inc., Deb.,
7.125% due 11/15/2023
4,331,250
5,000,000 Wal-Mart Stores Inc., Deb.,
6.750% due 10/15/2023
4,187,500
21,048,750
SUPRANATIONAL ENTITY -- 3.9%
International Bank for Reconstruction and De-
velopment:
110,000,000 Zero coupon due 3/1/2026
8,937,500
70,000,000 Zero coupon due 3/1/2028
4,812,500
42,860,000 Zero coupon due 7/15/2029
2,571,600
16,321,600
ELECTRONICS -- 3.5%
17,500,000 Loral Corporation, Sr. Deb.,
7.000% due 9/15/2023
14,415,625
TELEVISION -- 3.0%
14,500,000 CBS Inc., Note,
7.125% due 11/1/2023
12,325,000
ENTERTAINMENT -- 2.2%
$ 12,000,000 Paramount Communications, Inc., Sr. Deb.,
7.500% due 7/15/2023 $
9,105,000
TRANSPORTATION -- 1.9%
7,500,000 Ryder Systems, Inc., Bond, Series G,
9.000% due 5/15/2016
7,603,125
TIMBER PRODUCTS -- 1.3%
6,000,000 Weyerhaeuser Co., Deb.,
7.125% due 07/15/2023
5,227,500
PHOTOGRAPHY -- 1.2%
4,500,000 Eastman Kodak Company, Deb.,
9.200% due 6/1/2021
4,865,625
TOTAL U.S. CORPORATE BONDS AND NOTES
(Cost $373,778,928)
344,482,331
YANKEE BONDS -- 12.8%
Hydro-Quebec, Deb.:
1,600,000 Series HE, 8.625% due 6/15/2029
1,558,000
15,000,000 Series HH, 8.500% due 12/1/2029
14,400,000
1,000,000 Series HI, 9.375% due 4/15/2030
1,051,250
5,000,000 Newfoundland Province of Canada, Deb.,
7.320% due 10/13/2023
4,181,250
6,500,000 Nova Scotia Power Corporation,
8.250% due 7/30/2022
6,110,000
Nova Scotia Province of Canada, Deb.:
3,000,000 9.125% due 5/1/2021
3,090,000
8,500,000 8.750% due 4/1/2022
8,425,625
13,500,000 Petro Canada,
9.250% due 10/15/2021
14,377,500
TOTAL YANKEE BONDS (Cost $54,029,106)
53,193,625
U.S. GOVERNMENT AGENCY SECURITIES -- 0.7%
Financing Corporation Strips, Series 19:
2,400,000 9.000% due 12/6/2018
322,992
21,400,000 9.000% due 6/6/2019
2,770,872
TOTAL U.S. GOVERNMENT AGENCY SECURITIES
(Cost $2,977,404)
3,093,864
REPURCHASE AGREEMENT -- 0.9% (Cost $3,840,000)
$ 3,840,000 Agreement with Citibank, N.A. 4.300% dated
06/30/1994 to be repurchased at $3,840,459 on
7/1/1994, collateralized by $4,000,000 U.S.
Treasury Note, 4.250% due 11/30/1995 $
3,840,000
TOTAL INVESTMENTS (Cost $434,625,438*) 97.7%
404,609,820
OTHER ASSETS AND LIABILITIES (NET) 2.3
9,620,258
NET ASSETS 100.0% $
414,230,078
<FN>
* Aggregate cost for Federal tax purposes.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1994
<TABLE>
<CAPTION>
<S> <C>
<C>
ASSETS:
Investments, at value (Cost $434,625,438) (Note 1)
See accompanying schedule
$404,609,820
Cash
330
Interest receivable
10,334,878
Receivable for Fund shares sold
748,953
TOTAL ASSETS
415,693,981
LIABILITIES:
Dividends payable $434,059
Payable for Fund shares redeemed 426,437
Distribution fee payable (Note 3) 169,202
Investment advisory fee payable (Note 2) 156,094
Service fee payable (Note 3) 87,148
Transfer agent fees payable (Note 2) 69,570
Administration fee payable (Note 2) 69,375
Custodian fees payable (Note 2) 10,400
Accrued expenses and other payables 41,618
TOTAL LIABILITIES
1,463,903
NET ASSETS
$414,230,078
NET ASSETS CONSIST OF:
Distributions in excess of net investment income earned
to date $
(1,213,208)
Accumulated net realized gain on investments sold
10,898,996
Unrealized depreciation of investments
(30,015,618)
Par value
36,673
Paid-in capital in excess of par value
434,523,235
TOTAL NET ASSETS
$414,230,078
NET ASSET VALUE:
CLASS A SHARES:
Net Asset Value and redemption price per share
($12,381,485 / 1,096,154 shares of common stock out-
standing)
$11.30
Maximum offering price per share ($11.30 / 0.955)
(based on maximum sales charge of 4.5% of the offering
price on June 30, 1994)
$11.83
CLASS B SHARES:
Net Asset Value and redemption price per share+
($401,515,366 / 35,547,808 shares of common stock out-
standing)
$11.30
CLASS D SHARES:
Net Asset Value and redemption price per share
($333,227 / 29,500 shares of common stock outstanding)
$11.30
<FN>
+ Redemption price per share is equal to net asset value less any applica-
ble contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1994
<TABLE>
<S> <C>
<C>
INVESTMENT INCOME:
Interest $
18,083,627
EXPENSES:
Distribution fee (Note 3) $ 1,085,363
Investment advisory fee (Note 2) 999,903
Service fee (Note 3) 555,502
Administration fee (Note 2) 444,401
Transfer agent fees (Notes 2 and 4) 219,497
Legal and audit fees 48,625
Custodian fees (Note 2) 32,909
Directors' fees and expenses (Note 2) 13,494
Other 74,905
TOTAL EXPENSES
3,474,599
NET INVESTMENT INCOME
14,609,028
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 5):
Net realized gain on investments sold during the
period
3,058,167
Net change in unrealized depreciation of investments
during the period
(64,884,090)
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(61,825,923)
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $
(47,216,895)
<FN>
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR
ENDED
ENDED
6/30/94
12/31/93
(UNAUDITED)
<S> <C> <C>
Net investment income $ 14,609,028 $
29,746,397
Net realized gain on investments sold during the
period 3,058,167
29,001,216
Net unrealized appreciation/(depreciation) of in-
vestments during the period (64,884,090)
18,943,101
(47,216,895)
77,690,714
Distributions to shareholders from net investment
income:
Class A (381,488)
(441,259)
Class B (15,218,768)
(30,089,838)
Class D (9,899)
(3,570)
Distributions in excess of net investment income:
Class A --
(3,065)
Class B --
(208,991)
Class D --
(25)
Distributions to shareholders from net realized
gain on investments:
Class A --
(106,722)
Class B --
(5,018,275)
Class D --
(2,184)
Net increase/(decrease) in net assets from capi-
tal share transactions (Note 6):
Class A 3,677,720
8,940,862
Class B (13,139,290)
2,664,579
Class D 166,187
214,405
Net increase/(decrease) in net assets (72,122,433)
53,636,631
NET ASSETS:
Beginning of period 486,352,511
432,715,880
End of period (including distributions in excess
of net investment income earned to date of
$1,213,208 and $212,081, respectively) $414,230,078
$486,352,511
<FN>
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS YEAR
PERIOD
ENDED ENDED
ENDED
6/30/94 12/31/93+++
12/31/92*
(UNAUDITED)
<S> <C> <C>
<C>
Net Asset Value, beginning of period $ 13.01 $ 11.89
$11.67
Income from investment operations:
Net investment income 0.42 0.88
0.14
Net realized and unrealized gain/(loss)
on investments (1.69) 1.27
0.23
Total from investment operations (1.27) 2.15
0.37
Less distributions:
Distributions from net investment income (0.44) (0.88)
(0.14)
Distributions in excess of net invest-
ment income -- (0.01)
- --
Distributions from capital gains -- (0.14)
- --
Distributions from capital -- --
(0.01)
Total distributions (0.44) (1.03)
(0.15)
Net Asset Value, end of period $ 11.30 $ 13.01
$11.89
Total return+ (9.82)% 18.45%
3.25%
Ratios to average net assets/supplemen-
tal data:
Net assets, end of period (in 000's) $12,381 $10,136 $
933
Ratio of operating expenses to average
net assets 1.08%** 1.11%
1.03%**++
Ratio of net investment income to aver-
age net assets 7.06%** 6.67%
7.53%**
Portfolio turnover rate 12% 65%
47%
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
** Annualized.
+ Total return represents aggregate total return from the period indi-
cated and does not reflect any applicable sales charges.
++ The annualized operating expense ratio excludes interest expense. The
annualized ratio including interest expense was 1.04% for the period
ended December 31, 1992.
+++ Per share amounts have been calculated using the average share method,
which more appropriately presents the per share data for the period
since use of the undistributed method does not accord with results of
operations.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR
YEAR
ENDED ENDED ENDED
ENDED
6/30/94 12/31/93++ 12/31/92*
12/31/91
(UNAUDITED)
<S> <C> <C> <C>
<C>
Net Asset Value, beginning of
period $ 13.01 $ 11.89 $ 11.80
$ 10.43
Income from investment opera-
tions:
Net investment income 0.39 0.80 0.83
0.86
Net realized and unrealized gain/
(loss) on investments (1.69) 1.29 0.12
1.38
Total from investment operations (1.30) 2.09 0.95
2.24
Less distributions:
Distributions from net invest-
ment income (0.41) (0.82) (0.83)
(0.87)
Distributions in excess of net
investment income -- (0.01) --
- --
Distributions from capital gains -- (0.14) --
- --
Distributions from capital -- -- (0.03)
- --
Total distributions (0.41) (0.97) (0.86)
(0.87)
Net Asset Value, end of period $ 11.30 $ 13.01 $ 11.89
$ 11.80
Total return+ (10.05)% 18.06% 8.36%
22.50%
Ratios to average net assets/
supplemental data:
Net assets, end of period (in
000's) $401,515 $476,008 $431,783
$413,878
Ratio of operating expenses to
average net assets 1.58%+++ 1.58% 1.57%**
1.53%
Ratio of net investment income
to average net assets 6.56%+++ 6.20% 6.99%
7.90%
Portfolio turnover rate 12% 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 as Class
B shares.
** The operating expense ratio excludes interest expense. The ratio in-
cluding interest expense for the year ended December 31, 1992 was
1.58%.
*** Annualized expense ratios before waiver of fees by the distributor for
the years ended December 31, 1989 and 1988 were 1.66% and 1.57%, re-
spectively.
+ Total return represents aggregate total return from the period indi-
cated and does not reflect any applicable sales charges.
++ Per share amounts have been calculated using the average share method,
which more appropriately presents the per share data for the period
since use of the undistributed method does not accord with results of
operations.
+++ Annualized.
# Net investment income before waiver of fees by the distributor would
have been $0.86 and $0.87 for the year ended December 31, 1989 and
1988, respectively.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
YEAR YEAR
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>
$ 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>
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD
ENDED
ENDED
6/30/94
12/31/93*++
(UNAUDITED)
<S> <C> <C>
Net Asset Value, beginning of period $ 13.01
$12.56
Income from investment operations:
Net investment income 0.39
0.63
Net realized and unrealized gain/(loss) on in-
vestments (1.69)
0.65
Total from investment operations (1.30)
1.28
Less distributions:
Distributions from net investment income (0.41)
(0.68)
Distributions in excess of net investment in-
come --
(0.01)
Distributions from net realized gains --
(0.14)
Total distributions (0.41)
(0.83)
Net Asset Value, end of period $ 11.30
$13.01
Total return+ (10.05)%
10.38%
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $ 333 $
208
Ratio of operating expenses to average net as-
sets 1.52%**
1.61%**
Ratio of net investment income to average net
assets 6.62%**
6.17%**
Portfolio turnover rate 12%
65%
<FN>
* The Fund commenced selling Class D shares on February 26, 1993.
** Annualized.
+ Total return represents aggregate total return from the period indi-
cated and does not reflect any applicable sales charges.
++ Per share amounts have been calculated using the average share method,
which more appropriately presents the per share data for the period
since use of the undistributed method does not accord with results of
operations.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Investment Funds Inc. (the "Company") was incorpo-
rated in Maryland on September 29, 1981 and commenced operations on Janu-
ary 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. As of the
date of this report, the Company is composed of four managed investment
funds: Smith Barney Shearson Investment Grade Bond Fund (the "Fund"),
Smith Barney Shearson Government Securities Fund, Smith Barney Shearson
Special Equities Fund and Smith Barney Shearson European Fund. As of No-
vember 6, 1992, the Fund offered two classes of shares to the general pub-
lic: 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 de-
ferred sales charge ("CDSC") upon redemption. Class B shares will convert
automatically to Class A shares approximately eight years after date of
purchase. As of January 29, 1993, the Fund offered a third class of
shares, Class D shares, and these shares were first purchased by the pub-
lic on February 26, 1993. Class D shares are offered to plans participat-
ing in the Smith Barney 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 prep-
aration 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 cur-
rent 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. Notwithstand-
ing 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 re-
flect the market value of such securities. In cases where securities are
traded on more than one exchange, the securities are valued on the ex-
change 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 instru-
ments maturing within 60 days of the valuation date are valued at amor-
tized cost.
Repurchase agreements: The Fund engages in repurchase agreement transac-
tions. 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 pe-
riod. 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 collat-
eral 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 de-
cline in the value of the underlying securities during the period while
the Fund seeks to assert its rights. The Fund's investment adviser, admin-
istrator or sub-administrator, 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 identi-
fied cost basis. Investment income and realized and unrealized gains and
losses are allocated based upon the relative net assets of each class of
shares.
Dividends and distributions to shareholders: Distributions from net in-
vestment income, if any, are determined on a class level and will be de-
clared 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 divi-
dends from net investment income. Additional distributions of net invest-
ment income and capital gains may be made at the discretion of the Board
of Directors to avoid application of a 4% nondeductible excise tax on cer-
tain amounts of undistributed income and capital gains. Income distribu-
tions and capital gain distributions on a Fund level are determined in ac-
cordance with income tax regulations which may differ from generally ac-
cepted 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.
Federal income taxes: The Fund intends to continue to qualify as a regu-
lated investment company, if such qualification is in the best interest of
its shareholders, by complying with the requirements of the Internal Reve-
nue Code of 1986, as amended, applicable to regulated investment companies
and to distribute substantially all of its taxable income to its share-
holders. Therefore, no Federal income tax provision is required.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors, a division of Mutual Manage-
ment Corp., which is controlled by Smith Barney Holdings Inc. ("Hold-
ings"). Holdings is a wholly owned subsidiary of The Travelers Inc. Under
the Advisory Agreement, the Fund pays 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.
Prior to May 5, 1994, the Fund was party to an administration agreement
with The Boston Company Advisors, Inc. ("Boston Advisors"), an indirect
wholly owned subsidiary of Mellon Bank Corporation ("Mellon"). Under this
agreement, the Fund paid a monthly fee at the annual rate of 0.20% of the
value of its average daily net assets, up to $500 million and 0.18% aver-
age daily net assets thereafter for its services.
As of the close of business on May 5, 1994, Smith, Barney Advisers, Inc.
("SBA"), which is controlled by Holdings, succeeded Boston Advisors as the
Fund's administrator. The new administration agreement contains substan-
tially the same terms and conditions, including the level of fees, as the
predecessor agreement.
As of the close of business on May 5, 1994, the Fund also entered into a
sub-administration agreement (the "Sub-Administration Agreement") with
Boston Advisors. Under the Sub-Administration Agreement, Boston Advisors
is paid a portion of the fees paid by the Fund to SBA at a rate agreed
upon from time to time between SBA and Boston Advisors.
For the six months ended June 30, 1994, Smith Barney Inc. ("Smith Barney")
received from investors $64,722 representing commissions (sales charges)
on sales of Class A shares.
A CDSC is generally payable by a shareholder in connection with the re-
demption 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 six months ended June 30, 1994, Smith Barney re-
ceived from investors $289,384 representing CDSCs on the redemption of
Class B shares.
No officer, director or employee of Smith Barney or of any parent or sub-
sidiary of Smith Barney 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 or
any of its 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 trans-
fer agent.
3. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Fund's shares pursuant to a dis-
tribution agreement with the Company, and sells shares of the Fund through
Smith Barney or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Company has adopted a ser-
vices and distribution plan (the "Plan"). Under this Plan, the Company
compensates Smith Barney for servicing shareholder accounts for Class A,
Class B and Class D shareholders, and covers expenses incurred in distrib-
uting Class B and Class D shares. Smith Barney 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 respec-
tive class of shares. Smith Barney 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 six months ended June 30, 1994 service fees for Class A, Class B
and Class D shares were $12,821, $542,331 and $350, respectively. For the
six months ended June 30, 1994 distribution fees for Class B and Class D
shares were $1,084,662 and $701, respectively.
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
transfer agent fees. For the six months ended June 30, 1994, the Fund paid
transfer agent fees of $5,452, $213,993 and $52 for Class A, Class B and
Class D shares, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-
term investments, aggregated $52,149,212 and $69,901,416, respectively,
for the six months ended June 30, 1994.
At June 30, 1994, aggregate gross unrealized appreciation for all securi-
ties in which there was an excess of value over tax cost was $4,771,014
and aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $34,786,632.
6. SHARES OF COMMON STOCK
At June 30, 1994, the Company had authorized on behalf of the Fund capital
of 200 million shares of $.001 par value common stock divided into three
classes of shares, Class A, Class B and Class D.
Changes in common stock outstanding were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
6/30/94 12/31/93
CLASS A SHARES: SHARES AMOUNT SHARES
AMOUNT
<S> <C> <C> <C> <C>
Sold 479,690 $ 5,691,304 814,955 $
10,439,045
Issued as reinvestment of
dividends 20,705 249,311 30,012
391,603
Redeemed (183,291) (2,262,895) (144,428)
(1,889,786)
Net increase 317,104 $ 3,677,720 700,539 $
8,940,862
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR
ENDED
6/30/94
12/31/93
CLASS B SHARES: SHARES AMOUNT SHARES
AMOUNT
<S> <C> <C> <C>
<C>
Sold 2,800,887 $ 34,375,155 7,479,308
$ 95,869,084
Issued as reinvestment of
dividends 883,611 10,697,970 2,026,146
26,160,376
Redeemed (4,724,953) (58,212,415) (9,246,595)
(119,364,881)
Net increase/(decrease) (1,040,455) $(13,139,290) 258,859
$ 2,664,579
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
6/30/94 12/31/93*
CLASS D SHARES: SHARES AMOUNT SHARES
AMOUNT
<S> <C> <C> <C> <C>
Sold 14,005 $ 171,902 15,619 $
209,421
Issued as reinvestment of
dividends 798 9,546 473
6,230
Redeemed (1,301) (15,261) (94)
(1,246)
Net increase 13,502 $ 166,187 15,998 $
214,405
<FN>
* The Fund commenced selling Class D shares to the public on February 26,
1993.
</TABLE>
7. 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 and re-
newed effective May 31, 1994, primarily for temporary or emergency pur-
poses, 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. Under
the terms of the Agreement, as amended, the Fund and the other affiliated
entities are charged an aggregate commitment fee of $100,000 which is al-
located 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 aggre-
gate amount of indebtedness pursuant to the Agreement of no less than 5 to
1. During the six months ended June 30, 1994, the Fund had an average out-
standing daily balance of $758,011 with interest rates ranging from 3.375%
to 4.875%. Interest expense totalled $14,597 which has been deducted from
interest income on the Statement of Operations for the six months ended
June 30, 1994.
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Greenwich Street Advisors
Two World Trade Center
New York, New York 10048
ADMINISTRATOR
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10105
SUB-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
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
Lewis E. Daidone
Treasurer
Christine T. Sydor
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,
fees and expenses as well
as other pertinent information.
SMITH BARNEY
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
Fund 104, 234, 242
FD0407 H4
SEMI-
ANNUAL
REPORT
DESCRIPTION OF ART WORK ON REPORT COVER
Small box above fund name showing boxes of growth for companies.
Smith Barney Shearson
SPECIAL
EQUITIES
FUND
JUNE 30, 1994
SMITH BARNEY
SPECIAL EQUITIES FUND
DEAR SHAREHOLDER:
We are pleased to provide you with the Semi-Annual Report, which includes
the portfolio of investments for Smith Barney Shearson Special Equities
Fund. For the six month period ended June 30, 1994, the aggregate total
return of the Fund's Class A and B shares were (15.42)% and (15.74)%, re-
spectively. This performance reflected the recent correction in the market
for small capitalization growth companies, the type in which the Fund typ-
ically invests.
There now appears to be a growing belief that small capitalization stocks,
particularly those viewed as growth stocks, are poised to stage a come-
back. A recent Wall Street Journal article discussed the fact that small
capitalization growth stock corrections, within a longer-term bull market,
have typically lasted some 14 weeks with an average decline of some 20%.
This current correction has endured for about 16 weeks with an average de-
cline of 21%. If history were the judge, we are ready to see an upward
move in these stocks. Why do we feel this way? Because we think we have
seen a decoupling of the relationship between stocks and the economy. The
economy is still growing, perhaps slower more recently, but it's growing.
Inflation does not seem to be a problem, yet everyone is greatly con-
cerned. This unsubstantiated fear is somewhat akin to worrying about rain
in Idaho next Thursday by someone who lives in California.
Interest rates have risen, but not so high as to wipe out business invest-
ment. We feel they were too low at 5.75% and may be too high at 8%. So
overall, our assessment is that the economy is fine; yet stocks are down.
Stocks of companies that reported good earnings comparisons still declined
in price. We have and will continue to review our portfolio.
We remain comfortable with our top positions and favor Callaway Golf Com-
pany, Starbucks Corporation, Sunglass Hut International, Inc., PETsMART,
Marvel Entertainment Group, Cheesecake Factory and Blyth Industries.
We appreciate your continued confidence and support and look forward to
reporting to you in the Fund's Annual Report.
Sincerely,
Heath B. McLendon George V. Novello
Chairman of the Board Investment Officer
August 22, 1994
PORTFOLIO HIGHLIGHTS (UNAUDITED) JUNE 30, 1994
INDUSTRY BREAKDOWN
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
Pie chart depicting the allocation of the Investments Funds Special Equi-
ties Fund's investment securities held at June 30, 1994 by industry clas-
sification. The pie is broken in pieces representing industries in the
following percentages:
<TABLE>
<CAPTION>
Industry
Percentage
<S> <C>
CONSUMER NON-DURABLES
8.8%
RETAIL STORES
11.5%
ENTERTAINMENT AND LEISURE
19.8%
CONVERTIBLE PREFERRED STOCK, REPURCHASE AGREEMENT AND NET
OTHER ASSETS AND LIABILITIES
11.3%
OTHER COMMON STOCKS
15.3%
MANUFACTURING
5.6%
DISTRIBUTOR
6.2%
TECHNOLOGY
6.9%
RESTAURANTS
7.0%
CONSUMER DURABLES
7.6%
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
Percentage of
Company Net
Assets
<S> <C>
CALLAWAY GOLF COMPANY
11.5%
STARBUCKS CORPORATION 4.6
SUNGLASS HUT INTERNATIONAL, INC. 4.2
PETSMART INC. 3.7
MICRO WAREHOUSE INC. 3.4
MARVEL ENTERTAINMENT GROUP 3.1
VIKING OFFICE PRODUCTS INC. 2.8
CHEESECAKE FACTORY 2.7
ALDILA, INC. 2.5
BARNES AND NOBLE INC. 2.4
</TABLE>
PORTFOLIO OF INVESTMENTS (UNAUDITED) JUNE 30, 1994
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE
1)
<C> <S> <C>
COMMON STOCKS -- 88.7%
ENTERTAINMENT AND LEISURE -- 19.8%
300,000 Aldila, Inc.+ $
4,500,000
85,000 Bell Sports Corporation+
1,976,250
521,300 Callaway Golf Company
20,330,700
275,000 CML Group, Inc.
3,231,250
125,000 Coastcast Corporation+
3,187,500
55,000 Cobra Golf Inc.+
1,890,625
35,116,325
RETAIL STORES -- 11.5%
85,000 American Eagle Outfitters Inc.
1,296,250
175,000 Barnes and Noble Inc.+
4,200,000
75,000 Gymboree Corporation+
2,962,500
77,800 National Record Mart, Inc.
311,200
270,000 Sunglass Hut International, Inc.+
7,357,500
40,000 Talbots Inc.
1,200,000
105,000 Tractor Supply Company+
2,651,250
30,000 Trend-Lines Inc., Class A
401,250
20,379,950
CONSUMER NON-DURABLES -- 8.8%
100,000 Brothers Gourmet Coffees Inc.+
1,150,000
100,000 Franklin Quest Company+
3,562,500
100,000 Nine West Group, Inc.+
2,600,000
25,000 Rawlings Sporting Goods Inc.
300,000
320,000 Starbucks Corporation+
8,080,000
15,692,500
CONSUMER DURABLES -- 7.6%
110,000 Bed Bath & Beyond Inc.+
3,148,750
250,000 Bombay Company+
3,218,750
80,000 Eagle Hardware & Garden Inc.+
740,000
80,000 Heilig-Meyers
2,170,000
138,000 Williams Sonoma Inc.+
4,174,500
13,452,000
RESTAURANTS -- 7.0%
100,000 Boston Chicken Inc.+
3,575,000
300,000 Cheesecake Factory+
4,725,000
147,800 Krystal Company+
1,625,800
100,000 Outback Steakhouse Inc.+
2,412,500
12,338,300
TECHNOLOGY -- 6.9%
75,000 Adaptec Inc.+ $
1,312,500
50,000 Altera Corp.+
1,412,500
110,000 Arrow Electronics Inc.+
4,097,500
85,000 Boston Technology Inc.+
818,125
25,000 Cisco Systems Inc.+
584,375
8,595 Encore Marketing International, Inc.+
4,297
70,000 Fore Systems Inc.
2,047,500
50,000 International Robomation Itell
1
60,000 Medisense Inc.
720,000
30,000 Newbridge Networks Corp.
1,031,250
35,000 Projectavision
210,000
12,238,048
DISTRIBUTOR -- 6.2%
280,000 Micro Warehouse Inc.+
5,950,000
200,000 Viking Office Products Inc.+
5,000,000
10,950,000
MANUFACTURING -- 5.6%
45,000 Cyrk Inc.+
1,023,750
120,000 Blyth Industries Inc.
2,715,000
150,000 Gentex Corporation+
3,825,000
115,000 Johnstown America Industries Inc.+
2,328,750
9,892,500
PET FOOD -- 3.7%
235,000 PETsMART Inc.+
6,638,750
PUBLISHING -- 3.1%
300,000 Marvel Entertainment Group+
5,475,000
SOFTWARE -- 2.2%
125,000 Acclaim Entertainment, Inc.+
2,027,350
50,000 Davidson & Associates, Inc.+
775,000
35,000 MapInfo Corporation+
717,500
10,000 Network General Corporation+
158,750
25,000 Stac Electronics
165,625
3,844,225
IRON/STEEL -- 1.5%
80,000 Huntco, Inc., Class A
$1,780,000
50,000 Wheeling Pittsburgh Corp.+
875,000
2,655,000
ENVIRONMENTAL SERVICES -- 1.3%
100,000 Molten Metal Technology, Inc.
1,800,000
100,000 Omega Environmental, Inc.
562,500
2,362,500
COMMUNICATIONS -- 1.3%
100,000 California Microwave Inc.+
2,275,000
ELECTRONICS -- 1.0%
65,000 First Alert Inc.
1,722,500
BUILDING AND CONSTRUCTION -- 0.9%
80,000 T J International Inc.
1,560,000
CHEMICALS -- 0.2%
60,000 Ecoscience Corporation
300,000
INSURANCE -- 0.1%
10 Berkshire Hathaway Inc.+
161,000
TOTAL COMMON STOCKS (Cost $145,891,722)
157,053,598
CONVERTIBLE PREFERRED STOCK -- 0.0% (Cost $672,900)
75,000 Encore Marketing International, Series A
84,375
FACE VALUE
REPURCHASE AGREEMENT -- 16.0% (Cost $28,444,000)
$28,444,000 Agreement with Citibank, N.A. 4.300% dated
06/30/94, to be repurchased at $28,447,397 on
07/01/94, collateralized by $27,180,000 Trea-
sury Notes, 8.500% due 04/15/97
28,444,000
TOTAL INVESTMENTS (Cost $175,008,622*) 104.7%
185,581,973
OTHER ASSETS AND LIABILITIES (NET) (4.7)
(8,312,553)
NET ASSETS 100.0% $
177,269,420
<FN>
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1994
<TABLE>
<CAPTION>
<S> <C>
<C>
ASSETS:
Investments, at value (Cost $175,008,622)(Note 1)
See accompanying schedule:
Investment securities $157,137,973
Repurchase agreement 28,444,000
$185,581,973
Cash
3,943
Receivable for investment securities sold
5,943,915
Receivable for Fund shares sold
565,433
Dividend receivable
6,400
TOTAL ASSETS
192,101,664
LIABILITIES:
Payable for investment securities purchased 10,246,443
Payable for Fund shares redeemed 4,187,456
Distribution fee payable (Note 3) 89,877
Investment advisory fee payable (Note 2) 83,732
Transfer agent fees payable (Note 2) 78,117
Service fee payable (Note 3) 37,260
Administration fee payable (Note 2) 30,448
Custodian fees payable (Note 2) 9,400
Accrued expenses and other payables 69,511
TOTAL LIABILITIES
14,832,244
NET ASSETS
$177,269,420
NET ASSETS CONSIST OF:
Distributions in excess of net investment income
earned to date $
(1,425,277)
Accumulated net realized loss on investments sold
(6,098,682)
Unrealized appreciation of investments
10,573,351
Par value
10,451
Paid-in capital in excess of par value
174,209,577
TOTAL NET ASSETS
$177,269,420
NET ASSET VALUE:
CLASS A SHARES:
Net asset value and redemption price per share
($39,795,433 / 2,326,219 shares of common stock
outstanding)
$17.11
Maximum offering price per share ($17.11 / .95)
(based on maximum sales charge of 5% of the of-
fering price on June 30, 1994)
$18.01
CLASS B SHARES:
Net asset value and offering price per share+
($136,700,187 / 8,079,446 shares of common stock
outstanding)
$16.92
CLASS D SHARES:
Net asset value, offering and redemption price per
share ($773,800 / 45,721 shares of common stock out-
standing)
$16.92
<FN>
+ Redemption price per share is equal to net asset value less any applica-
ble contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
<S> <C>
<C>
INVESTMENT INCOME:
Interest $
414,703
Dividend
139,645
TOTAL INVESTMENT INCOME
554,348
EXPENSES:
Distribution fee (Note 3) $542,213
Investment advisory fee (Note 2) 523,919
Transfer agent fees (Notes 2 and 4) 251,694
Service fee (Note 3) 238,145
Administration fee (Note 2) 190,516
Legal and audit fees 98,743
Custodian fees (Note 2) 36,468
Directors' fees and expenses (Note 2) 17,509
Other 80,418
TOTAL EXPENSES
1,979,625
NET INVESTMENT LOSS
(1,425,277)
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(NOTES 1 AND 5):
Net realized loss on investments sold during the
period
(5,827,903)
Net change in unrealized depreciation of invest-
ments during the period
(24,691,408)
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(30,519,311)
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
$(31,944,588)
<FN>
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR
ENDED
ENDED
6/30/94
12/31/93
(UNAUDITED)
<S> <C> <C>
Net investment loss $ (1,425,277) $
(1,062,922)
Net realized gain/(loss) on investments sold
during the period (5,827,903)
11,887,764
Net unrealized appreciation/(depreciation) on
investments during
the period (24,691,408)
15,305,261
Net increase/(decrease) in net assets resulting
from operations (31,944,588)
26,130,103
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 Fund
share transactions (Note 6):
Class A (3,228,669)
45,287,453
Class B 23,035,534
40,880,321
Class D 700,096
207,013
Net increase/(decrease) in net assets (11,437,627)
110,382,604
NET ASSETS:
Beginning of period 188,707,047
78,324,443
End of period (including distributions in excess
of net investment income earned to date of
$317,674 at June 30, 1994) $177,269,420
$188,707,047
<FN>
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS YEAR
PERIOD
ENDED ENDED
ENDED
6/30/94++ 12/31/93++
12/31/92*
(UNAUDITED)
<S> <C> <C>
<C>
Net asset value, beginning of period $ 20.23 $ 15.47
$14.13
Income from investment operations:
Net investment income/(loss) 0.09 (0.08)
(0.01)
Net realized and unrealized gain/(loss) on
investments (3.03) 5.17
1.35
Total from investment operations (3.12) 5.09
1.34
Distributions from net realized capital
gains -- (0.33)
- --
Net asset value, end of period $ 17.11 $ 20.23
$15.47
Total return+ (15.42)% 32.90%
9.48%
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $39,795 $50,121
$ 195
Ratio of operating expenses to average net
assets 1.53%** 1.67%
1.51%**
Ratio of net investment income/(loss) to
average net assets 0.95%** (0.46)%
(0.97)%**
Portfolio turnover rate 51% 112%
211%
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
** Annualized.
+ Total return represents aggregate total return for the periods indi-
cated and does not reflect any applicable sales charges.
++ Per share amounts have been calculated using the average share method.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR
YEAR
ENDED ENDED ENDED
ENDED
6/30/94 12/31/93++ 12/31/92*
12/31/91
(UNAUDITED)
<S> <C> <C> <C>
<C>
Net asset value, beginning of pe-
riod $ 20.08 $ 15.47 $ 14.18
$ 9.82
Income from investment operations:
Net investment income/(loss) (0.15) (0.20) (0.26)
(0.07)
Net realized and unrealized gain-
/(loss) on investments (3.01) 5.14 1.55
4.46
Total from investment operations (3.16) 4.94 1.29
4.39
Less distributions:
Distributions from net investment
income -- -- --
- --
Distributions from net realized
capital gains -- (0.33) --
- --
Distributions from capital -- -- --
(0.03)
Total distributions -- (0.33) 0.00
(0.03)
Net asset value, end of period $ 16.92 $ 20.08 $ 15.47
$ 14.18
Total return+ (15.74)% 31.93% 9.10%
44.76%
Ratios to average net assets/sup-
plemental data:
Net assets, end of period (in
000's) $136,700 $138,401 $78,130
$81,618
Ratio of operating expenses to av-
erage net assets 2.25%*** 2.34% 2.32%
2.31%
Ratio of net investment in-
come/(loss) to
average net assets (1.67)%*** (1.13)%
(1.77)% (0.74)%
Portfolio turnover rate 51% 112% 211%
379%
<FN>
* On November 6, 1992 the Fund commenced selling Class A shares. Those
shares in existence prior to November 6, 1992 were designated as Class
B shares.
** Expense ratio before reimbursement of expenses by investment adviser
and sub-investment adviser and administrator for the year ended Decem-
ber 31, 1988 was 2.39%.
*** Annualized.
+ Total return represents aggregate total return for the periods indi-
cated and does not reflect any applicable sales charges.
++ Per share amounts have been calculated using the average share
method.
# 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.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
YEAR
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>
$ 13.77 $ 12.04 $ 11.48 $ 13.02 $ 13.15 $ 9.94 $
11.83
0.29 0.28 0.71# (0.10) (0.05) 0.05
0.21
(3.70) 1.96 0.70 (1.30) 0.97 3.37
(1.35)
(3.41) 2.24 1.41 (1.40) 0.92 3.42
(1.14)
(0.29) (0.27) (0.55) -- (0.05) (0.21)
(0.05)
(0.23) -- (0.30) (0.14) (1.00) --
(0.70)
(0.02) (0.24) -- -- -- --
- --
(0.54) (0.51) (0.85) (0.14) (1.05) (0.21)
(0.75)
$ 9.82 $ 13.77 $ 12.04 $ 11.48 $ 13.02 $ 13.15 $
9.94
(24.71)% 18.60% 12.60% (10.91)% 7.05% 35.17%
(10.24)%
$76,009 $141,630 $169,983 $178,905 $214,419 $163,468
$129,856
2.30% 2.34% 2.32%** 2.09% 2.12% 2.20%
2.10%
2.12% 1.69% 5.23% (0.63)% (0.34)% 0.43%
2.01%
372% 228% 165% 148% 114% 146%
163%
<FN>
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD
ENDED
ENDED
6/30/94
12/31/93*++
(UNAUDITED)
<S> <C>
<C>
Net asset value, beginning of period $ 20.08
$22.62
Income from investment operations:
Net investment loss (0.08)
(0.16)
Net realized and unrealized loss on investments (3.08)
(2.05)
Total from investment operations (3.16)
(2.21)
Distributions from net realized capital gains --
(0.33)
Net asset value, end of period $ 16.92
$20.08
Total return+ (15.74)%
(9.77)%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 774
$ 185
Ratio of operating expenses to average net assets 2.03%**
2.19%**
Ratio of net investment loss to average net assets (1.45)%**
(0.98)%**
Portfolio turnover rate 51%
112%
<FN>
* The Fund commenced selling Class D shares on October 18, 1993.
** Annualized.
+ Total return represents aggregate total return for the periods
indicated.
++ Per share amounts have been calculated using the average share method.
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Investment Funds Inc. (the "Company") was incorpo-
rated in Maryland on September 29, 1981 and commenced operations on Janu-
ary 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. As of the
date of this report, the Company is composed of four managed investment
funds: Smith Barney Shearson Investment Grade Bond Fund, Smith Barney
Shearson Government Securities Fund, Smith Barney Shearson Special Equi-
ties Fund (the "Fund") and Smith Barney Shearson European Fund. As of No-
vember 6, 1992, the Fund offered two classes of shares to the general pub-
lic: 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 de-
ferred sales charge ("CDSC") upon redemption. Class B shares will convert
automatically to Class A shares approximately eight years after the date
of original purchase. On January 29, 1993, the Fund offered a third class
of shares, Class D shares, and these shares were first purchased on Octo-
ber 18, 1993. Class D shares are offered to plans participating in the
Smith Barney 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 mat-
ters 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 prep-
aration 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 cur-
rent 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. Notwithstand-
ing 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 re-
flect the market value of such securities. In cases where securities are
traded on more than one exchange, the securities are valued on the ex-
change 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 instru-
ments maturing within 60 days of the valuation date are valued at amor-
tized cost.
Repurchase agreements: The Fund engages in repurchase agreement transac-
tions. 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 pe-
riod. 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 collat-
eral 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 de-
cline in the value of the underlying securities during the period while
the Fund seeks to assert its rights. The Fund's investment adviser, admin-
istrator or sub-administrator, acting under the supervision of the Compa-
ny's Board of Directors, reviews the value of the collateral and the cred-
itworthiness 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 identi-
fied cost basis. Investment income and realized and unrealized gains and
losses are allocated based upon the relative net assets of each class of
shares.
Dividends and distributions to shareholders: Distributions from net in-
vestment income, if any, are determined on a class level and will be de-
clared and paid at least annually. Distributions from net realized capital
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 divi-
dends from net investment income. Additional distributions of net invest-
ment income and capital gains may be made at the discretion of the Board
of Directors to avoid the application of a 4% nondeductible excise tax im-
posed on certain amounts of undistributed ordinary income and capital
gains. 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 pri-
marily due to differing treatments of income and gains on various invest-
ment securities held by the Fund, timing differences and differing charac-
terization of distributions made by the Fund as a whole.
Federal income taxes: The Fund intends to continue to qualify as a regu-
lated investment company, if such qualification is in the best interest of
its shareholders, by complying with the requirements of the Internal Reve-
nue Code of 1986, as amended, applicable to regulated investment companies
and to distribute substantially all of its taxable income to its share-
holders. Therefore, no Federal income tax provision is required.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION
FEE AND OTHER TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors, a division of Mutual Manage-
ment Corp., which is controlled by Smith Barney Holdings Inc. ("Hold-
ings"). Holdings is a wholly owned subsidiary of The Travelers Inc. Under
the Advisory Agreement, the Fund pays a monthly fee at the annual rate of
.55% of the value of the Fund's average daily net assets.
Prior to May 5, 1994, the Fund was party to an administration agreement
with The Boston Company Advisors, Inc. ("Boston Advisors") an indirect
wholly owned subsidiary of Mellon Bank Corporation ("Mellon"). Under this
agreement, the Fund paid a monthly fee at the annual rate of 0.20% of the
value of its average daily net assets.
As of the close of business on May 5, 1994, Smith, Barney Advisers, Inc.
("SBA"), which is controlled by Holdings, succeeded Boston Advisors as the
Fund's administrator. The new administration agreement contains substan-
tially the same terms and conditions, including the level of fees as the
predecessor agreement.
As of the close of business on May 5, 1994, the Fund also entered into a
sub-administration agreement (the "Sub-Administration Agreement") with
Boston Advisors. Under the Sub-Administration Agreement, Boston Advisors
is paid a portion of the fees by the Fund to SBA at a rate agreed upon
from time to time between SBA and Boston Advisors.
For the six months ended June 30, 1994, the Fund incurred total brokerage
commissions of $72,631, of which $7,200 were paid to Smith Barney Inc.
("Smith Barney").
For the six months ended June 30, 1994, Smith Barney or its predecessor
received from investors $140,995, representing commissions (sales charges)
on sales of Class A shares.
A CDSC is generally payable by a shareholder in connection with the re-
demption 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 six months ended June 30, 1994, Smith Barney re-
ceived from investors $137,130 representing CDSCs on the redemption of
Class B shares.
No officer, director or employee of Smith Barney or of any parent or sub-
sidiary of Smith Barney 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 or
any of its 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 Company's custodian. The Shareholder Services
Group, Inc., a subsidiary of First Data Corporation, serves as the Compa-
ny's transfer agent.
3. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Fund's shares pursuant to a dis-
tribution agreement with the Company, and sells shares of the Fund through
Smith Barney 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 Fund compensates
Smith Barney 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 is paid an annual service fee with re-
spect 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 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 six months ended June 30, 1994, the service fee for Class
A, Class B, and Class D shares was $57,407, $180,159 and $579, respec-
tively. For the six months ended June 30, 1994, the distribution fee for
Class B and D shares were $540,477 and $1,736, respectively.
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 six months ended June 30, 1994, transfer
agent fees for Class A, Class B and Class D shares were $65,626, $185,992
and $76, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-
term investments, aggregated $112,210,661 and $87,192,163, respectively,
for the six months ended June 30, 1994.
At June 30, 1994, aggregate gross unrealized appreciation for all securi-
ties in which there was an excess of value over tax cost was $25,545,541
and aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $14,972,190.
6. SHARES OF COMMON STOCK
At June 30, 1994, the Company on behalf of the Fund had authorized capital
of 100 million shares of $.001 par value common stock divided into three
classes of shares, Class A, Class B and Class D.
Changes in the common stock outstanding were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR
ENDED
6/30/94 12/31/93
CLASS A SHARES: SHARES AMOUNT SHARES
AMOUNT
<S> <C> <C> <C> <C>
Sold 889,689 $ 17,096,195 1,956,806 $
32,135,851
Issued as reinvestment of
dividends -- -- 9,933
199,734
Issued in exchange for
shares of Small
Capitalization Fund
(Note 8) -- -- 1,707,528
34,338,381
Redeemed (1,041,639) (20,324,864) (1,208,680)
(21,386,513)
Net increase/(decrease) (151,950) $ (3,228,669) 2,465,587 $
45,287,453
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR
ENDED
6/30/94 12/31/93
CLASS B SHARES: SHARES AMOUNT SHARES
AMOUNT
<S> <C> <C> <C> <C>
Sold 3,575,685 $ 68,698,280 6,238,027
$119,893,345
Issued as reinvestment of
dividends -- -- 94,014
1,878,397
Issued in exchange for
shares of Small
Capitalization Fund
(Note 8) -- -- 267,249
5,339,634
Redeemed (2,390,431) (45,662,746) (4,756,506)
(86,231,055)
Net increase 1,185,254 $ 23,035,534 1,842,784 $
40,880,321
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD
ENDED
6/30/94 12/31/93*
CLASS D SHARES: SHARES AMOUNT SHARES
AMOUNT
<S> <C> <C> <C> <C>
Sold 36,624 $702,194 9,085 $
204,530
Issued as reinvestment of
dividends -- -- 148
2,963
Issued in exchange for
shares of Small
Capitalization Fund
(Note 8) -- -- 1
20
Redeemed (115) (2,098) (22)
(500)
Net increase 36,509 $700,096 9,212 $
207,013
<FN>
* The Fund commenced selling Class D shares on October 18, 1993.
</TABLE>
7. 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 and re-
newed effective May 1994, 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. Under the terms
of the Agreement, as amended, the Fund and the other affiliated entities
are charged an aggregate commitment fee of $100,000 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 aggre-
gate amount of indebtedness pursuant to the Agreement of no less than 5 to
1. During the six months ended June 30, 1994, the Fund did not borrow
under the Agreement.
8. 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
shares issued by Acquiring Fund, the total net assets of the Acquired Fund
and the Acquiring Fund and any unrealized appreciation included in the Ac-
quired Fund's total net assets are as follows:
<TABLE>
<CAPTION>
VALUE OF
SHARES SHARES TOTAL NET
TOTAL NET
ISSUED BY ISSUED BY ASSETS OF
ASSETS OF ACQUIRED FUND
ACQUIRING ACQUIRED ACQUIRING ACQUIRING ACQUIRED
ACQUIRING UNREALIZED
FUND FUND FUND FUND FUND*
FUND APPRECIATION
<S> <C> <C> <C> <C>
<C> <C>
The Fund Small Capitalization 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>
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Greenwich Street Advisors
Two World Trade Center
New York, New York 10048
ADMINISTRATOR
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10105
SUB-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
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
George V. Novello
Investment Officer
Lewis E. Daidone
Treasurer
Christina T. Sydor
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, fees and expenses as well
as other pertinent information.
SMITH BARNEY
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
Fund 102, 192, 253
FD0405 H4
